<PAGE>
 
                                 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, 1998

                                      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.)

                                        
1380 LAWRENCE STREET, SUITE 1400
          DENVER, COLORADO                                           80204
(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
                               (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. [_]

  As of March 12, 1999, 6,724,911 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 11, 1999, was $55,441,449. 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 14, 1999 are incorporated by reference into Part III
of this Form 10-K.
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                              TABLE OF CONTENTS 

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                                                 PART I

Item 1.    Business......................................................................................        3              
Item 2.    Properties....................................................................................       19              
Item 3.    Legal Proceedings.............................................................................       19              
Item 4.    Submission of Matters to a Vote of Security Holders...........................................       20              
                                                                                                                                
                                                PART II 
                                                                                                                                
Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters.........................       20              
Item 6.    Selected Financial Data.......................................................................       21              
Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.........       22              
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk....................................       44              
Item 8.    Financial Statements and Supplementary Data...................................................       44              
Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..........       44              
                                                                                                                                
                                                PART III
                                                                                                                                
Item 10.   Directors and Executive Officers of the Registrant............................................       44              
Item 11.   Executive Compensation........................................................................       44              
Item 12.   Security Ownership of Certain Beneficial Owners and Management................................       44              
Item 13.   Certain Relationships and Related Transactions................................................       44              
                                                                                                                                
                                                PART IV  
                                                                                                                                
Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................       45              
</TABLE>

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                                    PART I

ITEM 1. BUSINESS
        --------

GENERAL

     Matrix Bancorp, Inc. ("Matrix Bancorp" or the "Company"), formerly Matrix
Capital Corporation, is a unitary thrift holding company that, through its
subsidiaries (the "Subsidiaries"), focuses on traditional banking, mortgage
banking and the administration of self-directed trust accounts. The Company's
traditional banking activities include originating and servicing residential,
commercial and consumer loans and providing a broad range of depository
services. The Company's 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. The Company's trust activities focus
primarily on the administration of self-directed individual retirement accounts,
qualified retirement plans, and custodial and directed trust accounts, as well
as offering specialized custody and clearing services to investment
professionals. The Company was incorporated in Colorado in June 1993. Its
principal executive offices are located at 1380 Lawrence Street, Suite 1400,
Denver, Colorado 80204, and its telephone number is (303) 595-9898.

     In December 1998, the Company changed its name to "Matrix Bancorp, Inc."
The name change was approved by the shareholders at the 1998 Annual Meeting of
Shareholders held on May 1, 1998. The Company's management group believes that
the name change more accurately reflects the true nature of the investment
activities undertaken by the Company. The trading symbol for the Company's
common stock on the NASDAQ National Market will continue to be "MTXC."

THE SUBSIDIARIES

     The Company's core business operations are conducted through the following
operating Subsidiaries:

     MATRIX BANK. With its main office in Las Cruces, New Mexico, full service
branches in Sun City, Arizona and Las Cruces, New Mexico, and loan offices in
Denver and Evergreen, Colorado (near Denver), Matrix Capital Bank ("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. Matrix Bank also holds the noninterest-bearing
custodial escrow deposits related to the residential mortgage loan portfolio
serviced by Matrix Financial Services Corporation ("Matrix Financial") and the
interest-bearing money market accounts administered by Sterling Trust Company
("Sterling Trust"). See "--Matrix Financial" and "--The Vintage Group." These
custodial escrow deposits and money market accounts under administration, as
well as other traditional deposits, are used to fund bulk purchases of
residential mortgage loan portfolios throughout the United States, a substantial
portion of which are serviced by Matrix Financial following their purchase. As
of December 31, 1998, Matrix Bank was deemed to be "well capitalized" under
applicable regulatory standards. See "--Regulation and Supervision--Matrix
Bank's Capital Ratios."

     UNITED FINANCIAL. United Financial, Inc. ("United Financial") provides
brokerage and consulting services to financial institutions and financial
services companies in the mortgage banking industry. These services include the
brokering and analysis of residential mortgage loan servicing rights ("MSRs")
and residential mortgage loans, corporate and mortgage loan servicing portfolio
valuations (which includes the "mark-to-market" valuation and analysis required
under Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
("FAS 125")), and to a lesser extent, consultation and brokerage services in
connection with mergers and acquisitions of mortgage banking entities. United
Financial provides brokerage services to mortgage banking entities, such as
Crossland Mortgage Corp., Chase Manhattan Mortgage and AccuBanc Mortgage.
During 1998 and 1997, United Financial brokered the sale of 68 and 91 mortgage
loan servicing portfolios totaling $66.4 billion and $33.4 billion in
outstanding mortgage loan principal balances, respectively. As a result of this
volume of brokerage activity and the expertise of the United Financial analytics
department, the Company has 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, the Company is often able to identify certain types of
mortgage loan servicing portfolios that are well suited to its particular
servicing platform and unique corporate structure.

     MATRIX FINANCIAL. Matrix Financial acquires MSRs on a nationwide basis
through purchases in the secondary market, services the loans underlying the
MSRs and originates mortgage loans through its wholesale loan origination
network. As of December 31, 1998, Matrix Financial serviced 78,346 borrower
accounts representing $5.4 billion in principal balances (excluding $9.9 million
in subservicing for non-affiliates of the Company), the majority of which were
seasoned loans having

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lower principal and higher custodial escrow balances than newly originated
mortgage loans. As a servicer of mortgage loans, Matrix Financial is required to
establish custodial escrow accounts for the deposit of borrowers' payments,
which may include principal, interest, taxes and insurance. These payments are
held at Matrix Bank. At December 31, 1998, the custodial escrow accounts related
to the Company's servicing portfolio maintained at Matrix Bank were $89.5
million in the aggregate. For the calendar year 1998, Matrix Financial
originated $575.0 million in residential mortgage loans primarily through its
regional wholesale production offices located in Atlanta, Denver, Las Vegas and
Phoenix. The mortgage loans originated by Matrix Financial are typically sold in
the secondary market.

     THE VINTAGE GROUP. In early 1997, the Company acquired The Vintage Group,
Inc. ("Vintage"). Vintage's subsidiaries, Sterling Trust and First Matrix
Investment Services Corporation ("First Matrix") are located in Waco and
Arlington, Texas, respectively. Sterling Trust was incorporated in 1984 as a
Texas independent, non-bank trust company specializing in the administration of
self-directed individual retirement accounts, qualified retirement plans, and
custodial and directed trust accounts. As of December 31, 1998, Sterling Trust
administered in excess of 36,000 accounts with assets under administration of
almost $2.1 billion; approximately $137.0 million of which represented interest-
bearing deposits under administration held at Matrix Bank. First Matrix is a
NASD broker/dealer that provides services to individuals and deferred
contribution plans.

     UNITED CAPITAL MARKETS. United Capital Markets, Inc. ("UCM") is a
Registered Investment Advisor that focuses on risk management services for
institutional clients. It provides a professional outsourcing alternative to in-
house risk management departments and Wall Street derivative products. UCM
typically focuses on interest rate and prepayment risk as they relate to
specific objectives articulated to UCM by the client. UCM's risk management
strategy includes modeling of asset risk, setting up and trading individual
hedge accounts and matching accounting practice and management goals. Although
the Company believes that UCM will ultimately be able to implement risk
management strategies for clients with respect to several asset classes, UCM's
initial focus has been on the implementation of risk management strategies for
clients' portfolios of MSRs. UCM is managed by former senior executives from
nationally recognized investment banks and the mortgage banking industry with
many years of experience in risk management and hedging strategies.

     UNITED SPECIAL SERVICES. United Special Services, Inc. ("USS") provides
real estate management and disposition services to financial services companies
and financial institutions. In addition to the unaffiliated clients currently
served by USS, Matrix Financial uses USS exclusively in handling the disposition
of its foreclosed real estate. USS 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.

     See Note 19 to the Consolidated Financial Statements included elsewhere
herein for a presentation of financial information by industry segment.

SAVINGS BANK ACTIVITIES

     GENERAL. With branches in Las Cruces, New Mexico and Sun City, Arizona, and
loan production offices in Denver and Evergreen, Colorado, Matrix Bank serves
its local communities by providing a broad range of personal and business
depository services, offering residential and consumer loans and providing
commercial real estate loans, including Small Business Administration ("SBA")
loans. For a discussion of the depository services offered by Matrix Bank, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." For a discussion of the historical
loan portfolio of the Company, including that of Matrix Bank, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Asset
and Liability Management--Lending Activities."

     PURCHASE AND SALE OF BULK LOAN PORTFOLIOS. In addition to its mortgage loan
origination and servicing-related activities, which are discussed under "--
Mortgage Bank Activities," the Company traditionally makes bulk purchases of
residential mortgage loans in the secondary market through Matrix Bank. The
Company believes that its structure provides advantages over its competitors in
the purchase of bulk mortgage loan packages. United Financial, through its
networking within the mortgage banking industry, is able to refer mortgage
banking 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. Additionally, Matrix Bank's affiliation with Matrix Financial also
provides servicing advantages that a typical community bank does not possess.
Matrix Financial, which generally acts as a subservicer for Matrix Bank's
mortgage loan portfolio, services loans throughout the entire United States and
has the ability to service additional borrower accounts without any substantial
changes or improvements. As such, Matrix Bank is not limited in the types of
loans that it can acquire, nor is Matrix Bank restricted to certain geographic
regions as Matrix Financial services loans in all fifty states. During the years
ended December 31, 1998 and 1997, the Company made bulk purchases of mortgage
loans of approximately $678.2 million and $493.7 million, respectively.

                                       4
<PAGE>
 
     Substantially all of the residential mortgage loans that the Company
acquires are classified as held for sale. This accounting classification
dictates that the Company must carry the loans at the lower of aggregate cost or
market. The purchased loan portfolios typically include both fixed and
adjustable rate mortgage loans. Although the Company reviews many loan
portfolios for prospective acquisition, the focus is on acquiring seasoned first
lien priority loans secured primarily by one-to-four single family residential
properties with unpaid principal balances of less than $350,000. To the extent
that adjustable rate loans are available, the Company generally targets
adjustable over fixed rate portfolios. Due to the accounting treatment required,
the Company's management believes that its focus on seasoned and adjustable rate
products reduces the effect on the portfolio's market value in increasing
interest rate environments. Mortgage loan portfolios are purchased from various
sellers who have either originated the loans or, more typically, acquired the
loan portfolios in bulk purchases.

     The Company considers several factors prior to a purchase. Among others,
the Company 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 the Company and the product mix in its existing mortgage loan
portfolio.

     In some cases, the mortgage loan portfolios that the Company acquires are
purchased at a discount to par. 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 the Company with an
opportunity to resell the loans at a higher price if the purchase discount on
such 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 the Company
prior to reselling the loans. The Company 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 the loans
over a short period of time. Because many considerations may impact pricing or
yield, each loan package evaluated is priced based on the specific underlying
loan characteristics.

     The Company also buys non-performing Federal Housing Administration ("FHA")
and Veteran's Administration ("VA") loans from third party sellers. The
principal and interest on these non-performing loans are generally guaranteed by
the Department of Housing and Urban Development ("HUD"), and in many cases, the
terms of the purchase require the seller to pass scheduled interest through to
the Company and to ultimately guarantee the collection of principal and
interest. These loans are at fixed rates and are anticipated to mature within a
short period of time. As of December 31, 1998, the Company owned $165.7 million
of such loans.

     The Company 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 Company employees, but occasionally are outsourced to third party
contractors. The underwriter takes into account many factors 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 situated, the loan-to-value ratios on the underlying
loans, the payment histories of the borrowers and other pertinent statistics. In
addition, the underwriter attempts to verify that each sample loan conforms to
the standards for loan documentation set by the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC")
and, in cases where a significant portion of the sample loans contain non-
conforming documentation, the Company assesses the additional risk involved in
purchasing such loans. This process helps the Company determine whether the
mortgage loan portfolio meets the Company's investment criteria and, if it does,
the range of pricing that the Company feels is appropriate.

     The Company continually monitors the secondary market for purchases and
sales of mortgage loan portfolios and typically undertakes a sale of a
particular loan portfolio held by the Company 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 the Company is
unsuccessful in matching its purchases and sales of mortgage loans, the Company
may have excess capital at Matrix Bank, resulting in less leverage and higher
capital ratios. During the years ended December 31, 1998 and 1997, the Company
made bulk sales of approximately $319.4 million and $198.3 million in loans, for
gains on sale of bulk mortgage loans of $3.1 million and $2.4 million,
respectively.

     COMMERCIAL AND OTHER LENDING. Matrix Bank, through its commercial real
estate division, has sought to provide limited diversity in its loan portfolio
by originating commercial and consumer loans, as well as offering a full range
of lending products to its customers. The Company offers a variety of commercial
loan products, including single family construction loans, commercial real
estate loans, business loans and SBA loans, as well as providing financing to
charter schools for the purchase of real estate and equipment. Matrix Bank's
loan production office in Evergreen, Colorado principally originates single
family construction and commercial real estate loans; therefore, the Company's
market for these products consists of the Denver, Colorado metro area. The main
office in Las Cruces, New Mexico also originates a portion of these loans as
well.

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     The Company 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. These loans are generally made on a commitment
term that lasts for a period of nine to eighteen months and typically adjust
with the prime rate of interest. In many cases, the residential properties have
been pre-sold to the homeowner. Construction lending is generally considered to
involve a higher level of risk than secured lending on existing properties
because the properties securing these loans are usually more speculative and
more difficult to evaluate and monitor.

     The commercial lending entered into by the Company is generally limited to
income-producing real estate properties which meet strict internal underwriting
guidelines. The repayment of loans collateralized by income-producing properties
is dependent 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 conditions in the real estate market, interest rate levels and overall
economic conditions. Loans on such properties are generally not permitted to
exceed a loan-to-value ratio of 75%. Also, each borrower is reviewed with regard
to management talent, integrity, experience and available financial resources.
The Company generally requires personal guarantees on all commercial loans.

     The Company's SBA division, recently opened during 1998, offers the
following loan products: SBA 7a loans, first trust deed loans under the SBA 504
program, first trust deed companion (piggyback) loans and Business and Industry
Guaranteed Loans offered through the United States Department of Agriculture.
The Company is considering applying for preferred lender status under the SBA
program in the Denver, Colorado and Las Cruces, New Mexico market areas.
Preferred lender status would allow the Company 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
receive priority funding and service from the SBA.

     During 1998, the Company began to offer direct financing leases to charter
schools located primarily in Colorado, Arizona and Texas for the purchase of
real estate, modular space and equipment. Charter schools are public schools
that serve as an alternative to traditional public schools, thereby providing
additional academic choices for parents and students. The direct financing
leases are generally fully amortizing and are completed on a tax-exempt basis.
During 1998, the Company originated $27.4 million of these leases. The leases
are originated with the intent of reselling them, and as a result, are being
classified as held for sale.

     In addition, the Company offers a variety of lending products to meet the
specific needs of its customers. These products include secured installment
loans with fixed repayments, manufactured housing, credit card programs, home
equity loans, business loans and share loans. In addition to the secured
consumer loans, on a very limited basis, the Company extends unsecured loans to
qualified borrowers based on their financial statements and creditworthiness.
The majority of the consumer lending is originated within the Las Cruces, New
Mexico market area.

BROKERAGE AND CONSULTING SERVICES

     BROKERAGE SERVICES. United Financial operates as a national, full-service
mortgage servicing and mortgage loan broker. It is capable of analyzing,
packaging, marketing and closing servicing portfolios and selected corporate
merger and acquisition transactions. United Financial markets its services to
all types and sizes of market participants, thereby developing diverse
relationships. United Financial has provided servicing brokerage services to
each of the following clients during the last 12 months:

     AccuBanc Mortgage                   NationBanc Mortgage
     Chase Manhattan Mortgage            Old Kent Mortgage
     Crossland Mortgage Corp.            PNC Mortgage Corporation of America
     Harbor Financial Mortgage Corp.     U.S. Bank
     Mellon Mortgage
 
     MSRs are sold either on a bulk basis, in which the seller identifies,
packages and sells a portfolio of MSRs to a buyer in a single transaction, or on
a flow basis, in which the seller agrees to sell to a specified buyer from time
to time the MSRs originated by the seller that meet certain criteria at a
predetermined price. United Financial is capable of helping both buyers and
sellers with respect to bulk sales and flow sales of MSRs.

     The Company believes that the client relationships developed by United
Financial 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 United
Financial's national market presence. These contacts also enable United
Financial to identify prospective clients for other Subsidiaries and make
referrals where appropriate. See "--Consulting and Analytic Services."

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     The secondary market for purchasing and selling MSRs has become
increasingly more active since its inception during the early 1980s. While MSRs
are the primary asset of most mortgage companies, other institutions such as
commercial banks and savings associations also build portfolios of MSRs, which
can serve as a significant source of noninterest income. Most institutions that
own MSRs 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. With companies required to capitalize originated MSRs, management of
mortgage servicing assets has become even more critical. These managerial
efforts, combined with interest rate sensitivity of the assets and the growth
strategies of market participants, create constantly changing supply and demand
and, therefore, price levels in the secondary market for MSRs.

     The sale and transfer of MSRs occurs in a market that is inefficient and
often requires an intermediary to facilitate matching 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, United Financial
has access to information on the availability of mortgage servicing portfolios
and helps bring together interested buyers and sellers.

     In addition, United Financial provides brokerage services to buyers and
sellers of single family residential mortgage loans. United Financial provides
loan brokerage services to both servicing brokerage clients and non-servicing
brokerage clients.

     CONSULTING AND ANALYTIC SERVICES. United Financial has made a significant
commitment to its analytics department, which has developed expertise in helping
companies implement and, on an ongoing basis, track their "mark-to-market"
valuations and analyses. United Financial has enhanced its existing valuation
models and has created a software program that can be customized to fit its
customers' many different needs and unique situations in performing valuations
and analyses. In addition, United Financial has the infrastructure and
management information system capabilities necessary to undertake the complex
analyses required by FAS 125. Many of the companies affected by the
implementation of FAS 125 have outsourced this function to a third party rather
than dedicate the resources necessary to develop systems for and perform their
own FAS 125 valuations.

     Because FAS 125 requires that mortgage servicing portfolios be valued at
the lower of cost or market value on a quarterly basis, active management of
servicing assets has become a critical component to holders MSRs. Due to the
risk of impairment on MSRs as a result of constantly changing interest rates and
prepayment speeds on the underlying mortgage portfolio, risk management of
portfolios of MSRs by the holder of the portfolio, which typically takes the
form of hedging the portfolio, has become a more prevalent practice over recent
periods. The FAS 125 "mark-to-market" analyses done by United Financial help
clients assess which of their portfolios of MSRs are most susceptible to
impairment due to interest rate and prepayment risk. Once identified, the
analytics department of United Financial is able to introduce the client to
management at UCM, who in turn is able to offer its risk management services
relating to the identified or other mortgage servicing portfolios owned by the
client in order to meet the client's stated objectives.

     UCM's primary strategy employs risk management techniques similar to those
utilized by Wall Street firms to offset risk. The UCM approach includes modeling
of asset risk, establishing and trading individual hedge accounts and matching
accounting practice and management goals. UCM employs this strategy by
calculating the appropriate mix of exchange-traded treasury futures and options
to offset the change in value of the clients' portfolios. These calculations are
completed with real time market pricing. Monthly portfolio evaluations are
calculated to insure correlation and appropriate accounting treatment. The use
of these liquid positions to offset risk is a less expensive strategy and
mirrors strategies used by major investment banks. Additionally, the hedging
instruments have lower transaction costs allowing both ease in rebalancing, if
necessary, and daily reporting. UCM uses a combination of futures and options to
match both the duration and convexity of the hedged asset. As of December 31,
1998, UCM was providing risk management services to eight clients with
approximately $20.0 billion of MSRs hedged.

     Management believes that combining the services offered by the analytics
department of United Financial with those of UCM provides the Company with a
competitive advantage in attracting and retaining clients because the Company is
able to offer financial services companies and financial institutions a more
complete package of services than the Company's competitors. In addition, United
Financial is able to refer clients to Matrix Bank for financing opportunities
and to USS for asset disposition services. The full range of services offered by
United Financial and its affiliates further strengthens United Financial's
client relationships.

MORTGAGE BANK ACTIVITIES

     RESIDENTIAL MORTGAGE LOAN SERVICING. Matrix Financial and Matrix Bank each
has its own mortgage servicing portfolio, but the Company conducts its
residential servicing activities exclusively through Matrix Financial. Matrix
Bank's MSRs are

                                       7
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subserviced by Matrix Financial. At December 31, 1998, Matrix Financial serviced
approximately $5.4 billion of mortgage loans, including $352.6 million
subserviced for Matrix Bank but excluding $9.9 million subserviced for non-
affiliates of the Company.

     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, where the money can be invested by the Company in
interest-earning assets at returns that historically have been greater than
could be realized by the Company using the custodial escrow deposits as
compensating balances to reduce the effective borrowing cost on the Company's
warehouse credit facilities.

     As compensation for its mortgage servicing activities, the Company receives
servicing fees, plus any late charges collected from delinquent borrowers and
other fees incidental to the services provided. At December 31, 1998, the
Company's weighted-average servicing fee was 0.36%. In the event of default by
the borrower, the Company receives no servicing fees until the default is cured.

     Servicing is provided on mortgage loans on a recourse or nonrecourse basis.
The Company's policy is to accept only a limited number of servicing assets on a
recourse basis. As of December 31, 1998 and 1997, on the basis of outstanding
principal balances, less than 1% of the mortgage servicing contracts owned by
the Company involved recourse servicing. To the extent that servicing is done on
a recourse basis, the Company is exposed to credit risk with respect to the
underlying loan in the event of a repurchase. Additionally, many of the
nonrecourse mortgage servicing contracts owned by the Company require the
Company 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. The
Company, therefore, 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
are generally not fully reimbursable by FNMA, FHLMC or the Government National
Mortgage Association ("GNMA"), for whom the Company provides significant amounts
of mortgage loan servicing. As of December 31, 1998 and 1997, the Company had
advanced approximately $7.9 million and $5.7 million, respectively, in funds on
behalf of third party investors.

     MSRs 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 MSRs and the loss of future servicing fees. To date, there
have been no terminations of MSRs by any mortgage loan owners because of the
Company's failure to service the loans in accordance with its obligations.

     In order to track information on its servicing portfolio, the Company
utilizes a data processing system provided by Alltel Information Services, Inc.
("Alltel"), one of the largest mortgage banking service bureaus in the United
States. Management believes that this system gives the Company sufficient
capacity to support anticipated expansion of its residential mortgage loan
servicing portfolio.

     The following table sets forth certain information regarding the
composition of the Company's mortgage servicing portfolio (excluding loans
subserviced for others) as of the dates indicated:

<TABLE>
<CAPTION>
                                                                                          AS OF DECEMBER 31,
                                                                    ----------------------------------------------------
                                                                       1998                   1997               1996               
                                                                    ------------         ------------       ------------            
                                                                                        (IN THOUSANDS)     
<S>                                                                 <C>                  <C>                <C>                     
FHA insured/VA guaranteed residential..........................     $    960,053         $    699,056       $    318,145            
Conventional loans.............................................        4,338,308            2,633,563          2,171,016            
Other loans....................................................           59,368               15,443             15,875            
                                                                    ------------         ------------       ------------            
     Total mortgage servicing portfolio........................     $  5,357,729         $  3,348,062       $  2,505,036            
                                                                    ============         ============       ============            

Fixed rate loans...............................................     $  4,234,349         $  2,691,409       $  1,986,599            
Adjustable rate loans..........................................        1,123,380              656,653            518,437            
                                                                    ------------         ------------       ------------            

     Total mortgage servicing portfolio........................     $  5,357,729         $  3,348,062       $  2,505,036            
                                                                    ============         ============       ============            
</TABLE>

                                       8
<PAGE>
 
     The following table shows the delinquency statistics for the mortgage loans
serviced by the Company (excluding loans subserviced for others) compared with
national average delinquency rates as of the dates presented:

<TABLE>
<CAPTION>
                                                          AS OF  DECEMBER 31,
                          ----------------------------------------------------------------------------------
                                             1998                                      1997                     
                          ----------------------------------------    --------------------------------------    
                                                        NATIONAL                                  NATIONAL      
                                    COMPANY            AVERAGE(1)             COMPANY            AVERAGE(1)     
                          -------------------------    -----------    -----------------------    -----------    
                            NUMBER     PERCENTAGE      PERCENTAGE     NUMBER     PERCENTAGE      PERCENTAGE     
                              OF      OF SERVICING         OF           OF      OF SERVICING         OF         
                            LOANS     PORTFOLIO(2)        LOANS       LOANS     PORTFOLIO(2)        LOANS       
                          --------    -------------    -----------    ------    -------------    -----------    
<S>                       <C>         <C>              <C>            <C>       <C>              <C>            
Loans delinquent for:                                                                                           
 30-59 days...............   3,120          3.98%          2.96%       3,558          5.78%          3.03%      
 60-89 days...............     612          0.78           0.68          835          1.36           0.71       
 90 days and over.........     712          0.91           0.60          912          1.48           0.62       
                          --------     ---------      ---------    ---------     ---------       --------  
 Total delinquencies......   4,444          5.67%          4.24%       5,305          8.62%          4.36%      
                          ========     =========      =========    =========      ========      =========
 Foreclosures.............     727          0.93%          1.11%         447          0.73%          1.11%      
                          ========      ========       ========     ========      ========      =========         

<CAPTION> 
                                                 AS OF DECEMBER 31,
                                        -------------------------------------
                                                         1996               
                                        -------------------------------------
                                                                     NATIONAL
                                                COMPANY             AVERAGE(1)
                                     -------------------------    ------------
                                        NUMBER     PERCENTAGE       PERCENTAGE
                                          OF      OF SERVICING          OF   
                                        LOANS     PORTFOLIO(2)         LOANS 
                                     ---------   -------------    ------------
<S>                                  <C>         <C>              <C>       
Loans delinquent for:                                                        
 30-59 days...............               2,607          5.45%            3.04%
 60-89 days...............                 667          1.40             0.71
 90 days and over.........                 684          1.43             0.62
                                     ---------   ------------     ------------
 Total delinquencies......               3,958          8.28%            4.37%
                                     =========   ============     ============
 Foreclosures.............                 264          0.55%            1.03%
                                     =========   ============     ============
</TABLE> 

________________
(1) Source: Mortgage Bankers Association, "Delinquency Rates of 1- to 4-Unit
    Residential Mortgage Loans" (Seasonally Adjusted) (Data as of December 31,
    1998, 1997 and 1996, respectively).
(2) Delinquencies and foreclosures generally exceed the national average due to
    high rates of delinquencies and foreclosures on certain bulk loan and bulk
    servicing portfolios acquired by the Company at a discount.

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

<TABLE>
<CAPTION>
                                                         AS OF  DECEMBER 31,                                
                        ------------------------------------------------------------------------------------
                                           1998                                       1997                  
                        -----------------------------------------    ---------------------------------------
                                                     PERCENTAGE                                 PERCENTAGE  
                          NUMBER     AGGREGATE      OF AGGREGATE     NUMBER     AGGREGATE      OF AGGREGATE 
                            OF       PRINCIPAL        PRINCIPAL        OF       PRINCIPAL        PRINCIPAL  
          RATE            LOANS       BALANCE          BALANCE       LOANS       BALANCE          BALANCE   
                        --------     --------       ------------     ------     ---------      ------------
                                                        (DOLLARS IN THOUSANDS)                              
<S>                       <C>        <C>            <C>              <C>        <C>            <C>          
Less than 7.00%.........   7,123     $   662,491         12.36%       2,968     $   220,582          6.59%  
7.00%-- 7.99%...........  22,341       1,799,472         33.59       13,836         915,789         27.35   
8.00%-- 8.99%...........  26,702       1,859,471         34.71       19,800       1,121,807         33.51   
9.00%-- 9.99%...........  15,557         731,586         13.65       15,780         696,575         20.80   
10.00%--10.99%..........   6,067         284,637          5.31        9,086         390,956         11.68   
11.00%--11.99%..........     251           9,441          0.18           37           2,110          0.06   
12.00% and over.........     305          10,631          0.20           10             243          0.01   
                        --------     -----------     ---------    ---------     -----------      --------  
 Total..................  78,346     $ 5,357,729        100.00%      61,517     $ 3,348,062        100.00%  
                        ========     ===========     =========    =========     ===========      ========

<CAPTION>                                                                                 
                                                   AS OF DECEMBER 31,
                                        -----------------------------------------
                                                          1996                
                                        -----------------------------------------
                                                                     PERCENTAGE
                                           NUMBER     AGGREGATE     OF AGGREGATE
                                             OF       PRINCIPAL       PRINCIPAL 
                                           LOANS       BALANCE         BALANCE  
                                        ------------ -----------    ------------- 
                                                (DOLLARS IN THOUSANDS)
<S>                                     <C>          <C>            <C> 
Less than 7.00%.........                    3,545     $   145,720           5.82%
7.00%-- 7.99%...........                   12,269         726,800          29.01
8.00%-- 8.99%...........                   14,011         838,215          33.46
9.00%-- 9.99%...........                    9,567         413,598          16.51
10.00%--10.99%..........                    6,322         301,837          12.05
11.00%--11.99%..........                    1,144          45,111           1.80
12.00% and over.........                      924          33,755           1.35
                                        ---------     -----------    ----------- 
                                           47,782     $ 2,505,036         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 maturity of the mortgage loans serviced by the Company (excluding
loans subserviced for others) as of the dates shown. The changes in the
remaining maturities as a percentage of unpaid principal between 1998, 1997 and
1996, as reflected below, are the result of acquisitions of MSRs completed
during 1998 and 1997.

<TABLE>
<CAPTION>
                                                          AS OF  DECEMBER 31,
                  -------------------------------------------------------------------------------------------------------
                                           1998                                                  1997                       
                  --------------------------------------------------    -------------------------------------------------
                                                         PERCENTAGE                                          PERCENTAGE     
                    NUMBER     PERCENTAGE      UNPAID      UNPAID       NUMBER    PERCENTAGE      UNPAID       UNPAID       
                      OF       OF NUMBER      PRINCIPAL   PRINCIPAL       OF      OF NUMBER      PRINCIPAL    PRINCIPAL     
   MATURITY         LOANS       OF LOANS       AMOUNT      AMOUNT       LOANS      OF LOANS       AMOUNT       AMOUNT       
   --------       --------     ----------     ---------  ----------    -------    ----------     ---------   ------------ 
                                                          (DOLLARS IN THOUSANDS)
<S>               <C>          <C>          <C>          <C>           <C>        <C>          <C>           <C> 
1-- 5 years....      9,478       12.10%     $   216,441        4.04%     7,485      12.17%     $   103,761         3.10%    
6--10 years....     21,320       27.21          943,428       17.61     11,405      18.54          257,208         7.68     
11--15 years...     10,231       13.06          534,187        9.97     14,325      23.29          589,747        17.62     
16--20 years...      7,870       10.04          545,628       10.18      9,600      15.61          558,605        16.68     
21--25 years...     12,524       15.99        1,184,562       22.11      7,427      12.07          687,563        20.54     
More than 25        
 years.........     16,923       21.60        1,933,483       36.09     11,275      18.32        1,151,178        34.38     
                  --------     -------      -----------  ----------    -------    -------      -----------   ----------
 Total.........     78,346      100.00 %    $ 5,357,729      100.00%    61,517     100.00%     $ 3,348,062       100.00%     
                  ========     =======      ===========  ==========    =======    =======      ===========   ==========

<CAPTION> 
                                          AS OF DECEMBER 31,
                         ---------------------------------------------------- 
                                                 1996                 
                         -----------------------------------------------------
                                                                    PERCENTAGE 
                           NUMBER    PERCENTAGE         UNPAID        UNPAID   
                             OF       OF NUMBER        PRINCIPAL     PRINCIPAL 
   Maturity                LOANS      OF LOANS          AMOUNT        AMOUNT         
   --------              ---------   ----------       ----------   -----------
                                         (DOLLARS IN THOUSANDS)
<S>                      <C>         <C>             <C>           <C> 
1-- 5 years....             5,020         10.51%     $    77,136          3.08%
6--10 years....             8,784         18.39          184,629          7.37 
11--15 years...             6,418         13.43          340,282         13.58 
16--20 years...            14,066         29.44          566,862         22.63 
21--25 years...             7,006         14.66          545,336         21.77 
More than 25 
 years.........             6,488         13.57          790,791         31.57 
                          -------       -------      -----------       -------
 Total.........            47,782        100.00%     $ 2,505,036        100.00% 
                          =======       =======      ===========       =======
</TABLE> 

                                       9
<PAGE>
 
     The Company's servicing activity is diversified throughout all 50 states
with concentrations at December 31, 1998 in California, Florida and Texas of
approximately 19.9%, 9.5% and 8.3%, respectively, based on aggregate outstanding
unpaid principal balances of the mortgage loans serviced.

     ACQUISITION OF SERVICING RIGHTS. The Company's strategy with respect to
mortgage servicing focuses on acquiring servicing for which the underlying
mortgage loans tend to be more seasoned and have lower principal and higher
custodial escrow balances than newly originated mortgage loans. Management
believes this strategy allows the Company to mitigate its prepayment risk, while
allowing the Company to capture relatively high custodial escrow balances in
relation to the outstanding principal balance. During periods of declining
interest rates, prepayments of mortgage loans 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 from refinancing to the borrower can be significant. However, the
Company remains opportunistic in its acquisition philosophy. If a higher
balance, less seasoned portfolio is available at the Company's desired internal
rate of return, the Company may, from time to time, pursue such acquisitions.

     The following table shows quarterly and annual average prepayment rate
experience on the mortgage loans serviced by the Company (excluding loans
subserviced by and for others):

<TABLE>
<CAPTION>
                                            FOR THE YEAR ENDED DECEMBER 31,  
                                           ---------------------------------- 
                                           1998(1)(2)     1997(3)      1996   
                                           ---------    -----------   ------- 
    <S>                                    <C>          <C>           <C>     
    Quarter ended:                                                            
     December 31........................     28.36%       12.52%      12.19%  
     September 30.......................     23.60        12.75       11.53   
     June 30............................     21.53        10.94       12.00   
     March 31...........................     17.00         8.97       11.83   
                                             -----        -----       -----
    Annual average......................     22.62%       11.30%      11.89%  
                                             =====        =====       =====   
</TABLE>

 _________________
(1) These prepayment rates exclude prepayment experience for MSRs subserviced
    for the Company by others of $930 million, $703 million, $0 and $1.3 billion
    for the quarters ended December 31, September 30, June 30, and March 31,
    1998, respectively.

(2) These prepayment rates do not include prepayments which resulted from the
    Company targeting its own servicing portfolio for refinance opportunities.

(3) These prepayment rates exclude prepayment experience for MSRs subserviced
    for the Company by others of $700 million, $1.1 billion, $610 million and
    $1.3 billion for the quarters ended December 31, September 30, June 30, and
    March 31, 1997, respectively.

    The Company acquires substantially all of its MSRs in the secondary market.
The secondary market for purchasing and selling MSRs is inefficient in several
respects, including the lack of a centralized exchange for conducting trading,
the lack of definitive market prices and the lack of conformity in modeling
assumptions. The industry expertise of United Financial and Matrix Financial
allows the Company to capitalize upon these inefficiencies when acquiring MSRs.
Prior to completing any such acquisition, the Company analyzes 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 Matrix Financial 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 and loan prepayment assumptions that management considers to be
appropriate to reflect the risk associated with the investment.

    SERVICING SALES. The Company periodically sells its purchased mortgage
servicing portfolios and generally sells all originated MSRs. Such sales
increase revenue (reflected in loan origination income for originated servicing
and gain on sale of servicing for purchased servicing) and generate cash at the
time of sale, but reduce future servicing fee income. Originated MSRs were sold
on both a bulk and flow basis on loans having an aggregate principal amount of
$277.4 million and $186.1 million during the years ended December 31, 1998 and
1997, respectively. Periodically, the Company may also sell purchased MSRs to
restructure its portfolio or generate revenues. Purchased MSRs were sold on
loans having an aggregate principal amount of $175.3 million and $1.3 billion
during the years ended December 31, 1998 and 1997, for net gains of $803,000 and
$3.4 million, respectively.

    The Company anticipates that it will continue to adhere to its policy of
selling substantially all originated MSRs. The Company also may sell purchased
MSRs. Management intends to base decisions regarding future mortgage servicing
sales upon the Company's cash requirements, purchasing opportunities, capital
needs, earnings and the market price for MSRs. During a quarter in which a sale
of purchased MSRs occurs, reported income will tend to be greater than if such
sale had not occurred during that quarter. Prices obtained for MSRs 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.

                                       10
<PAGE>
 
     In the ordinary course of selling MSRs, the Company, in accordance with
industry standards, makes certain representations and warranties to purchasers
of MSRs. If a loan defaults and there has been a breach of representations or
warranties and the Company has no third party recourse, the Company may become
liable for the unpaid principal and interest on defaulted loans. In such a case,
the Company may be required to repurchase the mortgage loan and bear any
subsequent loss on the loan. In connection with any purchases by the Company of
MSRs, the Company also is exposed to liability to the extent that an originator
or seller of the MSRs is unable to honor its representations and warranties.
Historically, the Company has not incurred material losses due to breaches of
representations and warranties, and the Company does not anticipate any future
material losses due to breaches of representations and warranties; however,
there can be no assurance that the Company will not experience such losses.

     HEDGING OF SERVICING RIGHTS. Ownership of MSRs exposes the Company to
impairment of its investment in certain interest rate environments. As
previously discussed, the 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, an impairment in the associated basis in
the MSRs may occur. To mitigate this risk of impairment due to declining
interest rates, the Company initiated a hedging strategy during 1997 which is
managed by UCM. The Company analyzed its servicing portfolio for potential
segments more susceptible to interest-rate risk. Based on the Company's
analysis, which focused on higher fixed rate, higher balance, less seasoned
loans in the servicing portfolio, the Company hedged a segment of its portfolio.
As of December 31, 1998 and 1997, the Company had identified and hedged $674
million and $306 million, respectively, of its servicing portfolio using a
program of exchange-traded futures and options. Additionally, as of December 31,
1998 and 1997, the net realized deferred gains and the unrealized deferred gains
(losses) of the open positions was approximately $420,000 and $275,000,
respectively. The unrealized gain (loss) is recorded as an adjustment to the
basis of the corresponding investment in MSRs. The hedging program qualifies for
hedge accounting treatment based on a high degree of statistical correlation and
current accounting regulation. The Company only hedges fixed rate loans in its
servicing portfolio, as correlation cannot be established for adjustable rate
loans.

     RESIDENTIAL MORTGAGE LOAN ORIGINATION. The Company originates residential
mortgage loans on both a wholesale and retail basis through Matrix Financial and
Matrix Bank. For the years ended December 31, 1998 and 1997, Matrix Financial
originated a total of $575.0 million and $403.0 million in residential mortgage
loans, respectively.

     Wholesale Originations. Matrix Financial's primary source of mortgage loan
originations is its wholesale division, which originates mortgage loans through
approved independent mortgage loan brokers that 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, 1998, Matrix Financial had approved relationships with
approximately 600 mortgage loan brokers. From Matrix Financial's offices in
Atlanta, Denver, Las Vegas and Phoenix, the sales staff solicits mortgage loan
brokers throughout the Southeastern and Rocky Mountain areas of the United
States for mortgage loans that meet Matrix Financial's criteria. Mortgage loans
submitted by brokers are funded after being underwritten by Matrix Financial.

     Mortgage loan brokers act as intermediaries between borrowers and Matrix
Financial in arranging mortgage loans. Matrix Financial, as an approved FNMA,
FHLMC and GNMA seller/servicer, provides such 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 its product offerings made through its wholesale loan
origination network, the Company offers 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 services and swift response to their loan
applications. As a result, these borrowers generally are not averse to paying
higher interest rates for this loan product type, as compared to the interest
rates charged by conventional lending sources. The Company has established
classifications with respect to the credit profiles of these borrowers. The
classifications range from A- through D depending upon a number of factors,
including the borrower's credit history and employment status. During 1998 and
1997, Matrix Financial originated $45.7 million and $48.3 million, respectively,
of A- through D credit residential mortgage loans, all of which were sold to
unaffiliated third party investors on a nonrecourse basis under standard
industry representations and warranties.

     Matrix Financial's management has decided, for strategic purposes, to
increase its emphasis on wholesale originations through hiring additional sales
staff at existing offices. In today's interest rate environment, increased loan
origination volumes can act as a hedge against the decreasing value of mortgage
servicing portfolios caused by increased prepayments.

                                       11
<PAGE>
 
     Retail Originations. Matrix Bank originates residential loans on a retail
basis through its branches in Las Cruces, New Mexico and Sun City, Arizona. In
early 1997, Matrix Bank opened a lending office in Evergreen, Colorado. This
location originates primarily residential construction loans and commercial
loans in the local market place. The Company anticipates that the construction
loans funded through the Evergreen office will be converted to permanent
mortgage loans funded through Matrix Bank. 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.

     In 1998, the Company converted its telemarketing call center, located in
Denver, into a retention center which is focusing on the solicitation of the
Company's servicing portfolio for refinancing opportunities. The goal in
soliciting the portfolio is to identify those mortgagees who are likely to
refinance and have them refinance with Matrix Financial, thereby preserving a
portion of our servicing portfolio, which would have been likely to prepay
anyway.

     QUALITY CONTROL. The Company has a loan quality control process designed to
ensure sound lending practices and compliance with FNMA, FHLMC and applicable
private investor guidelines. Prior to funding any wholesale or retail loan, the
Company performs a pre-funding quality control audit that consists of the
verification of employment and utilizes a detailed checklist. Subsequent to
funding, the Company, on a monthly basis, selects 10% of all closed loans for a
detailed audit conducted by its 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
senior management of the Company to determine trends and additional training
needs. All resolvable issues are addressed and cured by the Company. The Company
also performs a quality control audit on all early payment defaults, first
payment defaults and 60-day delinquent loans; the findings are reported to the
appropriate investor and/or senior management.

     SALE OF LOAN ORIGINATIONS. The Company generally sells the residential
mortgage loans that it originates. Under ongoing programs established with FNMA
and FHLMC, conforming conventional loans may be sold on a cash basis or pooled
by the Company and exchanged for securities guaranteed by FNMA or FHLMC. These
securities are then sold by the Company to national or regional broker/dealers.
Mortgage loans sold to FNMA or FHLMC are sold on a nonrecourse basis so that
foreclosure losses are generally borne by FNMA or FHLMC and not by the Company.

     The Company also sells nonconforming residential mortgage loans on a
nonrecourse basis to other secondary market investors. These 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 the Company has previously negotiated purchase commitments, and for which
the Company occasionally pays a fee.

     The Company sells 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. In all other cases the decision is left
to the Company. Generally, the Company sells conforming loans on a servicing-
retained basis and nonconforming loans on a servicing-released basis. See "--
Residential Mortgage Loan Servicing."

     In connection with the Company's residential mortgage loan originations and
sales, the Company makes customary representations and warranties, similar in
nature and scope to those provided in connection with sales of MSRs. The
Company's experience has been that giving such representations and warranties
rarely results in a request for repurchases or repurchases of a significant
amount of residential mortgage loans in a given transaction. However, there can
be no assurance that the Company 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 issued.

     The sale of mortgage loans may generate a gain or loss for the Company.
Gains or losses result primarily from two factors. First, the Company may make a
loan to a borrower at a price that is higher or lower than it would receive if
it 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 result in changes in the market value of the mortgage loans
from the time that the price commitment is given to the borrower until the time
that the mortgage loan is sold to the investor.

     In order to hedge against the interest rate risk resulting from these
timing differences, the Company historically has 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
("pipeline loans"). The Company adjusts its net commitment position daily either
by entering into new commitments to sell or by buying back commitments to sell
depending upon its projection of the portion of the pipeline loans that it
expects 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

                                       12
<PAGE>
 
of the Company's use of forward commitments and subsequent profitability. At
December 31, 1998, the Company had approximately $133.7 million in pipeline and
funded loans offset with mandatory forward commitments of approximately $110.0
million and non-mandatory forward commitments of approximately $10.1 million.
The inherent value of the forward commitments is considered in the determination
of the lower of cost or market in valuing the Company's pipeline and funded
loans at any given time. For a discussion of secondary marketing losses incurred
by the Company during 1996, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Comparison of Results of
Operations for Fiscal Years 1997 and 1996--Loan Origination."

SELF-DIRECTED TRUST ACTIVITIES

     Sterling Trust provides administrative services for self-directed
individual retirement accounts ("IRAs"), qualified business retirement plans,
personal custodial accounts and a variety of corporate trust and escrow
arrangements. Sterling Trust actively markets its services on a nationwide basis
to the financial services industry, specifically broker/dealers, registered
representatives, insurance agents, tax professionals, financial planners and
advisors and investment product sponsors. The advantage Sterling Trust offers to
these financial service professionals is the ability to hold a wide-array of
assets, including all types of public offerings as well as non-standard assets
such as real estate, individually-negotiated debt instruments and private
offerings of securities. Sterling Trust retains no discretion with respect to
the investment of trust assets, and executes no investment transaction until so
instructed by the client or the client's designated representative.

     Sterling Trust's self-directed IRAs offer the client the freedom of choice
and the convenience of consolidation. Sterling Trust handles all of the
maintenance and administrative duties needed to maintain the tax-deferred status
of IRA accounts. All accounts are 100% self-directed and Sterling Trust offers
no investment advice or investment products.

     In the qualified business retirement plan arena, Sterling Trust offers a
combination of investment flexibility along with record keeping services on
401(k) plans, profit sharing plans, money purchase pension plans, and other
types of defined contribution plans, as well as defined benefit plans. In
addition, for employers who desire the handling of investment transactions for
the qualified plan but don't require Sterling Trust's full services, record
keeping only services are available as an option.

     Non-qualified custodial services are also available which offer the same
flexibility and reporting services as are available for retirement plans.
Sterling Trust offers the service of monitoring and tracking all investments
within client's portfolios.

     Sterling Trust also provides a full range of corporate trust and escrow
services to investment product sponsors. In general, Sterling Trust will
consider serving as administrative trustee on various types of documents, as
long as Sterling Trust has no discretion with regard to the investment of
assets. Typical administrative services include holding of trust assets,
periodic reporting on investment activity, paying agent services, and issuing
and maintaining investor records.

     In 1998, the Company began to offer specialized custody and clearing
services to investment professionals. These services are provided via a direct
connection with National Securities Clearing Corp. ("NSCC") using FundSERV to
streamline and secure the trading process. The Company also offers a mutual fund
No Transaction Fee Supermarket that includes over 72 fund families and over
1,300 funds.

     At December 31, 1998, Sterling Trust had assets under administration of
almost $2.1 billion. Historically, approximately 6% to 8% of the assets under
administration are maintained in interest-bearing accounts. These accounts,
which approximated $137.0 million at December 31, 1998, are held at Matrix Bank.
See "General--The Subsidiaries--Matrix Bank".

REAL ESTATE MANAGEMENT AND DISPOSITION SERVICES

     USS provides real estate management and disposition services to customers
across the United States. In addition to the unaffiliated clients currently
served by USS, many of whom are also clients of United Financial, Matrix
Financial uses USS exclusively in handling the disposition of its foreclosed
real estate. Having USS provide this service, as opposed to Matrix Financial,
transforms the disposition process into a revenue generator for the Company,
since USS 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 USS typically collects its fee from the real estate broker, USS is able
to provide this disposition service on an outsourced basis and at no additional
cost to the mortgage loan servicer. USS is able to pass the cost of the
disposition on to the real estate broker because of the volume it generates. In
addition, USS provides limited collateral valuation opinions to clients who are
interested in assessing the value of the underlying collateral on non-performing
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.

                                       13
<PAGE>
 
COMPETITION

     The industries in which the Company operates are highly competitive. The
Company competes for the acquisition of MSRs and bulk loan portfolios mainly
with mortgage companies, savings associations, commercial banks and other
institutional investors. The Company believes that it has competed successfully
for the acquisition MSRs and bulk loan portfolios by relying on the advantages
provided by its unique corporate structure and the secondary marketing expertise
of the employees in each Subsidiary.

     Management believes that Matrix Bank's most direct competition for deposits
comes from local financial institutions. The distinction among market
participants is 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,
additional significant competition for deposits may be expected 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.

     Competition in mortgage loan and MSRs brokerage and consulting arises
mainly from other mortgage banking consulting firms, national and regional
investment banking companies and accounting firms. Management believes that the
distinction among market participants is based primarily on customer service.
United Financial competes for its brokerage and consulting activities by
recruiting qualified and experienced sales people, by developing innovative
sales techniques, by offering superior analytical services, including hedging
strategies, by providing financing opportunities to its customers through its
affiliation with Matrix Bank and by seeking to provide a higher level of service
than is furnished by its competitors.

     Competition in originating mortgage loans arises mainly from other mortgage
companies, finance companies, savings associations and commercial banks. The
distinction among market participants is based primarily on price and, to a
lesser extent, the quality of customer service and name recognition. Aggressive
pricing policies of the Company's competitors, especially during a declining
period of mortgage loan originations, could in the future result in a decrease
in the Company's mortgage loan origination volume and/or a decrease in the
profitability of the Company's loan originations, thereby reducing the Company's
revenues and net income. The Company competes for loans by offering competitive
interest rates and product types and by seeking to provide a higher level of
personal service to mortgage brokers and borrowers than is furnished by
competitors. However, the Company does not have a significant market share of
the lending markets in which it conducts operations.

     Sterling Trust faces considerable competition in all of the services and
products that it offers. The main competition comes 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 niche retirement products. In an effort to increase market
share, Sterling Trust will endeavor to provide superior service, expand its
marketing efforts, provide competitive pricing and continue to diversify its
product mix.

     UCM faces competition from in-house risk management departments and Wall
Street derivative products. UCM believes that distinction among market
participants is based on name recognition, price and customer service and
satisfaction. UCM competes by offering a unique hedging product that tends to be
of lower cost than the products offered by competitors.

     USS's main competitors consist of Cendant (formerly PHH, which was
purchased by FHLMC), the Clayton Group (formerly Prudential Asset Recovery) and
FNMA, which offers real estate disposition services on an outsourced basis.
Additionally, clients or potential clients that opt to perform these services 
in-house, also diminish USS's market.

EMPLOYEES

     At December 31, 1998, the Company had 447 employees. Management believes
that its relations with its employees are good. Neither Matrix Bancorp nor any
of the Subsidiaries is a party to any collective bargaining agreement.

REGULATION AND SUPERVISION

     Set forth below is a brief description of various laws and regulations
affecting the operations of the Company. The description of laws and regulations
contained herein 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 the business, operations and prospects of the Company.

                                       14
<PAGE>
 
     MATRIX BANCORP. The Company is a unitary thrift holding company within the
meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA").  As such,
Matrix Bancorp has registered with the Office of Thrift Supervision ("OTS") and
is subject to OTS regulation, examination, supervision and reporting
requirements.  In addition, the OTS has enforcement authority over Matrix
Bancorp and its non-savings institution Subsidiaries.  Among other things, this
authority permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to Matrix Bank.  In addition, Matrix Bank must notify the
OTS at least 30 days before making any distribution to Matrix Bancorp.

     As a unitary thrift holding company, Matrix Bancorp generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that Matrix Bank continues to be a "qualified thrift
lender" ("QTL") under HOLA.  Upon any nonsupervisory acquisition by Matrix
Bancorp of another savings association or savings bank that meets the QTL test
and is deemed to be a savings institution by the OTS, Matrix Bancorp would
become a multiple thrift holding company (if the acquired institution is held as
a separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage.  HOLA limits the
activities of a multiple thrift holding company and its uninsured institution
subsidiaries primarily to activities permissible for bank holding companies
under Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended (the
"BHC Act"), subject to the prior approval of the OTS, and activities authorized
by OTS regulation.

     Legislation has been proposed that would (i) permit banking, insurance and
securities industries to merge, (ii) subject unitary thrift holding companies
such as Matrix Bancorp to regulation by the Board of Governors of the Federal
Reserve ("FRB") rather than the OTS, and (iii) eliminate the federal thrift
charter and the OTS.  A bill that was passed by the House of Representatives in
1998 would subject unitary savings and loan holding companies to the activity
restrictions generally applicable to multiple savings and loan holding
companies.  A grandfathering provision would allow existing unitary savings and
loan holding companies to continue to engage in activities permitted unitary
savings and loan holding companies under existing law and the grandfathering
could be transferred to acquirers.  It is too early to tell whether legislation
would result in the imposition on the Company of the capital requirements
applicable to bank holding companies.  The Company is also unable to predict
whether legislation will be enacted or, given such uncertainty, determine the
extent to which the legislation, if enacted, would affect its business.  The
Company is also unable to predict whether the Savings Association Insurance Fund
("SAIF") and the Bank Insurance Fund ("BIF") will eventually be merged.
 
     FEDERAL SAVINGS BANK OPERATIONS. Matrix Bank is subject to extensive
regulation, examination and supervision by the OTS, as its chartering authority
and primary regulator, and potentially by the Federal Deposit Insurance
Corporation ("FDIC"), which insures its deposits up to applicable limits.  Such
regulation and supervision (i) establishes a comprehensive framework of
activities in which Matrix Bank can engage, (ii) limits the ability of Matrix
Bank to extend credit to any given borrower, (iii) imposes specified liquidity
requirements, (iv) specifically restricts the transactions in which Matrix Bank
may engage with its affiliates, (v) requires Matrix Bank to meet a QTL test that
imposes a level of portfolio assets in which Matrix Bank must invest (primarily
residential mortgages and related investments), (vi) places limitations on
capital distributions by savings associations such as Matrix Bank, including
cash dividends, (vii) imposes assessments to the OTS to fund its operations,
(viii) establishes a continuing and affirmative obligation, consistent with
Matrix Bank's safe and sound operation, to help meet the credit needs of the
entire community, including low and moderate income neighborhoods, (ix) requires
Matrix Bank to maintain certain noninterest-bearing reserves against its
transaction accounts, (x) establishes various capital categories resulting in
various levels of regulatory scrutiny applied to the institutions in a
particular category and (xi) establishes standards for safety and soundness.  In
addition, insured institutions with total assets of $500 million or more, such
as Matrix Bank, beginning with 1999 fiscal year financial results, must submit
annual audit reports prepared by independent auditors to federal and state
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 OTS. The 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. During 1998,
Matrix Bank adopted revisions to its audit policy to comply with these
requirements. 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 such regulations, whether by the OTS,
the FDIC or the Congress could have a material impact on Matrix Bank and its
operations.

     Know Your Customer Rules. The OTS has proposed "Know Your Customer" rules,
which are intended to detect patterns of large cash deposits and withdrawals
outside the "normal" activity of accountholders at financial institutions.  The
proposed regulations would require each institution to develop a program to:
determine the identity of customers, their source of funds and their normal and
expected transactions as well as to monitor account activity for inconsistencies
with normal and expected transactions, and report any suspicious transactions.
The proposed regulations were jointly proposed by the federal banking agencies.
Since then, the FDIC and the Comptroller of the Currency have indicated that
they will withdraw the proposal.  Therefore, it is uncertain if or whether such
regulations will be adopted in any form.  The proposed regulations, if adopted,
could, at least initially, result in additional personnel costs.

                                       15
<PAGE>
 
     Transactions with Affiliates. Under current federal law, Sections 23A and
23B of the Federal Reserve Act govern transactions between depository
institutions and their affiliates. In a holding company context, at a minimum,
the parent holding company of a savings institution and any companies that are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Section 23A limits the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to 10% of such savings institution's capital stock and surplus,
and contains an aggregate limit on all such transactions with all affiliates to
20% of capital stock and surplus. The term "covered transaction" includes, among
other things, the making of loans or other extensions of credit to an affiliate
and the purchase of assets from an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees or acceptances on letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on terms substantially the same, or no less favorable,
to the savings institution or its subsidiary as similar transactions with
nonaffiliates. Matrix Bank engages in transactions with its affiliates, which
are structured with the intent of complying with such regulations.

     Insurance of Accounts and Regulation by the FDIC. Matrix Bank is a member
of the SAIF, which is administered by the FDIC. Savings deposits are insured up
to $100,000 per insured member (as defined by law and regulation) by the FDIC.
Such insurance is backed by the full faith and credit of the United States. As
insurer, the FDIC imposes deposit insurance assessments and is authorized to
conduct examinations of and to require reporting by the FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC 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 Improvement Act of 1991
("FDICIA") required the FDIC to implement a risk-based deposit insurance
assessment system. Pursuant to this requirement, the FDIC has adopted a risk-
based assessment system under which all SAIF insured depository associations are
placed into one of nine categories and assessed based upon their level of
capital and supervisory evaluation. Under this system, associations classified
as well capitalized and considered healthy pay the lowest assessment while
associations that are less than adequately capitalized and considered of
substantial supervisory concern pay the highest assessment. In addition, under
FDICIA, the FDIC may impose special assessments on SAIF members to repay amounts
borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. The FDIC may increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. Matrix Bank's current assessment is .064% of deposits, which is the lowest
rate.

     By contrast, financial institutions that are members of the BIF, which has
higher reserves, experienced lower deposit insurance assessments.  The disparity
in deposit insurance assessments between SAIF and BIF members was exacerbated by
the statutory requirement that both the SAIF and the BIF funds be recapitalized
to a 1.25% reserved deposits ratio and that a portion of most thrift's deposit
insurance assessments be used to service bonds issued by the Financial
Corporation ("FICO").  BIF reached the required reserve ratio in 1995.  As a
result, financial institutions that have deposits insured by the SAIF were
subject to a potential competitive disadvantage as compared to BIF members.

     On September 30, 1996, the President signed legislation that provides for
BIF members to service a growing portion of the FICO bond payments. Until
January 1, 2000, annual assessments of .013% of BIF deposits and .064% of SAIF
deposits will service the annual payments due on the FICO bonds. Accordingly,
Matrix Bank's portion of the payment on the FICO bonds is .064% of the deposits.
The legislation provided for subsequent full pro rata sharing of FICO bond
payments by BIF and SAIF institutions. The legislation called for a merger of
the SAIF and BIF as of January 1, 1999, but only if the thrift charter has been
eliminated.

     The financing corporations created by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, as amended ("FIRREA") and the Competitive
Equality Banking Act of 1987 are also empowered to assess premiums on savings
associations to help fund the liquidation or sale of troubled associations.
Such premiums cannot, however, exceed the amount of SAIF assessments and are
paid in lieu thereof.

     Brokered Deposits. Under the FDIC regulations governing brokered deposits,
well capitalized associations 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.  Matrix Bank is considered to be a well capitalized association.
Although Matrix Bank historically had not accepted brokered deposits, it began
to do so in February 1998 to allow for the desired growth of Matrix Bank.  At
December 31, 1998, Matrix Bank had $148.7 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 liquidity.  It is possible that such
alternatives, if available, would result in a higher cost of funds.

                                       16
<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 OTS has adopted regulations to implement the prompt corrective action
legislation.  An institution is deemed to be "well capitalized" if it has a
total risk-based capital ratio of 10% or greater and a leverage ratio of 5% or
greater.  An institution is "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.  An institution is
"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%.  An institution is deemed to be "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%.  An institution is considered to be "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, 1998, Matrix Bank was a
"well capitalized" institution.

     "Undercapitalized" institutions must adhere to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan.  A savings institution's compliance with such 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" banks must comply with one or more of a number
of additional restrictions, including, but not limited to, an order by the OTS
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 by 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 such
status.

     The following table indicates Matrix Bank's regulatory capital ratios at
December 31, 1998:

<TABLE>
<CAPTION>
                                                                                         As of December 31, 1998
                                                                                 --------------------------------------
                                                                                     CORE                   RISK-BASED
                                                                                    CAPITAL                   CAPITAL
                                                                                 ------------              ------------
                                                                                          (DOLLARS IN THOUSANDS)
<S>                                                                             <C>                        <C> 
Shareholder's equity/GAAP capital.............................................   $     51,163              $     51,163
Additional capital items:
  General valuation allowances................................................             --                     2,985
                                                                                 ------------              ------------
Regulatory capital as reported to the OTS.....................................         51,163                    54,148
Minimum capital requirement as reported to the OTS............................         32,828                    36,938
                                                                                 ------------              ------------
Regulatory capital--excess....................................................   $     18,335              $     17,210
                                                                                 ============              ============
Capital ratios................................................................           6.23%                    11.73%
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.  FHLB
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 at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is
greater.  Matrix Bank was in compliance with this requirement with an investment
in FHLB stock at December 31, 1998 of $15.6 million.

     The FRB regulations require depository institutions to maintain 
noninterest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The FRB regulations generally require that
reserves be maintained against aggregate transaction accounts as follows: for
that portion of transaction accounts aggregating $46.5 million or less (which
may be adjusted by the FRB) the reserve requirement is 3%; and for accounts
greater than $46.5 million, the reserve requirement is $1.4 million plus 10%
(which may be adjusted by the FRB between 8% and 14%) against that portion of
total transaction accounts in excess of $46.5 million. At December 31, 1998,
Matrix Bank had $11.2 million of reserves with the Federal Reserve System.

                                       17
<PAGE>
 
     MORTGAGE BANKING OPERATIONS. The rules and regulations applicable to the
Company's 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, lenders, such as the Company, are required
annually to submit to the HUD, FNMA and FHLMC audited financial statements, and
each regulatory entity maintains its own financial guidelines for determining
net worth and eligibility requirements.  The Company's affairs are also subject
to examination by HUD, FNMA and FHLMC at any time to assure compliance with the
applicable regulations, policies and procedures.  Mortgage loan origination
activities are subject to, among others, the Equal Credit Opportunity Act,
Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act of
1974, as amended, and the regulations promulgated thereunder that prohibit
discrimination and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs.

     Additionally, there are various state and local laws and regulations
affecting the Company's operations. The Company is licensed in those states in
which it does business requiring such a license where the failure to be licensed
would have a material adverse effect on the Company, its business, or its
assets. Mortgage origination operations also may be subject to state usury
statutes.

     REGULATION OF STERLING TRUST COMPANY. Sterling Trust provides custodial
services and directed (nondiscretionary) 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 (the "TDB").  Under applicable law, a Texas trust company, such as
Sterling Trust, is subject to virtually all provisions of the Texas Finance Code
(the "TFC") 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 not less than $1
million, such as Sterling Trust, has the power to (i) purchase, sell, discount
and negotiate notes, drafts, checks and other evidences of indebtedness, (ii)
purchase and sell securities, (iii) issue subordinated debentures and capital
notes  with the written consent of the Texas Banking Commissioner (the
"Commissioner") and (iv) exercise powers incidental to the enumerated powers
described in the TFC.  A Texas trust company, such as Sterling Trust, is
generally prohibited from accepting demand or time deposits if not insured by
the FDIC.

     Limitation on Capital Distributions. The TFC prohibits a Texas trust
company from reducing its outstanding capital and restricted surplus through
redemption or other capital distribution without the prior written approval of
the Commissioner. The TFC does not prohibit the declaration and payment of pro
rata share dividends consistent with the Texas Business Corporation Act.

     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 can be converted into cash within four business days. Subject to
the requirements set forth in the preceding sentence, a Texas trust company is
permitted to invest its corporate assets in any investment permitted by law,
provided that without the prior written consent of the Commissioner or otherwise
provided by the TFC, a Texas trust company may not invest an amount in excess of
15% of its capital and certified surplus in the securities of a single issuer.

     Branching. The TFC permits a Texas trust company to establish and maintain
branch offices at any location within the state on prior written approval of the
Commissioner.

     Transactions with Related Parties. The TFC 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 such transaction is approved by a
disinterested majority of the board of directors or the prior written approval
of the Commissioner.

     Enforcement. Under applicable provisions of the TFC, the 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 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 Commissioner has the authority to assess
civil penalties of up to $500 per day for violations of a cease and desist,
removal or prohibition order.

     Capital Requirements. Applicable law requires a Texas trust company to have
and maintain capital of at least $1 million.  The Commissioner may require
additional capital of a Texas trust company if the Commissioner determines it
necessary to protect the safety and soundness of such company.  Sterling Trust
is in compliance with all capital requirements under Texas law.

                                       18
<PAGE>
 
ITEM 2.  PROPERTIES
         ----------

     The executive and administrative offices of the Company, United Financial
and UCM are located at 1380 Lawrence Street, Suite 1400, Denver, Colorado 80204.
The lease on these premises extends through December 2002 and the current annual
rent is approximately $185,000. The Company leases an additional 8,100 square
feet in downtown Denver for a monthly rental payment of approximately $8,400,
under terms that extend through June 2001. Most of this additional space is
utilized by USS's operations. The Company also owns a 30,000 square foot
building in Phoenix, which houses the majority of Matrix Financial's operations.
This building was purchased by the Company in 1994 and is subject to third party
mortgage indebtedness. See Note 8 to the Consolidated Financial Statements
included elsewhere herein. The Company also leases four smaller office
facilities in Atlanta, Denver, Las Vegas and Scottsdale, most of which are
currently used by Matrix Financial to conduct its wholesale loan origination
activities.

     Matrix Bank owns an approximately 30,000 square foot building in Las
Cruces, New Mexico. Of this 30,000 square feet, approximately 17,800 square feet
serve as the headquarters for Matrix Bank. Substantially all of the remaining
space is rented to unaffiliated third party tenants at market rates. Matrix Bank
also owns an 1,800 square foot detached branch in Las Cruces and an
approximately 3,000 square foot branch in Sun City, Arizona. Additionally,
Matrix Bank's loan origination branch in Evergreen, Colorado leases
approximately 1,650 square feet for a monthly rental payment of approximately
$3,000, under a lease that expires on January 1, 2000.

     Sterling Trust occupies approximately 11,300 square feet in Waco, Texas,
under a lease agreement that is in place until June 30, 2001, at a monthly
rental payment of $13,553. The lease agreement provides for renewal options and
allocation of certain expenses the lessee would reimburse over a specified
amount during the life of the lease. Three officers of Sterling Trust and an
officer of First Matrix own, in the aggregate, approximately 33% of the equity
interest in the lessor. Additionally, Sterling Trust leases another 928 square
feet, also in Waco, under a lease that expires on June 30, 1999, for a monthly
rental amount of $1,021. Management of Sterling Trust anticipates the renewal of
this lease at its expiration.

     First Matrix is located in Arlington, Texas and operates in a 1,446 square
foot office suite.  The current lease requires a monthly payment of $1,506 and
matures on April 30, 1999.  Management of First Matrix plans to renew this lease
for an additional year at a rate that slightly exceeds their current monthly
payment.

     UCM also leases approximately 1,550 square feet in St. Louis, Missouri for
a monthly rental payment of $2,325. The St. Louis lease extends through October
2000.

     The Company believes that all of its present facilities are adequate for
its current needs and that additional space is available for future expansion
upon acceptable terms.

ITEM 3.  LEGAL PROCEEDINGS
         -----------------

     United Financial is a defendant is a lawsuit entitled Douglas County Bank
& Trust Co. v. United Financial, Inc. that was commenced on or about May 23,
1997 in the United States District Court for the District of Nebraska. In the
action, the plaintiff-buyer alleged that United Financial, as broker for the
seller, made false representations regarding the GNMA certification of certain
mortgage pools, the servicing rights of which were offered for sale in a written
offering. The plaintiff further alleged that it relied on United Financial's
representations in purchasing the servicing rights from the seller. Trial was
conducted in Omaha, Nebraska during the week of July 12, 1998. The jury returned
a verdict in favor of United Financial on four counts and in favor of the
plaintiff on one count, and awarded the plaintiff $75,000. On July 31, 1998, the
plaintiff filed a motion for judgement notwithstanding the verdict, or
alternatively, a new trial. On November 6, 1998, the Court denied the
plaintiff's motion. Plaintiff has appealed the Court's ruling, and no assurances
can be given that an adverse judgment of a material amount will not ultimately
be rendered or that any such judgment would not have a material adverse effect
on the Company's consolidated financial condition, results of operations or cash
flows. United Financial is considering an appeal of the $75,000 award to the
plaintiff.

     Matrix Financial was named defendant in an action styled Leslie M.
Ronzitti v. Matrix Financial Services Corp. and Wendover Funding.  Plaintiff
commenced this action on or about August 8, 1997. The plaintiff alleged that
Matrix Financial, as subservicer for Matrix Bank, breached the terms of the
underlying note and deed of trust with plaintiff and otherwise committed
negligence, fraud and violations of RESPA in connection with their servicing of
plaintiff's mortgage loan. On December 31, 1998, the parties settled this
action. Matrix Financial agreed to pay the plaintiff a nominal amount in
consideration of the plaintiff's full release of all claims against Matrix
Financial and the dismissal of the suit with prejudice by the plaintiff.

                                       19
<PAGE>
 
     Matrix Bank has been named defendant in an action styled Transamerica
Mortgage Company v. Matrix Capital Bank that was commenced on or about February
7, 1999 in the District Court of the J-191st Judicial District, Dallas County,
Texas.  The plaintiff has alleged that Matrix Bank, as seller of certain
mortgage loans to plaintiff, breached a representation and warranty given to
plaintiff by Matrix Bank under the purchase agreement relating to such loans.
The action relates to approximately $700,000 in principal amount of mortgage
loans, and plaintiff has requested specific performance of the repurchase
obligations of Matrix Bank under the purchase agreement and/or an unspecified
amount of damages.  Matrix Bank believes that its has defenses to this lawsuit.
However, no assurances can be given that an adverse judgment will not ultimately
be rendered or that any such judgment would not have a material adverse effect
on the Company's consolidated financial condition, results of operations or cash
flows.

     The Company is involved from time to time in routine litigation incidental
to its business. However, other than described above, the Company believes that
it is not a party to any material pending litigation that, if decided adversely
to the Company, would have a material adverse effect on the Company's
consolidated financial condition, results of operations or cash flows.

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, 1998.


                                    PART II
                                        
Item 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
         ---------------------------------------------------------------------

     The Company's common stock, $.0001 par value ("Common Stock"), is traded on
the NASDAQ National Market under the symbol "MTXC." The initial public offering
of Common Stock occurred on October 18, 1996. The following table sets forth the
high and low sales prices for the Common Stock on the NASDAQ National Market for
the periods indicated.

<TABLE>
<CAPTION>
                                       MARKET PRICE
                              ----------------------------
Quarter Ended:                     HIGH           LOW
                              ----------------------------
<S>                           <C>            <C>
December 31, 1998..........   $      13.750  $       6.625
September 30, 1998.........          28.750          8.000
June 30, 1998..............          29.250         25.000
March 31, 1998.............          28.625         13.500

December 31, 1997..........          18.250         13.875
September 30, 1997.........          16.875         13.000
June 30, 1997..............          14.250         10.250
March 31, 1997.............          15.875         11.625
</TABLE>

     On March 11, 1999, the closing price of the Common Stock was $14.25 per
share.  Also as of that date, the approximate number of holders of record of the
Company's Common Stock was 65.  This number does not include beneficial owners
who hold their shares in a depository trust in "street" name.

     Since its organization in June 1993, the Company has not paid any dividends
on its equity, except for an aggregate of $92,000 in dividends paid in 1993 and
$201,000 paid in 1996, of which $4,000 for 1993 and $201,000 for 1996 represent
dividends paid by Vintage (i.e., the pooled company) prior to its acquisition by
the Company. The Company expects that it will retain all available earnings
generated by its operations for the development and growth of its business and
does not anticipate paying any cash dividends in the foreseeable future. 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 the future earnings, capital requirements, financial condition and
future prospects of the Company and such other factors the Board of Directors
may deem relevant. The Company's bank stock loan, which was amended in June
1998, does not permit Matrix Bancorp to declare or pay any dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Note 8 to the Consolidated
Financial Statements included elsewhere herein.  In addition, the ability of
Matrix Financial, Sterling Trust and Matrix Bank to pay dividends to the Company
may be restricted in certain instances, including covenants under Matrix
Financial's existing warehouse facilities and certain other debt covenants of
the Company.

                                       20
<PAGE>
 
Item 6.  Selected Financial Data
         -----------------------

           SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
                 (Dollars in thousands, except per share data)

  The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations," each of which is
included elsewhere herein.  In February 1997, the Company completed the
acquisition of Vintage in a transaction accounted for as a pooling of interests.
As a result of the pooling, the historical financial and other information of
the Company has been restated to include the financial and other information of
Vintage.


<TABLE>
<CAPTION>
                                                                                     As of and for the
                                                                                   Year Ended December 31,
                                                             ----------------------------------------------------------------------
                                                                1998         1997         1996            1995           1994
                                                             ----------   ----------   ----------     ----------       ----------
<S>                                                           <C>          <C>         <C>            <C>              <C> 
Operating Data
Net interest income before provision for loan
 and valuation losses....................................    $   24,190   $   13,888   $    6,059     $    3,592       $    4,004
Provision for loan and valuation losses..................         4,607          874          143            401              216
                                                             ----------   ----------   ----------     ----------       ----------
Net interest income after provision for loan
 and valuation losses....................................        19,583       13,014        5,916          3,191            3,788
                                                             ----------   ----------   ----------     ----------       ----------
Noninterest income:
    Loan administration..................................        17,411       16,007        8,827          7,749            6,926
    Brokerage............................................         7,054        3,921        4,364          4,787            4,017
    Trust services.......................................         4,169        3,561        3,061          2,869            2,488
    Gain on sale of loans and mortgage-backed
     securities.........................................          3,108        2,441        3,121          3,039            1,590
    Gain on sale of mortgage servicing rights...........            803        3,365        3,232          1,164              684
    Loan origination(1).................................          5,677        4,694        1,809          2,302            1,294
    Other...............................................          8,523        4,040        2,173          1,744              940
                                                             ----------   ----------   ----------     ----------       ----------
        Total noninterest income........................         46,745       38,029       26,587         23,654           17,939
Noninterest expense......................................        52,939       37,746       26,655         20,453           16,593
                                                             ----------   ----------   ----------     ----------      -----------
Income before income taxes...............................        13,389       13,297        5,848          6,392            5,134
Income taxes.............................................         4,876        5,159        2,278          2,469            2,014
                                                             ----------   ----------   ----------     ----------      -----------
Net income...............................................    $    8,513   $    8,138   $    3,570(2)  $    3,923      $     3,120
                                                             ==========   ==========   ==========     ==========      ===========
Net income per share assuming dilution(3)................    $     1.24   $     1.20   $     0.68     $     0.83      $      0.69
Weighted average common shares assuming dilution.........     6,881,890    6,781,808    5,077,321      4,707,221        4,529,593
Cash dividends(4)........................................    $       --   $       --   $      201     $       --      $        --

Balance Sheet Data
Total assets.............................................    $1,012,640   $  606,745   $  274,559     $  186,313      $   113,597
Total loans (excluding allowance for loan and
 valuation losses).......................................       852,158      513,128      213,400        147,608           90,068
Allowance for loan and valuation losses..................         3,710        1,756        1,039            943              728
Nonperforming loans and leases(5)........................        13,209        4,990        3,903          5,538            3,314
Mortgage servicing rights................................        58,147       36,440       23,680         13,817            6,183
Foreclosed real estate(5)................................           916        1,242          788            835              543
Deposits(6)(7)...........................................       490,516      224,982       90,179         48,877           41,910
Custodial escrow balances................................        96,824       53,760       37,881         27,011           24,687
FHLB borrowings..........................................       168,000      171,943       51,250         19,000           14,600
Borrowed money...........................................       178,789       89,909       42,431         65,093           18,438
Total shareholders' equity...............................        49,354       40,610       32,270         10,686            6,662
 
Operating Ratios and Other Selected Data
Return on average assets(8)..............................          1.02%        1.78%        1.69%          2.59%            3.13%
Return on average equity(8)..............................         18.92        22.71        24.30          47.62            57.06
Average equity to average assets(8)......................          5.41         7.86         6.97           5.44             5.49
Net interest margin(8)(9)................................          3.37         3.70         3.45           2.84             4.64
Operating efficiency ratio(10)...........................         79.81        73.95        82.01          76.19            76.37
Total amount of loans purchased..........................    $  678,150   $  493,693   $  159,015     $   91,774      $    80,048
Balance of owned servicing portfolio (end of period).....    $5,357,729   $3,348,062   $2,505,036     $1,596,385      $ 1,041,785
Trust assets under administration (end of period)........    $2,089,562   $1,437,478   $1,162,231     $  952,528      $   750,186
Wholesale loan origination volume........................    $  574,963   $  402,984   $  583,279     $  388,937      $   183,130
</TABLE>

                                                                21
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                       As of and for the
                                                                                    Year Ended December 31,
                                                             ---------------------------------------------------------------------
                                                                1998           1997           1996           1995           1994
                                                             ---------       --------       --------       --------       --------
<S>                                                            <C>            <C>            <C>            <C>            <C>
Loan Performance Ratios
Nonperforming loans and leases/total loans(5)............       1.55%          0.97%          1.83%          3.75%          3.68%
Nonperforming assets/total assets(5).....................       1.39           1.03           1.89           3.42           3.40
Net loan charge-offs/average loans(8)....................       0.38           0.04           0.03           0.15           0.03
Allowance for loan and valuation losses/
    total loans..........................................       0.44           0.34           0.49           0.64           0.81
Allowance for loan and valuation losses/
    nonperforming loans..................................      28.09          35.19          26.62          17.03          21.97
</TABLE>
__________
(1)  On January 1, 1995, the Company adopted FAS 122, which was superceded by
     FAS 125. Since FAS 122 prohibited retroactive application, the historical
     accounting results for 1998, 1997, 1996 and 1995 are not directly
     comparable to the results for prior periods.
(2)  See "Management's Discussion and Analysis of Financial Condition and
     Results of Operations--Comparison of Results of Operations for Fiscal
     Years 1997 and 1996--Loan Origination Income" for a discussion of the
     impact on net income of a secondary marketing loss incurred in March 1996.
(3)  Net 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.
(4)  Represents dividends paid by Vintage prior to its acquisition by the
     Company.
(5)  See "Management's Discussion and Analysis of Financial Condition and
     Results of Operations--Asset and Liability Management--Nonperforming
     Assets" for a discussion of the impact of certain bulk purchases of
     mortgage loan portfolios on the level of nonperforming loans and foreclosed
     real estate, and the effect of repurchasing sub-prime automobile loans.
(6)  Following the Company's acquisition of Vintage in February 1997, Sterling
     Trust moved approximately $80.0 million of fiduciary deposits from a third
     party institution to Matrix Bank.
(7)  Beginning in February 1998, Matrix Bank began accepting brokered deposits.
     At December 31, 1998, the total balance of brokered deposits was $148.7
     million.
(8)  Calculations are based on average daily balances where available and
     monthly averages otherwise.
(9)  Net interest margin has been calculated by dividing net interest income
     before loan and valuation loss provision by average interest-earning
     assets.
(10) The operating efficiency ratio has been calculated by dividing noninterest
     expense by operating income (net interest income plus noninterest income).


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

  The following management's discussion and analysis of the financial condition
and results of operations of the Company should be read in conjunction with the
preceding "Selected Consolidated Financial and Operating Information."
Additionally, the Company's Consolidated Financial Statements and the Notes
thereto, as well as other data included herein, should be read and analyzed in
combination with the analysis below.

General

  The Company was formed in June 1993 when the founding shareholders of Matrix
Financial and United Financial, Subsidiaries of the Company, exchanged all of
the outstanding capital stock of those two entities for shares of the Company in
a series of transactions that were each accounted for as a pooling of interests.
In September 1993, the Company 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. The Company formed USS in
June 1995 and UCM in December 1996. In February 1997, the Company acquired
Vintage in a pooling of interests and, accordingly, no goodwill was recorded and
the consolidated financial statements of the Company for the prior periods have
been restated.

  The principal components of the Company's revenues consist primarily of net
interest income recorded by Matrix Bank and Matrix Financial, loan
administration fees generated by Matrix Financial, brokerage, consulting and
disposition services fees realized by United Financial, UCM and USS,
respectively, loan origination fees and gains on sales of mortgage loans and
MSRs generated by Matrix Bank and Matrix Financial and trust service fees
generated by Sterling Trust. The Company's results of operations are influenced
by changes in interest rates and the effect of these changes on the interest
spreads of the Company, the volume of loan originations, mortgage loan
prepayments and the value of mortgage servicing portfolios.

Comparison of Results of Operations for Fiscal Years 1998 and 1997

  Net Income; Return on Average Equity. Net income increased $375,000, or 4.6%,
to $8.5 million ($1.24 per share) for fiscal year 1998 as compared to $8.1
million ($1.20 per share) for fiscal year 1997. Return on average equity
decreased to 18.9% for fiscal year 1998 as compared to 22.7% for fiscal year
1997. Excluding non-recurring charges in both years, net income increased $1.1
million, or 12.1%, to $10.1 million for fiscal year 1998 as compared to $9.0
million for fiscal year 1997. The non-recurring charges recorded during 1998, on
a pre-tax basis, include a $2.3 million loss recorded related to MCA (discussed
below), $255,000 related to United Financial's litigation expenses pertaining to
the Douglas County case and $62,000 of costs that were written off due to the
termination of the merger agreement with Fidelity National Financial, Inc. Non-
recurring charges in 1997 consisted of a $1.4 million pre-tax loss relating to
the recourse obligation, subsequent operation

                                       22
<PAGE>
 
and ultimate disposition of the Company's entire portfolio of sub-prime auto
loans. Excluding non-recurring charges, earnings per share increased 10.4%
($1.47 compared to $1.33 from the prior year) and returns on average equity were
22.5% and 25.2% for fiscal years 1998 and 1997, respectively.

  During recent years, Matrix Financial entered into several purchase
transactions with MCA Mortgage Corporation ("MCA"), a Michigan-based mortgage
banking entity. At December 31, 1998, Matrix Financial was carrying
approximately $5.0 million of residential mortgage loans on its balance sheet
that were purchased from MCA on a servicing retained basis.  The Company also
had an outstanding receivable relating to brokerage and consulting services
provided to MCA.  In January 1999, the Company learned that MCA was closing its
operations.  Additionally, in February 1999, the Company learned that MCA had
declared bankruptcy and that some of the loans purchased by
Matrix Financial had been sold multiple times or pledged multiple times as
security for repayment of various credit facilities.  The Company also
discovered that there appeared to be servicing issues relating to some of the
purchased loans.  The servicing issues consisted of instances in which loans
owned by Matrix Financial and serviced by MCA had previously paid off, but for
which MCA had continued to remit monthly principal and interest, rather than the
payoff proceeds.  As a result of the above MCA issues, the Company recorded a
$2.3 million loss as of December 31, 1998.

  Net Interest Income.  Net interest income before provision for loan and
valuation losses increased $10.3 million, or 74.2%, to $24.2 million for fiscal
year 1998 as compared to $13.9 million for fiscal year 1997.  The increase in
net interest income before provision for loan and valuation losses was due to a
94.6% increase in the Company's average loan balance, which was offset by a
decrease in the Company's net interest margin to 3.37% for fiscal year 1998 as
compared to 3.70% for fiscal year 1997.  The average yield on loans decreased to
8.59% in 1998 from 8.74% in 1997, primarily due to the overall decrease and
continuance of lower interest rates in the market, as well as the acquisition by
the Company of fewer discounted loans.  Average interest-bearing liabilities
increased to $663.6 million for fiscal year 1998 from $322.8 million for the
prior fiscal year.  The increase in the average interest-bearing liabilities was
offset by a reduction in the cost of the interest-bearing liabilities to 5.50%
in 1998 from 5.66% in 1997. 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 increased $3.7 million to $4.6 million for fiscal year 1998 as compared
to $874,000 for fiscal year 1997.  This increase was primarily attributable to
the MCA loss, as well as the increase in the balance of loans receivable, which
increased to $852.2 million at December 31, 1998 as compared to $513.1 million
at December 31, 1997.  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 and
other income earned from servicing loans for various investors.  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.  Loan administration fees increased $1.4 million, or 8.8%, to
$17.4 million for fiscal year 1998 as compared to $16.0 million for fiscal year
1997.  Loan administration fees are affected by factors that include the size of
the Company's residential mortgage loan servicing portfolio, the servicing
spread, the timing of payment collections and the amount of ancillary fees
collected.  The 1998 increase was primarily attributable to the increase in the
outstanding principal balance underlying the Company's mortgage loan servicing
portfolio.  The mortgage loan servicing portfolio increased $556.8 million, or
16.3%, to an average balance of $4.0 billion for fiscal year 1998 as compared to
an average balance of $3.4 billion for fiscal year 1997.  This increase was
offset by a reduction in the average service fee rate (including all ancillary
income) to 0.44% for fiscal year 1998 as compared to 0.47% for fiscal year 1997.

  Brokerage fees.  Brokerage fees represent income earned from brokerage and
consulting services performed pertaining to MSRs.  Brokerage fees increased $3.2
million, or 79.9%, to $7.1 million for fiscal year 1998 as compared to $3.9
million for fiscal year 1997.  This increase is the result of an increase in the
balance of residential mortgage servicing portfolios brokered by United
Financial, which in terms of aggregate unpaid principal balances on the
underlying loans, increased $33.0 billion to $66.4 billion for fiscal year 1998
as compared to $33.4 billion for fiscal year 1997.  Due to current market
conditions for MSRs, the Company is unable to predict whether United Financial
will continue to broker the volume of MSRs that it did during fiscal year 1998.
In addition, 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 increased $608,000, or 17.1%, to $4.2
million for fiscal year 1998 as compared to $3.6 million for fiscal year 1997.
This increase is associated with the growth in the number of trust accounts
under administration at Sterling Trust, which increased to 36,374 accounts at
December 31, 1998 from 29,382 accounts at December 31, 1997 and the increase in
total assets under administration to $2.1 billion at December 31, 1998 from $1.4
billion at December 31, 1997.  

                                       23
<PAGE>
 
Over half of the increase in accounts is the result of a service agreement with
a large Registered Investment Advisor ("Advisor"), which was signed in early
1998 and provides custody and clearing services for this Advisor's clients.
While this represents a significant portion of Sterling Trust's growth during
1998, the Advisor's clients have all signed individual agreements for Sterling
Trust's services.

  Gain on Sale of Loans.  During fiscal years 1998 and 1997, the Company made
bulk loan sales of approximately $319.4 million and $198.3 million, for gains on
sale of bulk mortgage loans of $3.1 million and $2.4 million, respectively.
Gain on sale of loans 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 portfolios available in the market, the type of loan portfolios
the Company purchases and the particular loan portfolios the Company elects to
sell.

  Gain on Sale of Mortgage Servicing Rights.  Gain on the sale of MSRs decreased
$2.6 million, or 76.1%, to $803,000 for fiscal year 1998 as compared to $3.4
million for fiscal year 1997.  In terms of aggregate outstanding principal
balances of mortgage loans underlying such MSRs, the Company sold $175.3 million
in purchased MSRs during fiscal year 1998 as compared to $1.3 billion during
fiscal year 1997.  Gains from the sale of MSRs can fluctuate significantly from
year to year based on the market value of the Company's servicing portfolio, the
particular servicing portfolios the Company elects to sell and the availability
of similar portfolios in the market.  Due to the Company's position in and
knowledge of the market, the Company will at times pursue opportunistic sales of
MSRs.

  Loan Origination.  Loan origination income increased $983,000, or 20.9%, to
$5.7 million for fiscal year 1998 as compared to $4.7 million for fiscal year
1997.  This increase is attributable to the increase in wholesale residential
mortgage loan production of $172.0 million, or 42.7%, to $575.0 million during
fiscal year 1998 as compared to $403.0 million during fiscal year 1997.  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.

  Other Income.  Other income increased $4.5 million, or 111.0%, to $8.5 million
for fiscal year 1998 as compared to $4.0 million for fiscal year 1997.  The
increase in other income was primarily due to increased consulting income from
UCM which rose to $2.6 million for fiscal year 1998 as compared to $184,000 for
fiscal year 1997, an increase in USS service fee income which totaled $2.0
million for fiscal year 1998 as compared to $1.1 million for fiscal year 1997
and certain financing transactions engaged in by the Company which increased
miscellaneous fee income over the prior fiscal year.

  Noninterest Expense.  Noninterest expense increased $15.2 million, or 40.3%,
to $52.9 million for fiscal year 1998 as compared to $37.7 million for fiscal
year 1997.  This increase was primarily due to the overall growth and expansion
of the Company that began in the fourth quarter of 1997 and has continued
throughout 1998 and the increase in the amortization of MSRs.  This growth and
expansion included the continued growth in the origination of loans at Matrix
Financial, the opening of a new lending subsidiary of Matrix Financial and
moderate growth at most of the other Subsidiaries.  The following table details
the major components of noninterest expense for the periods indicated:
<TABLE>
<CAPTION>
                                                                                                      Year Ended
                                                                                                      December 31,
                                                                                            ----------------------------------
                                                                                                1998                  1997
                                                                                            --------------        ------------
                                                                                                    (In thousands)
<S>                                                                                             <C>                  <C>
  Compensation and employee benefits...................................................         $22,194              $14,724
  Amortization of mortgage servicing rights............................................          10,563                6,521
  Occupancy and equipment..............................................................           3,059                2,132
  Postage and communication............................................................           2,393                1,522
  Professional fees....................................................................           1,439                  976
  Data processing......................................................................           1,344                  843
  Losses related to recourse sales.....................................................               -                1,237
  Other general and administrative.....................................................          11,947                9,791
                                                                                                -------              -------
     Total.............................................................................         $52,939              $37,746
                                                                                                =======              =======
</TABLE>
                                                                                
  Compensation and employee benefits increased $7.5 million, or 50.7%, to $22.2
million for fiscal year 1998 as compared to $14.7 million for fiscal year 1997.
This increase was primarily the result of the expansion discussed above, as well
as expansion in the operations of Matrix Bank.  Additionally, commission-based
compensation at Matrix Financial and United Financial increased due to the
overall increases in loan origination and brokerage income, respectively.  Most
of the Company's other Subsidiaries also added new employees during 1998.  The
Company had an overall increase of 68 employees, or 17.9%, to 447 full-time
employees at December 31, 1998 as compared to 379 full-time employees at
December 31, 1997.

                                       24
<PAGE>
 
  Amortization of MSRs increased $4.1 million, or 62.0%, to $10.6 million for
fiscal year 1998 as compared to $6.5 million for fiscal year 1997.  Amortization
of MSRs fluctuates based on the size of the Company's mortgage servicing
portfolio and the prepayment rates experienced.  The Company's prepayment rates
on its servicing portfolio averaged 22.6% during fiscal year 1998 as compared to
11.3% during fiscal year 1997.  In response to the lower interest rates
prevalent in the market, prepayment speeds have increased due to borrowers
refinancing into lower interest rate mortgages.  The Company anticipates the
increased amortization levels to continue for the foreseeable future in response
to the historically low interest rate levels.

  The remainder of noninterest expense, after removing the effect of the non-
recurring charges in both years, which includes occupancy and equipment expense,
postage and communication expense, professional fees, data processing costs and
other expenses increased $4.7 million, or 31.8% to $19.8 million for fiscal year
1998 as compared to $15.1 million for fiscal year 1997.  The increase was
generally attributable to the growth and expansion of the Company's business
lines, especially with regard to Matrix Financial and Matrix Bank.
Additionally, the Company experienced higher interest curtailment expenses
related to the increased prepayments at Matrix Financial.

  Provision for Income Taxes.  The Company's provision for income taxes
decreased $283,000 to $4.9 million for fiscal year 1998 as compared to $5.2
million for fiscal year 1997.  The increase in pre-tax income was offset by a
reduction in the effective tax rate to 36.4% for fiscal year 1998 from 38.8% for
fiscal year 1997.  The decrease in the effective tax rate was the result of the
origination of tax-exempt leases by the Company.

Comparison of Results of Operations for Fiscal Years 1997 and 1996

  Net Income; Return on Average Equity.  Net income increased $4.5 million, or
128.0%, to $8.1 million ($1.20 per share) for fiscal year 1997 as compared to
$3.6 million ($0.68 per share) for fiscal year 1996.  Return on average equity
decreased to 22.7% for fiscal year 1997 as compared to 24.3% for fiscal year
1996.  The decrease in return on average equity was due to the increase in
average equity to $35.8 million for fiscal year 1997 as compared to $14.7
million for fiscal year 1996.  The increase in average equity is primarily
attributable to the Company's initial public offering during the fourth quarter
of 1996, which increased equity by $18.2 million.

   Net Interest Income. Net interest income before provision for loan and
valuation losses increased $7.8 million, or 129.2%, to $13.9 million for fiscal
year 1997 as compared to $6.1 million for fiscal year 1996.  The Company's net
interest margin increased to 3.70% for fiscal year 1997 as compared to 3.45% for
fiscal year 1996.  These increases were attributable to the following: a 118.8%
increase in the Company's average loan portfolio balance to $355.8 million for
fiscal year 1997 from $162.6 million for fiscal year 1996, and a decrease in the
cost of interest-bearing liabilities to 5.66% for fiscal year 1997 as compared
to 6.59% for fiscal year 1996.  The decrease in the cost of interest-bearing
liabilities was the result of fiduciary deposits of approximately $80.0 million
administered by Sterling Trust being transferred from a third party financial
institution to Matrix Bank upon completion of the Vintage acquisition.  The
above were offset by a 102.8% increase in average interest-bearing liabilities
to $322.8 million for fiscal year 1997 as compared to $159.2 million for fiscal
year 1996, and a decrease in the Company's yield on interest-earning assets to
8.55% from 9.43% for fiscal years 1997 and 1996, respectively.  The decrease in
the Company's yield on interest-earning assets was attributable to the lower
yield earned on the loan portfolio, which decreased to 8.74% as compared to
9.67% for fiscal years 1997 and 1996, respectively.  The loan portfolio yield
decrease is attributable to the overall market decrease in interest rates and
the acquisition of loans with less discounts by the Company.  For a tabular
presentation of the changes in net interest income due to changes in the 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. Provision for loan losses increased
$731,000 to $874,000 for fiscal year 1997 as compared to $143,000 for fiscal
year 1996.  This increase was primarily attributable to the increase in the
balance of loans receivable, which increased to $513.1 million at December 31,
1997 as compared to $213.4 million at December 31, 1996.  For a discussion of
the Company's allowance for loan losses as it relates to nonperforming assets,
see "--Asset Quality--Nonperforming Assets."

   Loan Administration. Loan administration fees increased $7.2 million, or
81.3%, to $16.0 million for fiscal year 1997 as compared to $8.8 million for
fiscal year 1996.  Loan administration fees are affected by factors that include
the size of the Company's residential mortgage loan servicing portfolio, the
servicing spread, the timing of payment collections and the amount of ancillary
fees received.  This increase was primarily attributable to the increase in the
outstanding principal balance underlying the Company's mortgage loan servicing
portfolio.  The mortgage loan servicing portfolio increased $843.0 million, or
33.7%, to $3.3 billion at December 31, 1997 from $2.5 billion at December 31,
1996.

   Brokerage Fees. Brokerage fees decreased $443,000, or 10.2%, to $3.9 million
for fiscal year 1997 as compared to $4.4 million for fiscal year 1996.  This
decrease occurred despite the increase in bulk servicing portfolios brokered by
United 

                                       25
<PAGE>
 
Financial. Servicing portfolios brokered by United Financial increased $7.0
billion to $33.4 billion for fiscal year 1997 as compared to $26.4 billion for
fiscal year 1996. The decrease in brokerage fees is attributable to an overall
decrease in the margins earned on servicing brokered.

   Trust Services. Trust service fees increased $500,000, or 16.3%, to $3.6
million for fiscal year 1997 as compared to $3.1 million for fiscal year 1996.
This increase is associated with the growth in the number of trust accounts
under administration at Sterling Trust, which increased to 29,382 accounts at
December 31, 1997 from 25,772 accounts at December 31, 1996 and the increase in
the total assets under administration which increased to over $1.4 billion at
December 31, 1997 from under $1.2 billion at December 31, 1996.

  Gain on Sale of Loans and Mortgage-Backed Securities. Gain on sale of loans
and mortgage-backed securities decreased $680,000, or 21.8%, to $2.4 million for
fiscal year 1997 as compared to $3.1 million for fiscal year 1996.  Gain on sale
of loans can fluctuate significantly from year to year based on a variety of
factors, such as the current interest rate environment, the supply of loan
portfolios in the market, the mix of loan portfolios available, the type of loan
portfolios the Company purchases and the particular loan portfolios the Company
elects to sell.

   Gain on Sale of Mortgage Servicing Rights. Gain on sale of MSRs increased
$133,000 to $3.4 million for fiscal year 1997 as compared to $3.2 million for
fiscal year 1996.  In terms of aggregate outstanding principal balances of
mortgage loans underlying such servicing rights, the Company sold $1.3 billion
in purchased MSRs during fiscal year 1997 as compared to $646.0 million during
fiscal year 1996.  Gains from the sale of MSRs can fluctuate significantly from
year to year based on the market value of the Company's servicing portfolio, the
particular servicing portfolios the Company elects to sell and the availability
of similar portfolios in the market.  A majority of the gain in 1997 pertains to
MSRs bought by the Company in 1997.  Due to the Company's position in and
knowledge of the market, the Company will at times sell servicing portfolios if
it is determined that the market value is greater than the economic value that
would be achieved from holding the servicing portfolio.

  Loan Origination. Loan origination income increased $2.9 million, or 159.5%,
to $4.7 million for fiscal year 1997 as compared to $1.8 million for fiscal year
1996 despite the $180.3 million, or 30.9%, decrease in wholesale residential
mortgage loan production to $403.0 million for fiscal year 1997 as compared to
$583.3 million for fiscal year 1996.  The increase in loan origination income
was related to a $1.9 million secondary marketing loss that occurred in the
first quarter of 1996 and the origination in 1997 of a greater amount of non-
agency eligible loans, which generally result in higher origination fees.  The
secondary loss was attributable to the failure of a former officer of Matrix
Financial to adhere to the Company's established hedging policies, and as a
result, certain closed loans were not adequately hedged. The $1.9 million loss
resulted when interest rates increased dramatically in March 1996, thereby
causing the funded loans and pipeline commitments to decline in market value.
Had the Company's policies been followed, a loss still would have been
recognized, albeit significantly smaller, since it is difficult for the Company
to be completely hedged when interest rates rapidly and significantly change.
The Company has implemented several management and reporting changes to help
ensure that the hedging policies established by Matrix Financial's Board of
Directors are followed to mitigate secondary losses in volatile interest rate
markets.  Loan origination income includes all mortgage loan fees, secondary
marketing activity on new loan originations and servicing release premiums on
net originations sold, net of origination costs.

  Other Income. Other income increased $1.8 million, or 85.9%, to $4.0 million
for fiscal year 1997 as compared to $2.2 million for fiscal year 1996.  Other
income mainly consists of fee income, including credit card fees earned by
Matrix Bank, consulting income earned by UCM, brokerage income earned by First
Matrix and USS service fee income.  The increase in other income between 1997
and 1996 is predominantly related to the growth in credit card fee income, USS
service fees and consulting income generated by UCM, which was formed in
December 1996. Credit card fee income increased $889,000 to $908,000 for fiscal
year 1997 as compared to $19,000 for fiscal year 1996.  Additionally, USS
service fees and UCM consulting income increased $557,000 and $184,000,
respectively, to $1.1 million and $184,000 for fiscal year 1997 as compared to
$564,000 and $0 for fiscal year 1996.

  Noninterest Expense.  Noninterest expense increased $11.1 million, or 41.6%,
to $37.7 million for fiscal year 1997 as compared to $26.7 million for fiscal
year 1996.  This increase was primarily due to expenses related to the interim
subservicing on mortgage servicing portfolios acquired in 1997, the expenses
related to UCM which was formed in December 1996, the opening of a telemarketing
call center for the origination of loans at Matrix Financial, increased
amortization due to the Company's increased investment in MSRs and the overall
growth and expansion of the Company.  During 1997, the Company recognized a pre-
tax loss of approximately $1.4 million relating to the recourse obligation,
subsequent operation and ultimate disposition of its entire portfolio of sub-
prime auto loans.  This loss was less than the following non-recurring items,
which were recorded during fiscal year 1996: a $600,000 accrual for the
previously disclosed settlement of a class-action lawsuit, a 

                                       26
<PAGE>
 
one-time fee of $450,000 to recapitalize the SAIF, and a $787,000 loss relating
to the repurchase of sub-prime auto loans. The following table details the major
components of noninterest expense for the periods indicated:

<TABLE>
<CAPTION>
                                                                                                Year Ended December 31,
                                                                                          ----------------------------------
                                                                                              1997                  1996
                                                                                          -------------        -------------
                                                                                                    (In thousands)
<S>                                                                                          <C>                  <C>
  Compensation and employee benefits...................................................      $14,724              $12,722
  Amortization of mortgage servicing rights............................................        6,521                2,432
  Occupancy and equipment..............................................................        2,132                1,776
  Postage and communication............................................................        1,522                1,214
  Professional fees....................................................................          976                  666
  Data processing......................................................................          843                  642
  Losses related to recourse sales.....................................................        1,237                  787
  Other................................................................................        9,791                6,416
                                                                                             -------              -------
     Total.............................................................................      $37,746              $26,655
                                                                                             =======              =======
</TABLE>
                                                                               
  Compensation and employee benefits increased $2.0 million, or 15.7%, to $14.7
million for fiscal year 1997 as compared to $12.7 million for fiscal year 1996.
This increase was the result of continued expansion of the Company's business
lines in 1997, including the opening of a retail branch of Matrix Bank, a new
lending office of Matrix Bank, the formation of UCM at the end of 1996 and the
opening of Matrix Financial's telemarketing call center.  The Company had an
increase of 119 employees, or 45.8%, to 379 full-time employees at December 31,
1997 as compared to 260 full-time employees at December 31, 1996.

  Amortization of MSRs increased $4.1 million, or 168.1%, to $6.5 million for
fiscal year 1997 as compared to $2.4 million for fiscal year 1996.  Amortization
of MSRs fluctuates based on the size of the Company's mortgage servicing
portfolio and the prepayment rates experienced. The prepayment speed experienced
by the Company on the loans it serviced averaged 11.3% during fiscal year 1997
as compared to 11.9% during fiscal year 1996.

  The remainder of noninterest expense, which includes occupancy and equipment
expenses, postage and communication expenses, professional fees, data processing
costs, losses related to recourse sales and other expenses, increased $5.0
million, or 43.5%, to $16.5 million for fiscal year 1997 as compared to $11.5
million for fiscal year 1996.  The increase was primarily attributable to $1.2
million of interim subservicing costs on mortgage servicing portfolios acquired
during 1997 and the expansion of both existing and new business lines.

   Provision for Income Taxes. The provision for income taxes increased by $2.9
million to $5.2 million for fiscal year 1997 as compared to $2.3 million for
fiscal year 1996. The two periods had comparable effective tax rates of 38.8%
and 39.0%, respectively.

Average Balance Sheet

  The following table sets forth for the periods and as of the dates indicated,
information regarding the Company's 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 are 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,
                                ---------------------------------------------------------------------------------------------
                                            1998                            1997                           1996
                                ---------------------------    ----------------------------    ------------------------------
                                 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, net.......   $692,443   $59,452     8.59%   $355,848    $31,096    8.74%    $162,648   $15,733        9.67%
 Mortgage-backed securities..          -         -        -           -          -       -        4,653       351        7.54
 Interest-earning deposits...     15,042       627     4.17      15,371        778    5.06        5,556       312        5.62
 FHLB stock..................     10,719       615     5.74       4,606        275    5.97        2,585       153        5.92
                                --------    ------     ----    --------    -------    ----     --------   -------       -----   
  Total interest-earning 
   assets....................    718,204    60,694     8.45     375,825     32,149    8.55      175,442    16,549        9.43
</TABLE> 

                                       27
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                                 Year Ended December 31,
                                                             ---------------------------------------------------------------
                                                                         1998                              1997                     
                                                             -----------------------------    ------------------------------ 
                                                             Average               Average    Average                Average   
                                                             Balance    Interest     Rate     Balance    Interest      Rate   
                                                             -------    --------   -------    -------    --------    ------- 
                                                                                  (Dollars in thousands)
<S>                                                        <C>          <C>       <C>        <C>        <C>         <C>
Noninterest-earning assets:
   Cash...............................................       $ 13,241                         $ 10,268
   Allowance for loan and valuation losses............         (2,223)                          (1,343)
   Premises and equipment.............................          9,913                            8,302
   Other assets.......................................         93,208                           62,922
                                                             --------                         --------
       Total noninterest-earning assets...............        114,139                           80,149
                                                             --------                         --------
       Total assets...................................       $832,343                         $455,974
                                                             ========                         ========

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
   Passbook accounts..................................       $  2,859    $   102    3.58%     $  2,859    $   113       3.95%
   Money market and NOW accounts......................        142,382      4,432    3.11        96,982      3,278       3.38
   Certificates of deposit............................        211,592     11,687    5.52        83,993      4,985       5.94
   FHLB borrowings....................................        159,381      8,554    5.37        59,984      3,435       5.73
   Borrowed money.....................................        147,368     11,729    7.96        79,011      6,450       8.16
                                                             --------    -------  ------      --------    -------     ------
       Total interest-bearing liabilities.............        663,582     36,504    5.50       322,829     18,261       5.66
                                                             --------    -------  ------      --------    -------     ------
Noninterest-bearing liabilities:
   Demand deposits (including custodial escrow
       balances)......................................        106,247                           80,816
   Other liabilities..................................         17,518                           16,501
                                                             --------                         --------
   Total noninterest-bearing liabilities..............        123,765                           97,317
   Shareholders' equity...............................         44,996                           35,828
                                                             --------                         --------
       Total liabilities and shareholders' equity.....       $832,343                         $455,974
                                                             ========                         ========
Net interest income before provision for loan and         
   valuation losses...................................                   $24,190                          $13,888     
                                                                         =======                          =======
Interest rate spread..................................                              2.95%                               2.89%
                                                                                  ======                              ======
Net interest margin...................................                              3.37%                               3.70%
                                                                                  ======                              ======
Ratio of average interest-earning assets to average
   interest-bearing liabilities.......................                            108.23%                             116.42% 
                                                                                  ======                              ======
<CAPTION>

                                                                   Year Ended December 31,
                                                                -----------------------------
                                                                             1996
                                                                -----------------------------
                                                                Average               Average   
                                                                Balance    Interest     Rate    
                                                                -------    --------   -------
                                                                   (Dollars in thousands)
<S>                                                           <C>          <C>       <C>
Noninterest-earning assets:        
   Cash...............................................        $  3,085
   Allowance for loan and valuation losses............            (964)
   Premises and equipment.............................           6,976
   Other assets.......................................          26,199
                                                              --------
        Total noninterest-earning assets..............          35,296
                                                              --------
        Total assets..................................        $210,738 
                                                              ========

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
   Passbook accounts..................................        $  2,389    $     82       3.43%
   Money market and NOW accounts......................          11,964         468       3.91
   Certificates of deposit............................          54,824       3,210       5.85
   FHLB borrowings....................................          35,838       2,039       5.69
   Borrowed money.....................................          54,171       4,691       8.66
                                                              --------    --------     ------
        Total interest-bearing liabilities............         159,186      10,490       6.59
                                                              --------    --------     ------   
Noninterest-bearing liabilities:
   Demand deposits (including custodial escrow
        balances).....................................          27,934
   Other liabilities..................................           8,927
                                                              --------
   Total noninterest-bearing liabilities..............          36,861
   Shareholders' equity...............................          14,691
                                                              --------
        Total liabilities and shareholders' equity....        $210,738
                                                              ========
Net interest income before provision for loan and
   valuation losses...................................                    $  6,059
                                                                          ========
Interest rate spread..................................                                   2.84%
                                                                                        =====
Net interest margin...................................                                   3.45%
                                                                                        =====
Ratio of average interest-earning assets to average
   interest-bearing liabilities.......................                                 110.21%  
                                                                                       ======
</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 (i) changes in volume (i.e., changes in
volume multiplied by old rate) and (ii) changes in rate (i.e., 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.   

<TABLE>
<CAPTION>
                                                            Year Ended December 31,                     Year Ended December 31,
                                                        1998 vs. 1997 Increase (Decrease)               1997 vs. 1996 Increase
                                                              Due to Change in                       (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, net............................  $  28,914    $  (558)     $  28,356         $  18,688    $  (3,325)  $  15,363
 Mortgage-backed securities.......................         --         --             --              (351)          --        (351)
 Interest-earning deposits........................        (14)      (137)          (151)              551          (85)        466
 FHLB stock.......................................        351        (11)           340               120            2         122
                                                    ---------    -------      ---------         ---------    ---------   ---------
        Total interest-earning assets.............     29,251       (706)        28,545            19,008       (3,408)     15,600
                                                    ---------    -------      ---------         ---------    ---------   ---------

</TABLE>

                                      28
<PAGE>
<TABLE>   
<CAPTION> 
                                                           Year Ended December 31,               Year Ended December 31,       
                                                      1998 vs. 1997 Increase (Decrease)      1997 vs. 1996 Increase (Decrease)  
                                                               Due to Change in                     Due to Change in          
                                                      ----------------------------------     ---------------------------------    
                                                        Volume       Rate         Total        Volume       Rate       Total
                                                      ----------   -------     ----------     ----------  ---------  ----------
                                                                                      (In thousands)
<S>                                                   <C>          <C>         <C>            <C>       <C>           <C> 
Interest-bearing liabilities:
 Passbook accounts................................    $      --    $   (11)    $     (11)     $     16    $      15   $      31
 Money market and NOW accounts....................        1,412       (258)        1,154         3,322         (512)      2,810
 Certificates of deposit..........................        7,043       (341)        6,702         1,708           67       1,775
 FHLB advances....................................        5,338       (219)        5,199         1,374           22       1,396
 Borrowed money...................................        5,441       (162)        5,279         2,151         (392)      1,759
                                                      ---------    -------     ---------     ---------    ---------   ---------
  Total interest-bearing liabilities..............       19,234       (991)       18,243         8,571         (800)      7,771
                                                      ---------    -------     ---------     ---------    ---------   ---------
Change in net interest income before provision
 for loan and valuation losses....................    $  10,017    $   285     $  10,302     $  10,437    $  (2,608)  $   7,829
                                                      =========    =======     =========     =========    =========   =========
</TABLE>

Asset and Liability Management


  General. A significant portion of the Company's revenues and net income is
derived from net interest income and, accordingly, the Company strives to manage
its interest-earning assets and interest-bearing liabilities to generate what
management believes to be an appropriate contribution from net interest income.
Asset and liability management seeks to control the volatility of the Company's
performance due to changes in interest rates.  The Company constantly attempts
to achieve an appropriate relationship between rate sensitive assets and rate
sensitive liabilities.  The Company has responded to interest rate volatility by
developing and implementing asset and liability management strategies designed
to increase its noninterest income and improve the match between interest-
earning assets and interest-bearing liabilities.  These strategies include:

  .   Utilizing MSRs 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 MSRs because of the resulting decrease in prepayment rates on
      the underlying loans;

  .   Increasing the noninterest-bearing custodial escrow balances related to
      the Company's MSRs;

  .   Increasing focus on lines of business that are less interest rate
      sensitive, such as brokerage activities, consulting services, self-
      directed trust services and real estate disposition;

  .   Maintaining a wholesale loan origination operation. Wholesale originations
      provide a form of hedge against the balance of MSRS. 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 period, however, the volume of loan originations generally increases;

  .   Originating and purchasing adjustable rate mortgages and selling newly
      originated fixed rate residential mortgages in the secondary market;

  .   Increasing emphasis on the origination of construction and commercial real
      estate lending, which tend to have higher interest rates with shorter loan
      maturities than residential mortgage loans and generally are at adjustable
      rates;

  .   Increasing retail deposits, which are less susceptible to changes in
      interest rates than other funding sources;

  .   Pursuing strategic acquisitions or alliances 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 the Company's investing activities; and

  .   Hedging segments of the Company's servicing portfolio and selling forward
      commitments on our loan pipeline.


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

                                       29
<PAGE>
 
<TABLE> 
<CAPTION>
                                                                   As of December 31,
                             ------------------------------------------------------------------------------------------------------
                                  1998                1997                1996                   1995                  1994
                             ---------------    ----------------    ---------------        ----------------       ---------------
                             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................  $732,512  86.34%   $462,604  90.46%    $192,118  90.47%       $136,741  93.23%       $  80,010  89.56%
Multi-family, commercial
    real estate and
    commercial.............    52,689   6.21      29,492   5.77       15,352   7.23           7,544   5.15            7,518   8.41
Direct financing leases....    24,429   2.88       2,708   0.53           --     --              --     --               --     --
Construction...............    27,648   3.26       7,591   1.48        1,061   0.50              78   0.05              106   0.12
Consumer...................    14,880   1.75      10,733   2.10        4,869   2.29           3,245   2.21            2,434   2.72
                             -------- ------    -------- ------     -------- ------        --------  -----        --------- ------
  Total loans and leases...   852,158 100.44     513,128 100.34      213,400 100.49         147,608 100.64           90,068 100.81
Less allowance for loan and
    valuation losses.......     3,710   0.44       1,756   0.34        1,039   0.49             943   0.64              728   0.81
                             -------- ------    -------- ------     -------- ------        -------- ------        --------- ------
Loans receivable, net......  $848,448 100.00%   $511,372 100.00%    $212,361 100.00%       $146,665 100.00%       $  89,340 100.00%
                             ======== ======    ======== ======     ======== ======        ======== ======        ========= ======
</TABLE>
  The following table presents the aggregate maturities of loans in each major
category of the Company's loan portfolio as of December 31, 1998 (excluding the
allowance for loan and valuation losses).  Loans held for sale are classified as
maturing within one year.  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, 1998
                                                        ---------------------------------------------------------------
                                                          Less than           One to       Over five
                                                          one year          five years       years           Total
                                                        ------------       ------------    ---------     --------------
                                                                                   (In thousands)
<S>                                                      <C>               <C>             <C>           <C>
Residential...........................................   $  724,827        $        530    $   7,155     $  732,512
Multi-family, commercial real estate and commercial...       14,930              12,478       25,281         52,689
Direct financing leases...............................       24,429                  --           --         24,429
Construction..........................................       21,481               2,533        3,634         27,648
Consumer..............................................       10,714               2,743        1,423         14,880
                                                         ----------        ------------    ---------     ----------
  Total loans and leases..............................   $  796,381        $     18,284    $  37,493     $  852,158
                                                         ==========        ============    =========     ==========
</TABLE>

  Included in loans held for sale is approximately $49.5 million, at December
31, 1998, of loans which the Company has acquired under purchase/repurchase
facilities and purchase agreements with several parties.  The terms of these
agreements vary with each seller but include provisions which require the seller
to repurchase the loans within a defined period of time, or provide at the
Company's option, the ability, on short notice, to require the seller to
repurchase the loans, or in some cases, allow the seller to repurchase the
loans. In all cases, the seller provides contractual recourse to the Company in
the event of delinquency and/or loss.

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

<TABLE>
<CAPTION>
                                                                                As of December 31, 1998
                                                        --------------------------------------------------------------------
                                                          One to five                   Over five
                                                             years                        years                    Total
                                                        -------------                 ------------              ------------
                                                                                     (In thousands)
<S>                                                     <C>                          <C>                        <C>

Fixed...........................................        $     10,226                 $     14,231               $     24,457
Adjustable......................................               8,058                       23,262                     31,320
                                                        ------------                 ------------               ------------
  Total loans...................................        $     18,284                 $     37,493               $     55,777
                                                        ============                 ============               ============
</TABLE>
  Nonperforming Assets. As part of asset and liability management, the Company
monitors nonperforming assets ("NPAs") on a monthly basis.  NPAs 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 the Company's NPAs as of the dates indicated:

                                       30
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                                              As of December 31,
                                               -----------------------------------------------------------------------------
                                                       1998             1997            1996            1995            1994
                                                   ---------        --------        --------        --------        --------
                                                                            (Dollars in thousands)
<S>                                               <C>               <C>             <C>             <C>             <C>
                                                                            
Nonaccrual mortgage loans......................    $   8,208        $  4,796        $  3,031        $  5,523        $  3,275
Nonaccrual commercial loans and direct
 financing leases..............................        4,349              --              --              --              --
Nonaccrual consumer loans......................          652             194             872              15              39
                                                   ---------        --------        --------        --------        --------
  Total nonperforming loans and leases.........       13,209           4,990           3,903           5,538           3,314
Foreclosed real estate.........................          916           1,242             788             835             543
Repossessed automobiles........................           --              --             506              --              --
                                                   ---------        --------        --------        --------        --------
  Total nonperforming assets...................    $  14,125        $  6,232        $  5,197        $  6,373        $  3,857
                                                   =========        ========        ========        ========        ========
Total nonperforming loans and leases
 to total loans................................         1.55%           0.97%           1.83%           3.75%           3.68%
Total nonperforming assets to total assets.....         1.39%           1.03%           1.89%           3.42%           3.40%
Ratio of allowance for loan and valuation
 losses to total non-performing loans and 
 leases........................................        28.09%          35.19%          26.62%          17.03%          21.97%
                                                
Interest income on nonperforming loans and
 leases not included in interest income........    $     524        $     89        $    120        $    156        $    140
 
</TABLE>

  As of December 31, 1998, the Company had approximately $90,000 of non-
government accruing loans that were contractually past due 90 days or more.
Beginning in 1996, the Company began to accrue interest for government-sponsored
loans such as FHA insured and VA guaranteed loans which are past due 90 or more
days, as 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 $165.7 million and $18.7 million as of
December 31, 1998 and 1997, respectively.  A significant portion of these loans
are serviced by a third party who is required to remit monthly interest
regardless of whether it is collected.  The higher levels of nonaccrual mortgage
loans as a percentage of total loans during 1995 and 1994 were primarily
attributable to purchases by Matrix Bank of bulk residential loan portfolios in
those years. Decreases in the nonaccrual mortgage loans at December 31, 1998,
1997 and 1996 are attributable to the improvement of the loans that had past
delinquency problems and the credit quality of the loan portfolios the Company
acquired in 1998, 1997 and 1996.  In the past three years, Matrix Bank acquired
loans with fewer delinquency problems and/or document deficiencies, which also
resulted in a decrease in the nonaccrual loans as a percentage of total loans.

  The increase in nonaccrual commercial loans and direct financing leases in
1998 is the result of the Company's origination of tax-exempt lease financing
for charter schools for the purchase of real estate and equipment.  Several of
the charter schools for which the Company has provided financing have
encountered enrollment and/or state funding problems which has caused them to
become delinquent on their lease obligations to the Company.

   The increase in the nonaccrual consumer loans in 1996 is a result of sub-
prime auto loans that the Company repurchased pursuant to limited
representations and warranties included in loan sale agreements.  The Company
had a separate reserve of $600,000 included in other liabilities for anticipated
losses relating to the repurchased sub-prime auto loans at December 31, 1996.
Included in repossessed assets for 1996 is $506,000 of automobiles that the
Company was required to repurchase pursuant to the same limited representations
and warranties.  The balance of the loans and automobiles repurchased in 1996
and 1997 were either disposed of or sold to a third party investor in December
1997.  The Company does not anticipate that it will originate any additional
sub-prime automobile contracts.

  The prior delinquency and anticipated future delinquencies are taken into
consideration in the pricing of the loans acquired.  The Company generally
purchases such loans at discounts and, in some instances, receives recourse or
credit enhancement from the seller to further reduce the Company's risk of loss
associated with the loans' nonaccrual status.  At December 31, 1998, $8.0
million, or 60.6%, 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, 1998, were $754.2 million, of
which $12.8 million, or 1.7%, were nonaccrual loans.  However, against the
$754.2 million of total loans held for sale, the Company has $3.7 million of
purchase discounts.

  The percentage of the allowance for loan and valuation losses to nonaccrual
loans varies widely due to the nature of the Company's portfolio of mortgage
loans, which are collateralized primarily by residential real estate.  The
Company analyzes the collateral for each nonperforming mortgage loan to
determine potential loss exposure.  In conjunction with other factors, this loss
exposure contributes to the overall assessment of the adequacy of the allowance
for loan and valuation losses.  See "--Comparison of Results of Operations for
Fiscal Years 1998 and 1997."

                                       31
<PAGE>
 
     Analysis of Allowance for Loan and Valuation Losses.  The following table
sets forth information regarding changes in the Company's 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 December 31,
                                                      ----------------------------------------------------------------------
                                                         1998           1997           1996           1995           1994
                                                      ----------     ----------     ----------     ----------     ----------
                                                                                (Dollars in thousands)
<S>                                                   <C>            <C>            <C>            <C>            <C>
Balance at beginning of period.....................    $  1,756       $  1,039       $    943       $    728       $   538
Charge-offs:
  Real estate-mortgage.............................       1,922             22             64            198            26
  Real estate-construction.........................          --             --             --             35            --
  Direct financing leases..........................          --             --             --             --            --
  Consumer.........................................         789            166              6              7            --
                                                       --------       --------       --------       --------       -------
     Total charge-offs.............................       2,711            188             70            240            26
Recoveries:
  Real estate-mortgage.............................           2             --              8              5            --
  Consumer.........................................          56             31             15             49            --
                                                       --------       --------       --------       --------       -------
     Total recoveries..............................          58             31             23             54            --
                                                       --------       --------       --------       --------       -------
Net charge-offs....................................       2,653            157             47            186            26
Provision for loan losses charged to operations....       4,607            874            143            401           216
                                                       --------       --------       --------       --------       -------
Balance at end of period...........................    $  3,710       $  1,756       $  1,039       $    943       $   728
                                                       ========       ========       ========       ========       =======
Ratio of net charge-offs to average loans..........        0.38%          0.04%          0.03%          0.15%         0.03%
                                                       ========       ========       ========       ========       =======
Average loans outstanding during the period........    $692,443       $355,848       $162,648       $121,206       $79,393
                                                       ========       ========       ========       ========       =======
</TABLE>
                                                                               
     A majority of the increase in real estate-mortgage charge-offs for 1998 as
compared to 1997 is due to the loss recognized related to MCA.  See "--
Comparison of Results of Operations for Fiscal Years 1998 and 1997--Net Income;
Return on Average Equity" for additional information.  Additionally, the
increase in consumer charge-offs in 1998 pertains to losses experienced on the
Company's credit card portfolio, which accounts for less than 1% of the
Company's total loan portfolio as of December 31, 1998.

     The allowance for loan and valuation losses is increased by the provision
for loan and valuation losses (which is charged to operations) for particular
loans where management considers ultimate collection to be questionable; all
other loans are evaluated by the Company as part of their respective categories,
and not on an individual basis.  Each category of loans in the loan portfolio is
assigned a loss factor based on the assessed risk inherent in each loan
category, certain qualitative evaluations of individual classified assets,
trends in the portfolio, geographic and portfolio concentrations, new products
or markets, 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.  These loss factors range from 0.10%
for FHA/VA loans guaranteed by HUD to 8.00% for credit card loans.  Additionally
substandard and doubtful loans of homogeneous loan portfolios are assigned loss
factors of 5.00% and 50.00%, respectively.  The Company had no impaired loans as
of December 31, 1998, 1997, 1996, 1995 and 1994.  The loss factors are applied
to the outstanding principal balance of loans in their respective categories,
and the total for all categories determines the Company's allowance for loan and
valuation losses, except for direct financing leases, for which the allowance is
determined based on specific loans.

<TABLE>
<CAPTION>
                                                                        As of December 31,                                         
                                  ------------------------------------------------------------------------------------------------
                                        1998                     1997                    1996                      1995           
                                  ------------------------------------------------------------------------------------------------
                                            Percentage               Percentage               Percentage               Percentage 
                                            of Loans to              of Loans to              of Loans to              of Loans to
                                  Amount    Total loans    Amount    Total loans    Amount    Total loans    Amount    Total loans
                                  ------    ------------   ------    -----------    ------    -----------    ------    -----------
                                                                                    (Dollars in thousands)
<S>                               <C>       <C>            <C>       <C>            <C>       <C>            <C>       <C> 
Residential....................    $2,372     85.96%        $1,234     90.15%        $  911     90.03%        $830       92.64%
Multi-family, commercial real                                                                                                 
     estate and commercial.....       137      6.18             91      5.75             51      7.19           78        5.11
Direct financing leases........       275      2.87             --      0.53             --        --           --          --
Construction...................        72      3.24             23      1.48              6      0.50            1        0.05
Consumer.......................       854      1.75            408      2.09             71      2.28           34        2.20 
                                   ------    ------         ------    ------         ------    ------         ----      ------
                                   $3,710    100.00%        $1,756    100.00%        $1,039    100.00%        $943      100.00% 
                                   ======    ======         ======    ======         ======    ======         ====      ======
<CAPTION> 
                                            ----------------------
                                                    1994 
                                            -----------------------
                                                      Percentage  
                                                      of Loans to 
                                            Amount    Total loans 
                                            ------    ------------
<S>                                         <C>       <C> 
Residential........................          $635       88.83% 
Multi-family, commercial real
     estate and commercial.........            69        8.35 
Direct financing leases............            --          --
Construction.......................             1        0.12 
Consumer...........................            23        2.70 
                                             ----      ------
                                             $728      100.00% 
                                             ====      ======
</TABLE> 

                                      32 

<PAGE>
 
  The ratio of the allowance for loan and valuation losses to total loans was
0.44%, 0.34%, 0.49%, 0.64% and 0.81% at December 31, 1998, 1997, 1996, 1995 and
1994, respectively.  The allowance for loan and valuation losses is reduced by
loans charged off, net of recoveries.  The allowance for loan and valuation
losses allocated to residential, multi-family, commercial real estate and
commercial and construction loans has increased mainly due to the increased
outstanding loan principal balances in these loan categories and not due to any
increase in the perceived risk or losses experienced in these categories.  The
Company did not assign any of the allowance for loan and valuation losses to
direct financing leases in 1997, as the Company originated the $2.7 million of
outstanding direct financing leases in the last month of the year and management
felt that it was not necessary due to the immaterial amount of leases relative
to the total loan portfolio, as well as payments under the direct financing
leases were not due until 1998, and as such, the leases could not have been
delinquent at December 31, 1997.  This increase in the allowance for loan and
valuation losses in 1998 reflects the growth of the direct financing leases
during 1998 and the nonaccrual status of a small portion of this portfolio at
December 31, 1998.  Additionally, the increase in the allowance for loan and
valuation losses for consumer loans in 1998 primarily reflects the Company's
increase in its loss factor for credit card loans from 4.00% to 8.00% during
1998, due to the increased losses experienced in the portfolio.

  Risk Sensitive Assets and Liabilities. As discussed in "Asset and Liability
Management -- General" a significant portion of the Company's earnings and
ultimate success is partially dependent upon its ability to manage interest rate
risk.  Interest rate risk can be defined as the exposure of the Company's net
interest income to adverse movements in interest rates.  Although the Company
manages other risks, such as credit, operational and liquidity risk, in the
normal course of business, management considers interest rate risk to be a
significant market risk which could potentially have the largest material effect
on the Company's financial condition and results of operations.  The majority of
the Company's 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, MSRs, and also related to the net interest income earned
on its originated loans that are funded through warehouse lines of credit.  The
susceptibility to movements in interest rates affects the cash flows generated
from the MSRs 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 warehouse credit facilities that 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.

   The Company currently does not maintain a trading portfolio.  As a result,
the Company is not exposed to market risk as it relates to trading activities.
The majority of the Company's residential loan portfolio is held for sale which
requires the Company to perform quarterly market valuations of the portfolio in
order to properly record the portfolio at the lower of cost or market.
Therefore, the Company continually monitors the interest rates of its 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 ("ALCO" or the "Committee"), which reports to the
Board of Directors of Matrix Bank.  ALCO establishes policies that monitor and
coordinate the Company's sources, uses and pricing of its funds.  The Committee
is also involved in formulating the Company's budget and strategic plan as it
relates to investment objectives.  Due to the historical size of Matrix Bank's
loan portfolio and the high degree of purchase and sale activity, ALCO has
relied on the OTS interest rate risk exposure report to assist in the overall
monitoring of Matrix Bank's interest rate sensitivity.  Based on the information
and assumptions used in the OTS exposure report as of December 31, 1998,
management believes that a 200 basis point shock over a twelve month period, up
or down would not significantly affect Matrix Bank's annualized net interest
income.  As Matrix Bank continues to grow, management anticipates having to use
an asset/liability software package to monitor and manage Matrix Bank's interest
rate risk on a more timely basis.

   The Company continues 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 (see "Asset and
Liability Management  General" for additional discussion on strategies),
management focuses on acquiring adjustable rate residential mortgages and has
increased its efforts regarding the origination of residential construction
loans, commercial real estate loans and limited consumer lending which reprice
or mature more quickly than fixed rate residential real estate loans.  In 1998,
the Company increased its investment in non-performing FHA and VA loans, which
are fixed rate loans that have a significantly shorter life than newly
originated loans.  The other significant asset that the Company invests in is
MSRs.  The value and cash flows from MSRs 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 MSRs increase.  In a decreasing interest rate environment, the inverse
occurs.  Another significant strategy that the Company focuses on in managing
interest rate risk is 

                                       33
<PAGE>
 
identifying lines of business that generate noninterest rate sensitive
liabilities. Examples of this strategy are the investment in MSRs, which
generate no cost escrow deposits and Sterling Trust's operations, which
administer deposits with relatively low costs.

   In the ordinary course of business, the Company makes commitments to
originate residential mortgage loans and holds 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.  The Company mitigates this risk through the use of mandatory and
nonmandatory forward commitments to sell loans.  As of December 31, 1998, the
Company had $133.7 million in pipeline and funded loans offset with mandatory
forward commitments of $110.0 million and nonmandatory forward commitments of
$10.1 million.  The inherent value of the forward commitments is considered in
the determination of the lower of cost or market for such loans.

   Ownership of MSRs exposes the Company 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 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.  To mitigate this risk of
impairment due to declining interest rates, the Company hedged a segment of its
portfolio beginning in September 1997.  As of December 31, 1998 and 1997, the
Company had identified and hedged $674 million and $306 million, respectively,
of its mortgage servicing portfolio using a program of exchange-traded futures
and options.  See Note 13 to the Consolidated Financial Statements included
elsewhere herein.

   The following tables represent, in tabular form, contractual balances of the
Company's 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, 1998 and 1997.  The expected
maturity categories take into consideration historical and anticipated
prepayment speeds, as well as actual amortization of principal and does not take
into consideration the reinvestment of cash.  The Company's 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 by the Company and are reported in the thereafter column.  The Company
has made the assumption that the portfolio of loans held for sale will mature in
the first year.  The Company is very active in the secondary market as it
relates to the purchase and sale of mortgage loans.  The total amount of loans
sold in 1998 and 1997 approximated 70% and 108%, respectively, of the total held
for sale portfolio at December 31, 1997 and 1996.  This proves the Company's
intent to sell the loans classified as held for sale and the one-year maturity
assumption is supported.  The Company also treats 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
the Company's 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 for 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 forward sale commitments are included in the determination of the fair value
of loans held for sale.  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.

  MSRs are not included in the tabular presentation, as the investment does not
directly affect interest income.  As noted, however, earnings from MSRs directly
correlate with market risk as it relates to interest rate fluctuations.  The
Company mitigates this risk through both the type of MSRs acquired and hedging
of MSRs.  The loans underlying the servicing 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.  It is also believed 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.  Although significantly increased in 1998, the
prepayment percentages which the Company has 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, 1998, 1997 and 1996 were
22.6%, 11.3% and 11.9%, respectively, during a primarily decreasing interest
rate environment.  In the 1998 table below, prepayment speeds of 24% and 12%
were used for residential and non-residential loans, respectively, to project
expected cash flows relating to loans held for investment and in the 1997 table
below, prepayment speeds of 12% were used for all loan types. These assumptions
are based on the Company's historical prepayment speeds, as well as our
knowledge and experience in the market.

                                       34
<PAGE>
 
  The Company's on balance sheet financial instruments for the period ended
December 31, 1998 were:
<TABLE>
<CAPTION>
                                               Expected Maturity Date - Fiscal Year Ended December 31,
                                        -----------------------------------------------------------------------
                                                                                                        There-               Fair
                                          1999          2000      2001        2002        2003       after     Total      Value
                                        --------      --------  --------    --------    --------   ---------  -------    -------
                                                                        (Dollars in thousands)
<S>                                    <C>           <C>       <C>          <C>         <C>         <C>        <C>       <C>
Interest-earning assets:                                        
 Held for sale /(1)(2)/:                                        
  Fixed-rate residential loans.......... $376,168    $    --    $    --     $    --     $    --    $     --    $376,168   $378,274
   Average interest rate................     8.29%        --%        --%         --%         --%         --%       8.29%          
  Adjustable-rate residential loans..... $347,790    $    --    $    --     $           $    --    $     --    $347,790   $349,737
   Average interest rate................     7.90%        --%        --%         --%         --%         --%       7.90%          
  Fixed-rate commercial loans                                                                                                     
   and leases........................... $ 30,268    $    --    $    --     $    --     $    --    $     --    $ 30,268   $ 30,268
   Average interest rate................    12.06%        --%        --%         --%         --%         --%      12.06%          
                                                                                                                                  
 Held for investment/(2)/:                                                                                                        
  Fixed-rate residential loans.......... $    541    $   399    $   293     $   215     $   156    $    351    $  1,955   $  1,769
   Average interest rate/(3)/...........     9.45%      9.45%      9.45%       9.45%       9.45%       9.45%       9.45%          
  Adjustable-rate residential                                                                                                     
   loans/(4)/........................... $    995    $   747    $   559     $   419     $   314    $    887    $  3,921   $  3,548
   Average interest rate/(3)/...........     7.94%      7.94%      7.94%       7.94%       7.94%       7.94%       7.94%          
  Fixed-rate consumer loans............. $  3,272    $ 2,830    $ 2,441     $    --     $    --    $     --    $  8,543   $  9,149
   Average interest rate/(3)/...........    11.11%     11.11%     11.11%         --%         --%         --%      11.11%          
  Adjustable-rate consumer loans/(4)/... $    111    $    95    $    82     $    71     $    61    $    164    $    584   $    626
   Average interest rate/(3)/...........     8.38%      8.38%      8.38%       8.38%       8.38%       8.38%       8.38%          
  Fixed-rate other loans/(5)/........... $  8,929    $ 7,674    $ 6,576     $ 5,617     $ 4,778    $     --    $ 33,574   $ 33,644
   Average interest rate/(3)/...........     9.37%      9.37%      9.37%       9.37%       9.37%         --%       9.37%          
  Adjustable-rate other loans/(4)(5)/... $ 12,197    $10,456    $ 8,935     $ 7,607     $ 6,450    $     --    $ 45,645   $ 45,740
   Average interest rate/(3)/...........     8.94%      8.94%      8.94%       8.94%       8.94%         --%       8.94%          
                                                                                                                                  
 Interest-earning deposits.............. $     --    $    --    $    --     $    --     $    --    $  8,120    $  8,120   $  8,120
   Average interest rate................       --%        --%        --%         --%         --%       4.40%       4.40%          
  FHLB stock............................ $     --    $    --    $    --     $    --     $    --    $ 15,643    $ 15,643   $ 15,643
   Average interest rate................       --%        --%        --%         --%         --%       5.75%       5.75%          
                                                                                                                                  
   Total interest-earning assets........ $780,271    $22,201    $18,886     $13,929     $11,759    $ 25,165    $872,211   $876,518
                                         ========    =======    =======     =======     =======    ========    ========   ========
                                                                                                                                  
Interest-bearing liabilities:                                                                                                     
 Passbook accounts...................... $     --    $    --    $    --     $    --     $    --    $  2,830    $  2,830   $  2,830
  Average interest rate.................       --%        --%        --%         --%         --%       3.44%       3.44%          
 NOW accounts/(6)/...................... $     --    $    --    $    --     $    --     $    --    $ 19,506    $ 19,506   $ 19,506
  Average interest rate.................       --%        --%        --%         --%         --%       2.72%       2.72%          
 Money market accounts.................. $     --    $    --    $    --     $    --     $    --    $170,957    $170,957   $170,957
  Average interest rate.................       --%        --%        --%         --%         --%       3.42%       3.42%          
 Certificates of deposit over $100,000.. $  7,999    $   636    $   322     $   646     $   661    $     --    $ 10,264   $ 10,383
  Average interest rate.................     5.57%      6.33%      6.22%       6.44%       5.89%         --%       5.71%          
 Brokered certificates of deposit....... $148,676    $    --    $    --     $    --     $    --    $     --    $148,676   $148,907
  Average interest rate.................     4.92%        --%        --%         --%         --%         --%       4.92%           
 Other certificates of deposit.......... $ 84,776    $14,037    $ 5,652     $ 6,126     $ 5,020    $     --    $115,611   $116,748
  Average interest rate.................     5.54%      5.73%      5.87%       6.35%       5.76%         --%       5.63%          
 FHLB borrowings/(7)/................... $     --    $    --    $    --     $    --     $    --    $168,000    $168,000   $171,544
  Average interest rate.................       --%        --%        --%         --%         --%       4.90%       4.90%          
 Revolving borrowings................... $     --    $    --    $    --     $    --     $    --    $116,845    $116,845   $116,845
  Average interest rate.................       --%        --%        --%         --%         --%       6.60%       6.60%          
 Term borrowings........................ $  9,737    $ 8,625    $12,223     $ 4,997     $ 4,959    $ 21,403    $ 61,944   $ 61,944
  Average interest rate.................     7.73%      7.48%      7.62%       7.77%       6.71%      11.17%       8.78%          
                                                                                                                                  
  Total interest-bearing liabilities.... $251,188    $23,298    $18,197     $11,769     $10,640    $499,541    $814,633   $819,664
                                         ========    =======    =======     =======     =======    ========    ========   ======== 
</TABLE>
 __________
  (1) Loans held for sale are assumed to mature within one year, as the intent
      is to sell the loans.
  (2) Balances are stated net of discounts and other deductions.
  (3) For the fixed-rate loans held for investment, the Company computed a
      weighted average interest rate and a weighted average maturity for the
      loan portfolio and then applied a prepayment assumption of 24% to
      residential loans and 12% to non-residential loans 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 11/th/ 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 $22.7
      million.
  (7) See "--Short-term Borrowings" for additional discussion on the term of the
      FHLB borrowings.

                                       35
<PAGE>
 
   The Company's on balance sheet financial instruments for the period ended
December 31, 1997 were:

<TABLE>
<CAPTION>
                                                      Expected Maturity Date-Fiscal Year Ended December 31,
                                    ------------------------------------------------------------------------
                                                                                                   There-                Fair
                                          1998        1999        2000        2001       2002      after      Total      Value    
                                         ------      ------      ------      ------     ------    ------     -------    -------
                                                                          (Dollars in thousands)
<S>                                      <C>          <C>      <C>         <C>        <C>          <C>        <C>         <C> 
Interest-earning assets:
   Held for sale /(1)(2)/:
      Fixed-rate residential loans...... $201,081    $    --    $     --    $     --    $     --   $     --   $201,081   $202,073
          Average interest rate.........     9.09%        --%         --%         --%         --%        --%      9.09%
      Adjustable-rate residential loans. $255,897    $    --    $     --    $     --    $     --   $     --   $255,897   $257,159
          Average interest rate.........     8.03%        --%         --%         --%         --%        --%      8.03%
 
   Held for investment/(2)/:
      Fixed-rate residential loans...... $    562    $   490    $    427    $    371    $    323   $  1,416   $  3,589   $  3,685
          Average interest rate/(3)/....     9.66%      9.66%       9.66%       9.66%       9.66%      9.66%      9.66%
      Adjustable-rate residential 
          loans/(4)/.................... $    505    $   441    $    385    $    336    $    293   $  1,679   $  3,639   $  3,736
          Average interest rate/(3)/....     8.18%      8.18%       8.18%       8.18%       8.18%      8.18%      8.18%
      Fixed-rate consumer loans......... $  3,815    $ 3,376    $  2,989    $     --    $     --   $     --   $ 10,180   $ 10,388
          Average interest rate/(3)/....    14.44%     14.44%      14.44%         --%         --%        --%     14.44%
      Adjustable-rate consumer          
          loans/(4)/.................... $     69    $    60    $     52    $     45    $     39   $    169   $    434   $    443
          Average interest rate/(3)/....     8.38%      8.38%       8.38%       8.38%       8.38%      8.38%      8.38%
      Fixed-rate other loans/(5)/....... $  9,994    $ 8,532    $     --    $     --    $     --   $     --   $ 18,526   $ 18,613
          Average interest rate/(3)/....     9.79%      9.79%         --%         --%         --%        --%      9.79%
      Adjustable-rate other
          loans/(4)(5)/................. $  2,843    $ 2,476    $  2,153    $  1,871    $  1,623   $  7,060   $ 18,026   $ 18,110
          Average interest rate/(3)/....     9.25%      9.25%       9.25%       9.25%       9.25%      9.25%      9.25%
   Interest-earning deposits............ $     --    $    --    $     --    $     --    $     --   $  6,337   $  6,337   $  6,337
          Average interest rate.........       --%        --%         --%         --%         --%      5.91%      5.91%
   FHLB stock........................... $     --    $    --    $     --    $     --    $     --   $  8,700   $  8,700   $  8,700
          Average interest rate.........       --%        --%         --%         --%         --%      6.00%      6.00%
          Total interest-earning assets. $474,766    $15,375    $  6,006    $  2,623    $  2,278   $ 25,361   $526,409   $529,244
                                         ========    =======    ========    ========    ========   ========   ========   =========
Interest-bearing liabilities:
   Passbook accounts.................... $     --    $    --    $     --    $     --    $     --   $  2,851   $  2,851   $  2,851
          Average interest rate.........       --%        --%         --%         --%         --%      3.97%      3.97%
   NOW accounts/(6)/.................... $     --    $    --    $     --    $     --    $     --   $ 14,669   $ 14,669   $ 14,669
          Average interest rate.........       --%        --%         --%         --%         --%      2.92%      2.92%
   Money market accounts................ $     --    $    --    $     --    $     --    $     --   $ 99,899   $ 99,899   $ 99,899
          Average interest rate.........       --%        --%         --%         --%         --%      2.96%      2.96%
   Certificates of deposit over 
          $100,000...................... $  4,900    $ 1,030    $    414    $    207    $    634   $     --   $  7,185   $  7,258
          Average interest rate.........     5.91%      6.06%       6.73%       6.15%       6.44%        --%      6.03%
   Other certificates of deposit........ $ 63,692    $13,442    $  2,984    $  2,453    $  6,094   $     --   $ 88,665   $ 89,389
          Average interest rate.........     5.88%      6.01%       6.24%       6.30%       6.34%        --%      5.96%
   FHLB borrowings...................... $     --    $    --    $     --    $     --    $     --   $171,943   $171,943   $171,943
          Average interest rate.........       --%        --%         --%         --%         --%      6.37%      6.37%
   Revolving borrowings................. $     --    $    --    $     --    $     --    $     --   $ 48,338   $ 48,338   $ 48,338
          Average interest rate.........       --%        --%         --%         --%         --%      7.07%      7.07%
   Term borrowings...................... $  4,928    $ 4,438    $  5,373    $  3,546    $  1,699   $ 21,587   $ 41,571   $ 41,571
          Average interest rate.........     8.57%      8.97%       8.89%       9.14%      10.34%     11.15%     10.11% 
       Total interest-bearing               
          liabilities................... $ 73,520    $18,910    $  8,771    $  6,206    $  8,427   $359,287   $475,121   $475,918
                                         ========    =======    ========    ========    ========   ========   ========   ========  
 </TABLE>
 __________
  (1) Loans held for sale are assumed to mature within one year, as the intent
      is to sell the loans.
  (2) Balances are stated net of discounts and other deductions.
  (3) For the fixed rate loans held for investment, the Company computed a
      weighted average interest rate and a weighted average maturity for the
      loan portfolio and then applied a prepayment assumption of 12% 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 $9.2
      million.

      Short-term Borrowings. A primary function of asset and liability
  management is to ensure adequate liquidity. In addition to cash and cash
  equivalents, the Company relies 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 and unaffiliated financial
  institutions for Matrix Financial. See "Liquidity and Capital Resources."

                                      36
<PAGE>
 
     The following table sets forth a summary of the short-term borrowings of
the Company during 1998, 1997 and 1996 and as of the end of each such period:
<TABLE>
<CAPTION>
                                                                     Average                                Weighted    Weighted
                                                  Amount              amount             Maximum            average     average
                                                outstanding        outstanding         outstanding          interest    interest
                                                    at              during the           at any            rate during   rate at
                                                 year end            year(1)            month end           the year    year end
                                                 --------            -------            ---------           --------    --------
                                                                                  (Dollars in thousands)
<S>                                              <C>                <C>                 <C>               <C>            <C>
At or for the year ended December 31, 1996:
  FHLB borrowings..............................  $ 51,250           $ 35,838            $ 53,650           5.69%         5.84%
  Revolving lines of credit....................    31,504             35,489              60,804           7.17          6.50
  Repurchase agreements........................        --                991               4,962          12.58            --
At or for the year ended December 31, 1997:      
  FHLB borrowings..............................   171,943             59,984             171,943           5.73          6.37
  Revolving lines of credit....................    48,338             43,762              57,710           6.99          7.07
  Repurchase agreements........................        --              1,564               3,437          11.26            --
At or for the year ended December 31, 1998:      
  FHLB borrowings(2)...........................   168,000            159,381             271,000           5.37          4.90
  Revolving lines of credit....................    86,936             74,973              92,507           6.55          6.23
  Repurchase agreements........................     7,350              1,445               7,350           9.06          9.02
  Lease financing..............................    22,559              9,304              22,559           7.32          7.27
</TABLE>
_________
(1) Calculations are based on daily averages where available and monthly 
    averages otherwise.
(2) $47.0 million of the FHLB borrowings outstanding at December 31, 1998, were 
    borrowed under a Short Option Advance ("SOA") Agreement with the FHLB. These
    SOA borrowings have a term of ten years, but are callable by the FHLB
    beginning after a six month or one year lock-out period depending on the
    particular SOA borrowing. After the expiration of the lock-out period, the
    SOA borrowings are callable at three month 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. The interest rates on the SOA
    borrowings ranged from 4.85% to 4.94% at December 31, 1998 and their
    possible call dates varied from January 15, 1999 to April 14, 1999.
    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.

Liquidity and Capital Resources

    Liquidity is the ability of the Company to generate funds to support asset 
growth, satisfy disbursement needs, maintain reserve requirements and otherwise
operate on an ongoing basis. To date, Matrix Bancorp's principal source of
funding for its investing activities has been secured senior debt provided by
unaffiliated financial institutions, the issuance of 11.5% Senior Notes (the
"11.5% Senior Notes") in September 1997, the issuance of Senior Subordinated
Notes (the "Senior Subordinated Notes") in August 1995, a bank stock loan and
the Company's initial public offering. As of December 31, 1998, Matrix Bancorp
had $42.3 million in indebtedness outstanding. The borrowed funds have been used
historically as capital injections to Matrix Bank and Matrix Financial, as well
as to acquire the office building in Phoenix where Matrix Financial maintains
its headquarters. See "Properties."

    On June 29, 1998, the Company amended its bank stock loan and increased the 
credit available under the loan by an additional $12.0 million. The amended bank
stock loan has two components, an $8.5 million term loan and a revolving line of
credit of $11.5 million. As of December 31, 1998, the balance of the term loan
and the revolving line of credit were $7.9 million and $10.3 million,
respectively. One year from the date of the amendment, the balance of the
revolving line of credit will be converted to a term loan. The additional
proceeds from the loan will be used primarily as capital at Matrix Bank. The
amended bank stock loan requires the Company to maintain (i) total shareholders'
equity of the greater of $40.0 million or 90% of actual net worth at the end of
the most recent fiscal year, plus 50% of cumulative net income after the end of
the most recent fiscal year, plus 90% of all contributions made to stockholders'
equity after the closing date, and (ii) total adjusted debt to net worth less
than 4:1. Additionally, the amended bank stock loan does not permit Matrix
Bancorp to declare or pay any dividends.

    On September 29, 1997, the Company 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, commencing on March 31, 1998, with a
balloon payment for the entire principal balance due in September 2004. The
11.5% Senior Notes require the Company to (i) maintain consolidated tangible
equity capital of not less than $35 million and (ii) meet the requirements
necessary such that Matrix Bank will not be classified as other than "well
capitalized" as defined by 12 C.F.R. Section 565.4. 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. Under the
conditions of the 11.5% Senior Notes, the Company may not incur

                                       37
<PAGE>
 
any additional indebtedness if the consolidated leverage ratio exceeds 2:1 and
Matrix Bancorp may not declare or pay cash dividends unless, at the time of and
after giving effect to such dividend, (1) no default shall have occurred and be
continuing or would occur as a consequence thereof, (2) Matrix Bancorp would
(after giving effect to the payment of such dividend) be permitted to incur at
least $1.00 of additional indebtedness pursuant to the 2:1 consolidated leverage
ratio described above, and (3) such dividend, together with the aggregate amount
of all restricted payments made, is less than 25% of the aggregate consolidated
net income of the Company for the period beginning on October 1, 1997 and ending
on the date of the Company's most recent quarter plus 100% of the net cash
proceeds received by Matrix Bancorp from the issuance of equity interests. As of
December 31, 1998, under the foregoing test, Matrix Bancorp would be entitled to
declare and pay dividends of approximately $640,000, although it has no present
intent to do so, as distributions are not permitted under the Company's bank
stock loan.

  In August 1995, the Company issued $2.9 million in aggregate principal amount
of Senior Subordinated Notes. Interest on the Senior Subordinated Notes is
payable semi-annually on January 15 and July 15, and the Senior Subordinated
Notes mature on July 15, 2002, with earlier mandatory redemptions of $727,500,
or 25% of the Senior Subordinated Notes, scheduled on July 15, 1999, 2000 and
2001, respectively.  The Company is restricted from paying cash dividends under
the Senior Subordinated Notes.  However, the Company may pay cash dividends in
an amount equal to 50% of the consolidated net income of the Company as long as
there has been no default under the terms of the Senior Subordinated Notes and
as long as the dividend does not exceed 10% of the consolidated net worth of the
Company.  The Company may redeem the Senior Subordinated Notes, in whole or in
part, at any time on or after July 15, 1998; at a redemption price equal to (i)
102% of par through July 14, 1999 and, thereafter, at par, plus (ii) all accrued
but unpaid interest.  Until February 1997, the Senior Subordinated Notes bore
interest at 13% per annum.  In February 1997, the rate increased to 14% per
annum.

  The trend of net cash used by the Company's operating activities experienced
over the reported periods results primarily from the growth that Matrix Bank has
experienced in its residential loan purchasing activity.  The Company
anticipates the trend of a net use of cash from operations to continue for the
foreseeable future.  This anticipation results from the expected growth at
Matrix Bank, which management believes will consist primarily of increased
activity in the purchasing of loan and mortgage servicing portfolios.  The
Company anticipates such growth will be funded through retail deposits, brokered
deposits, custodial escrow deposits, directed trust deposits, FHLB borrowings,
and possibly, new offerings.

  Matrix Bank's primary source of funds for use in lending, purchasing bulk loan
portfolios, investing and other general purposes are retail deposits, trust
deposits, custodial escrow balances, brokered deposits, FHLB borrowings, sales
of loan portfolios and proceeds from principal and interest payments on loans.
Contractual loan payments and deposit inflows and outflows 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, 1998, Matrix Bank had overnight borrowings from the
FHLB of $168.0 million.  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.  For a tabular
presentation of the Company's 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 primarily
from areas in which it is located and, therefore, its retail deposits are
concentrated primarily in Las Cruces and Sun City.  Matrix Bank relies
principally on customer service, marketing programs and its relationships with
customers to attract and retain these deposits.  Beginning in February 1998,
brokered deposits were 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.

  In February 1997, Sterling Trust moved approximately $80.0 million of
fiduciary deposits from a third party institution to Matrix Bank.  Additionally,
pursuant to a termination agreement, Fidelity National Title moved approximately

                                       38
<PAGE>
 
$47.1 million of deposits to Matrix Bank during the fourth quarter of 1998. 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,
                                       --------------------------------------------------------------------
                                              1998                     1997                      1996
                                       ------------------       ------------------       ------------------
                                                 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..................     $  2,859  3.58%          $  2,859  3.95%          $ 2,389   3.45%
NOW accounts.......................       17,586  2.97             23,837  3.34             2,813   2.24
Money market accounts..............      124,796  3.13             73,145  3.39             9,151   4.43
Time deposits (except brokered)....      108,107  5.79             83,993  5.94            54,824   5.85
Brokered deposits..................      103,485  5.25                 --    --                --     --
                                        --------  ----           --------  ----           -------   ----
      Total deposits...............     $356,833  4.37%          $183,834  4.56%          $69,177   5.43%
                                        ========  ====           ========  ====           =======   ====
</TABLE>

  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, 1998:

<TABLE>
<CAPTION>
                                                                As of December 31, 1998
                                                                -----------------------
                                                                               Weighted
                                                                               Average
                                                                Amount         Rate Paid
                                                                ------         ---------
                                                                 (Dollars in thousands)
    <S>                                                         <C>            <C> 
     Three months or less....................................    $ 2,453        5.42%
     Over three months through six months....................      2,205        5.66
     Over six months through twelve months...................      3,340        5.61
     Over twelve months......................................      2,266        6.22
                                                                 -------        ----
        Total................................................    $10,264        5.71%
                                                                 =======        ====
</TABLE>
                                                                               
     The Company actively monitors 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 from affiliates.  The Company anticipates
that such growth will require additional capital.  The capital requirements
related to the anticipated growth will in part be fulfilled through retention of
earnings, potentially increasing the Company's bank stock loan and future
possible debt or equity offerings.

     The Company's principal source of funding for its servicing acquisition
activities consists of a line of credit facility provided to Matrix Financial by
an unaffiliated financial institution.   As of December 31, 1998, Matrix
Financial's servicing acquisition facility aggregated $45.0 million, of which
$14.1 million was available to be utilized after deducting drawn amounts.
Borrowings under the servicing acquisition lines of credit are secured by MSRs
owned by Matrix Financial, bear interest at the federal funds rate plus a
negotiated margin and are due at the earlier of the maturity of the MSRs or
amortized over five to six years from the date of borrowing.  At December 31,
1998, $27.0 million was outstanding under the servicing acquisition line and the
interest rate on funds outstanding under this facility at December 1998 was
6.68%.

     The Company's principal source of funding for its loan origination business
consists of a warehouse line of credit and a sale/repurchase facility provided
to Matrix Financial by unaffiliated financial institutions.  As of December 31,
1998, Matrix Financial's warehouse line of credit facility aggregated $90.0
million, of which $17.8 million was available to be utilized.  Effective
February 22, 1999, the Company executed an amendment to its warehouse line of
credit facility to increase the credit available by an additional $30.0 million.
Additionally, the lead lender for the warehouse line has provided the Company
with an overline facility, which provides an additional $10.0 million in funding
capacity.  The availability of the overline facility is at the lender's sole
discretion. At December 31, 1998, $72.2 million was outstanding under the
warehouse line at a weighted average interest rate of 6.01%.  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 federal funds rate plus a
negotiated margin. As of December 31, 1998, Matrix Financial's sale/repurchase
facility was $25.0 million, with $15.1 million outstanding at a weighted average
interest rate of 9.02%.  Borrowings under the sale/repurchase facility are
secured by all of the mortgage loans and direct financing leases funded with
sale/repurchase facility proceeds and bear interest at the higher of the prime
rate or the LIBOR rate plus a negotiated margin on the loans and 8.00% on the
direct lease financing.

                                       39
<PAGE>
 
  The Company's principal source of funding for the working capital needs of
Matrix Financial consists of working capital facilities provided to Matrix
Financial by an unaffiliated financial institution.  As of December 31, 1998,
Matrix Financial's working capital facilities aggregated $10.0 million, of which
$5.5 million was available.  Borrowings under the working capital facilities are
secured by MSRs, eligible servicing advance receivables and eligible delinquent
mortgage loans and bear interest at the federal funds rate plus a negotiated
margin.  At December 31, 1998, $4.5 million was outstanding under the working
capital facilities at an interest rate of 6.18%.

  Matrix Bank is restricted from paying dividends to Matrix Bancorp due to
certain regulatory requirements.  Matrix Financial is restricted from paying
dividends to the Company under its Amended and Restated Loan Agreement.  Under
this loan agreement, Matrix Financial is limited to (1) dividends payable solely
in the form of capital stock, (2) cash dividends to Matrix Bancorp in an amount
not to exceed 50% of Matrix Financial's net cash income for the current fiscal
year so long as no default or potential default exists or would be created by
the dividend, or (3) dividends otherwise approved in writing by the agent.  At
December 31, 1998, the Company was in compliance with all debt covenants.  See
"Regulation and Supervision."

  In June 1996, the Company purchased 154 acres of land for $1.3 million in cash
for the purpose of developing 750 residential and multi-family lots in Ft.
Lupton, Colorado.  The purchase was completed with operating funds of the
Company and a loan from a third party financial institution of $845,000.  As
part of the acquisition, the Company entered into a Planned Unit Development
Agreement (the "Development Agreement") with the City of Ft. Lupton (the
"City").  The Development Agreement is a residential and golf course development
agreement providing for the orderly planning, engineering and development of a
golf course and surrounding residential community.  The City is responsible for
the development of the golf course and the Company is responsible for the
development of the surrounding residential lots and certain offsite
infrastructure (estimated at $1.3 million).  The Development Agreement also
provides for the rebate of certain developments fees, infrastructure fees and
storm drainage fees from the City to the Company (estimated at $1.6 million).

  The Development Agreement sets forth a mandatory obligation on the part of the
Company to secure future payment to the City of pledged golf course enhancement
fees of $600,000.  These pledged enhancement fees require successor homebuilders
to pay the City a $2,000 fee with the issuance of each building permit.  In the
event that less than 30 permits are issued per year, the Company is obligated to
pay the balance of $60,000 in assessment fees per year beginning in the year
1998 through the year 2007.  The Company has to date posted a $300,000 letter of
credit to secure those referenced enhancement fees.  The Company also entered
into a development management agreement with a local developer to complete the
development of the land.  The terms of the agreement specify that the Company is
to earn a preferred rate of return on its investment and, once the initial
amount of its investment plus the preferred rate of return have been returned,
the remaining profits are split equally.  The Company's current investment in
the project is $4.1 million.

  It is anticipated that the Company may obtain a loan from an unaffiliated
financial institution for a portion of the future development costs, as needed.

Inflation and Changing Prices

  The Consolidated Financial Statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles, 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 the assets and liabilities of the Company are monetary in
nature.  As a result, interest rates have a more significant impact on the
Company's 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.  The Company discloses the estimated fair market
value of its financial instruments in accordance with Statement of Financial
Accounting Standards No. 107.  See Note 15 to the Consolidated Financial
Statements included elsewhere herein.

Recent Accounting Pronouncements

  During fiscal year 1998, the Company adopted the provisions of two accounting
pronouncements:  Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("FAS 130") and Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("FAS 131").  Additionally, in June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("FAS 133"), which is effective
for fiscal years beginning after June 15, 1999.  Management of the Company plans
to adopt FAS 133 with its fiscal year beginning January 1, 2000.  It is not
currently known what effect the adoption of FAS 133 will have on the
Consolidated Financial Statements of the Company.

                                       40
<PAGE>
 
Year 2000

   The following disclosure is a Year 2000 Readiness Disclosure and a Year 2000
Statement, as defined in the Year 2000 Information and Readiness Disclosure Act,
which was enacted by Congress and was effective October 19, 1998.

   Similar to many other companies, the Company faces the risk of a potentially
serious information systems (computer) problem because many software
applications and operational programs written in the past may not properly
recognize calendar dates beginning in the Year 2000.  This problem could result
in a system failure or miscalculations causing a disruption of operations.  The
Company has established Year 2000 project teams, both at the Company and
individual Subsidiary levels.  The Year 2000 project teams and the Company's
overall Year 2000 effort are being overseen by the Company's Year 2000 Director
to ensure that consistent procedures and methodologies are being applied across
the Subsidiaries in addressing Year 2000 issues.

   The Company is subject to Year 2000 risks not only from its own internal data
processing systems and software, but also from third party sources providing
data and/or services to the Company and from certain significant customers.
Additionally, the Company has a limited amount of other non-information systems
equipment that relies on date-sensitive information.  As such, the Company has
established and implemented a Year 2000 Plan that includes the careful
evaluation of internal data processing systems and software and incorporates the
evaluation of third party sources, significant customers and vendors, and non-
information systems equipment for Year 2000 risks.

   The Company's Year 2000 Plan consists of the following five separate phases:

     .   Awareness - The process of informing all of the Company's employees,
         vendors, and significant customers about the nature and extent of the
         Year 2000 problem.

     .   Assessment - The process of gathering and analyzing information to
         determine the size and impact of the Year 2000 problem, the complexity
         of issues and the level of work and resources necessary to address Year
         2000 issues.

     .   Renovation - The process of modifying, reengineering, and retiring non-
         compliant information systems, applications, vendors, third party
         service providers and non-information systems based on the information
         learned during the assessment phase.

     .   Validation - The process of testing information systems, application,
         vendors, third party service providers and non-information systems for
         Year 2000 compliance.  This testing phase includes both newly renovated
         and compliant items.

     .   Implementation - The process of implementing all Year 2000 compliant
         changed, newly acquired or modified information systems, application,
         vendors, third party service providers and non-information systems.
         This phase also includes the updating of backup, contingency and
         disaster recovery plans.

   It is anticipated that the above phases of the Year 2000 Plan will progress
concurrently.  Additionally, the Company does not anticipate that its
Subsidiaries will progress at the same rate through the five phases of the Year
2000 Plan due to differences in their systems and the varying levels of
complexity associated with those systems.

   The Company's computing environment consists largely of personal computers
("PCs") connected to Local Area Network ("LAN") based systems.  The exception to
this is an in-house Digital VAX mini-computer system used by Sterling Trust.
This VAX system houses the Trust Accounting System which is written in the COBOL
language.  Due to the substantial number of programming changes required,
Sterling Trust's Year 2000 focus to date has mainly been on renovating,
validating and implementing changes to the Trust Accounting System. Unlike
Sterling Trust, processing for many Matrix Bank and Matrix Financial systems are
handled by outside service bureaus. Therefore, these Subsidiaries' Year 2000
efforts are more focused on obtaining information on the compliance status of
these outside service bureaus and on performing testing procedures to verify
their compliance.  Matrix Bank's efforts to become Year 2000 compliant are being
monitored by the OTS.  Failure to become Year 2000 compliant could subject
Matrix Bank to formal supervisory or enforcement actions. Matrix Financial plans
to participate in the Year 2000 Inter-System Readiness Test sponsored by the
Mortgage Bankers Association, which is 

                                       41
<PAGE>
 
currently scheduled to begin during March of 1999. The Year 2000 progress of
these three Subsidiaries as of February 28, 1999 is seen in the following
tables:
<TABLE>
<CAPTION>
                                                                     Sterling Trust Year 2000 Progress                      
                                                --------------------------------------------------------------------------  
                                                Awareness      Assessment     Renovation     Validation     Implementation  
                                                ---------      ----------     ----------     ----------     --------------  
<S>                                             <C>            <C>            <C>            <C>            <C>             
Information Systems.........................       100%            100%            100%             25%             85%     
  Estimated completion date.................        --              --              --         6/15/99         4/15/99      
Non-information systems.....................       100%            100%              0%              0%              0%     
  Estimated completion date.................        --              --         6/15/99         6/15/99         6/15/99      
Third parties...............................       100%            100%            100%              0%              0%     
  Estimated completion date.................        --              --              --         6/15/99         6/15/99       
</TABLE> 
<TABLE>
<CAPTION>
                                                                            Matrix Bank Year 2000 Progress                   
                                                --------------------------------------------------------------------------   
                                                Awareness      Assessment     Renovation     Validation     Implementation   
                                                ---------      ----------     ----------     ----------     --------------   
<S>                                             <C>            <C>            <C>            <C>            <C>              
Information Systems.........................       100%            100%             95%             47%             47%      
  Estimated completion date.................        --              --         6/30/99         6/30/99         6/30/99       
Non-information systems.....................       100%            100%             98%             66%             66%      
  Estimated completion date.................        --              --         6/30/99         6/30/99         6/30/99       
Third parties...............................       100%             48%            N/A               0%              0%      
  Estimated completion date.................        --         6/30/99              --         6/30/99         6/30/99        
</TABLE>
<TABLE>
<CAPTION>
                                                                        Matrix Financial Year 2000 Progress
                                               --------------------------------------------------------------------------
                                               Awareness      Assessment     Renovation     Validation     Implementation
                                               ---------      ----------     ----------     ----------     --------------
<S>                                            <C>            <C>            <C>            <C>            <C>
Information Systems.........................       96%             60%             57%             54%             54%
  Estimated completion date.................  3/31/99         4/30/99         5/31/99         5/31/99         5/31/99
Non-information systems.....................       71%             50%             33%             33%             33%
  Estimated completion date.................  4/30/99         5/31/99         5/31/99         5/31/99         5/31/99
Third parties...............................       90%             90%             90%             90%             90%
  Estimated completion date.................  4/30/99         5/31/99         5/31/99         5/31/99         5/31/99
</TABLE>

   The remaining Companies have more limited exposure risk to the Year 2000
issue.  For example, they have fewer mission critical systems, vendors, and
customers than the Subsidiaries discussed above. These remaining entities have
more limited renovation issues than Sterling Trust, Matrix Bank and Matrix
Financial and their validation process is substantially underway.  The progress
of the remaining Companies is seen in the following table.

<TABLE>
<CAPTION>
                                                                      Remaining Companies' Year 2000 Progress
                                               --------------------------------------------------------------------------
                                               Awareness      Assessment     Renovation     Validation     Implementation
                                               ---------      ----------     ----------     ----------     --------------
<S>                                            <C>            <C>            <C>            <C>            <C>
Information Systems.........................      100%             75%             75%             50%             75%
  Estimated completion date.................       --         4/30/99         5/31/99         6/30/99         6/30/99
Non-information systems.....................      100%             75%             50%             70%             70%
  Estimated completion date.................       --         4/30/99         5/31/99         6/30/99         6/30/99
Third parties...............................      100%             50%             75%             50%             50%
  Estimated completion date.................       --         4/30/99         6/30/99         6/30/99         6/30/99
</TABLE>

   The implementation process is at varying levels of completion across the
Company.  Included in the implementation phase of the Company's Year 2000 Plan
is the development of a contingency plan for the failure of the Company's
mission critical systems.  Several of the Company's Subsidiaries have completed
their contingency plans and it is anticipated that the remainder of the
contingency plans will be finished by June 30, 1999.  These plans will address
issues such as the failure of the Company's third party service providers, the
failure of the trust Accounting System, the failure of our telecommunications
network, and so on.

   Assuming the proper functioning of the Company's telecommunication and
utility providers, the failure of which would have a significant impact on the
Company's ability to conduct its day-to-day operations, management of each
Subsidiary has assessed what is believed to be the most reasonably likely worst
case Year 2000 scenario if the Company were to take no further steps to prevent
Year 2000 non-compliance.  Sterling Trust relies on electronic information
received from various external sources such as mutual fund companies, life
insurance companies, broker/dealers, etc., to prepare quarterly statements and
to process the investment directions of clients.  Sterling Trust's most
reasonably likely worst case scenario lies in not being 

                                       42
<PAGE>
 
able to obtain this data. Many of Sterling Trust's external service providers
are either regulated by the National Association of Securities Dealers or are
owned by one of the stock exchanges. As such, Sterling Trust anticipates that
most of these companies will be compliant. If for some reason the data from the
outside service providers is available, but cannot be transmitted
electronically, Sterling Trust plans to coordinate the receipt of that
information via phone and fax lines. Once received, Sterling Trust will then
manually input the data into their system in order to perform the necessary
functions described above. In addition, the database for Sterling Trust's
imaging system is not currently compliant. If Sterling Trust did not take the
necessary steps to upgrade this database, there would be no source documents
available, however, the information would be on the VAX. As such, Sterling Trust
could either upgrade its sequel server or replace the imaging system entirely.
Until one of these alternatives was completed, Sterling Trust would maintain and
file source documents in paper form, as it did prior to the time it began using
the imaging system.

   Management from Matrix Bank anticipates that its most reasonably likely worst
case Year 2000 scenario would be the failure of one of its credit card service
providers, such as Matrix Bank's credit card processor.  In the event that these
service providers are not Year 2000 compliant, Matrix Bank anticipates
discontinuing their credit card programs, which are mainly provided as a service
to the Bank's customers, but do not contribute significantly to the net income
of the Company on a consolidated basis.

   Alltel, FNMA and FHLMC, whom Matrix Financial and Matrix Bank rely on for
servicing mortgage loans are currently running compliant systems, however, the
Company has not yet validated those systems.  The Company anticipates using
phone and fax lines to receive necessary information if systems for Alltel, FNMA
or FHLMC fail on January 1, 2000.

   Under Matrix Financial's most reasonably likely worst case Year 2000
scenario, two other areas may be affected.  The first is the production
department where loan documentation is received from outside brokers and
processed by Matrix Financial.  These loan documents could contain inaccurate
calculations resulting from a Year 2000 problem with the software/hardware used
by the broker to generate the documents.  Matrix Financial risks inputting these
loans into their PC-based in-house loan processing system, resulting in the bad
input information being carried forward in the system.  Since there are more
than 500 brokers that send these documents to Matrix Financial, it is unlikely
that Matrix Financial will be able to certify that all of the brokers are Year
2000 compliant.  As such, additional legal disclosures are being reviewed to
protect Matrix Financial in the event of such a problem.  Additionally, due to
the large number of brokers, Matrix Financial intends to cease the acceptance of
loan documents from those brokers that are identified as non-compliant.  The
loss of business from any one broker will not have a material impact on the
Company, as no broker is individually significant to the Company's operations.
In addition, Matrix Financial is currently running a non-compliant version of
MortgageWare, which is the application that allows Matrix Financial to process
new loan applications.  Matrix Financial intends to upgrade this application to
a compliant version before June 30, 1999, however, if the upgrade does not
occur, Matrix Financial would manually register and lock loan applications with
the secondary marketing department and would track the new applications in an
Excel or Access spreadsheet.  Additionally, up front disclosures and processing
would either be completed through different origination software or outsourced
to a thrid party and closing documents would be generated from ShadowNet, which
is already compliant or would be outsourced to a Year 2000 compliant vendor.

   The second area of exposure for Matrix Financial is the secondary marketing
department.  Each day, rate information is received and loans are locked in at a
set rate to be sold to investors.  If an investor is unable to verify and
process the loan rate lock confirmation (the paper copy of the agreed upon
transaction) due to a Year 2000 issue, then Matrix Financial may be forced to
relock the loans at the current day's rates, unless other evidence of the
transaction exists.  Due to the daily fluctuation in these rates, this could
expose Matrix Financial to significant interest rate risk on the affected loans.
This process is being reviewed to provide an alternative method between Matrix
Financial and the investors for confirmation of the loan rate information.

   For the remaining Companies, the worst case scenarios involve the following
issues:  for Matrix Bancorp, United Financial and United Capital Markets,
validation of compliant Year 2000 systems and applications is not complete.
Therefore, it is possible that systems and applications which have been
represented to the Company as compliant by vendors may not work.  If the
validation phase is not completed on these items, the Company will have no
assurance of these systems' and applications' compliance, and as such, may have
inoperable programs, which could significantly affect aspects of the Company's
business.  USS's database used for tracking its properties under management has
also not yet been tested to determine whether further renovation issues exist.
If this process is not completed, it will be uncertain as to whether USS would
be able to continue to accurately track its properties under management, which
could significantly affect its business.

   The Company anticipates that the total costs associated with implementing its
Year 2000 Plan will not exceed $400,000; as such, Year 2000 compliance is not
expected to have a material effect on the Company's results of operations.  Most
of the costs associated with the Year 2000 issue will be expensed as incurred;
however, any costs attributable to the purchase of new software will be
capitalized.  Through February 28, 1999, the Company had expensed approximately
$145,000 for costs 

                                       43
<PAGE>
 
associated with Year 2000 compliance. The costs of the Year 2000 project and the
deadlines by which the Company believes that it will progress through the
various phases of the project are based on management's best estimates, which
were derived utilizing numerous assumptions of future events. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated. Management presently believes that the Year
2000 issue will not pose significant operational problems for its computer
systems. However, if the required modifications or replacements are not made, or
are not completed in a timely manner, the Year 2000 issue could have a material
impact on the operations of the Company. Additionally, despite the Company's
efforts to verify the Year 2000 compliance of third parties, there can be no
guarantee that the systems of other companies on which the Company relies will
be converted timely and will not have an adverse effect on the Company or its
systems.

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," "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: interest rate fluctuations; level of
delinquencies; defaults and prepayments; general economic conditions;
competition; government regulation; possible future litigation; the actions or
inactions or third parties (particularly of third party sources upon whom the
Company is relying in connection with Year 2000 issues); unanticipated
developments in connection with the design, implementation or completion of the
Company's Year 2000 Plan (including without limitation the resignation or
removal of the Company's Year 2000 Director, or any other key employees
responsible for the Year 2000 Plan, or the misrepresentation by a third party
source upon whom the Company is dependent as to the status of their Year 2000
readiness, progress or compliance); the risks and uncertainties discussed in the
Company's current report on Form 8-K, filed March 23, 1999; 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 Bank 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
         --------------------

         Not Applicable.


                                    PART III


Items 10 through 13.

  The information for these items is incorporated from the definitive proxy
  statement to be filed with the Commission.

                                       44
<PAGE>
 
                                    PART IV

Item 14.  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

                    See Form 8-K filed by the Company, dated November 30, 1998,
                    reporting on Year 2000 information under Item 5 thereof.

          (c)  Exhibits

                    See Exhibit Index, beginning on page II-1.

          (d)  Financial Statement Schedules
 
               None.
                                  

                                       45
<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 26th day of March,
1999.


                                           Matrix Bancorp, Inc.

                                      By:        /s/ 
                                           --------------------------  
                                           Guy A. Gibson
                                           President and Chief Executive 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.

        Signatures              Title                      Date
        ----------              -----                      ----


       /s/             President, Chief Executive       March 26, 1999
  ------------------   Officer and a Director
  Guy A. Gibson        (Principal Executive Officer)


       /s/             Chairman of the Board            March 26, 1999
  ------------------
  Richard V. Schmitz


       /s/             Vice Chairman and Director       March 26, 1999
  ------------------
  D. Mark Spencer


       /s/             Director                         March 26, 1999
  ------------------
  Thomas M. Piercy


       /s/             Senior Vice President and        March 26, 1999
  ------------------   Chief Financial Officer,
  David W. Kloos       and a Director
                       (Principal Accounting and
                       Financial Officer)


       /s/             Director                         March 26, 1999
  ------------------
  Stephen Skiba


       /s/             Director                         March 26, 1999
  ------------------
  David A. Frank

                                       46
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS


Consolidated Financial Statements of Matrix Bancorp, Inc.

<TABLE>
<S>                                                                                                             <C> 
Report of Independent Auditors..............................................................................    F-2
                                                                                                                 
Consolidated Balance Sheets - December 31, 1998 and 1997....................................................    F-3
                                                                                                                 
Consolidated Statements of Income - for the years ended December 31, 1998, 1997 and 1996....................    F-4 
                                                                                                                  
Consolidated Statements of Shareholders' Equity - for the years ended December 31, 1998, 1997 and 1996......    F-5 
                                                                                                                  
Consolidated Statements of Cash Flows - for the years ended December 31, 1998, 1997 and 1996................    F-6 
                                                                                                                 
Notes to Consolidated Financial Statements - December 31, 1998..............................................    F-7 
</TABLE>

                                      F-1
<PAGE>
 
                         REPORT OF INDEPENDENT AUDITORS

Shareholders and Board of Directors
Matrix Bancorp, Inc.

     We have audited the accompanying consolidated balance sheets of Matrix
Bancorp, Inc. (Company) as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards.  Those standards require that we plan and perform the audits 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 consolidated 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 consolidated financial position of
the Company at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.

     As discussed in Note 2 to the consolidated financial statements, in 1997
the Company adopted Statement of Financial Accounting Standards No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.

March 18, 1999                                  /s/ Ernst & Young LLP

                                      F-2
<PAGE>
 
                              MATRIX BANCORP, INC.

                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                 ---------------------------
                                                                                   1998               1997
                                                                                 ----------         --------
<S>                                                                              <C>                <C>
ASSETS
Cash.........................................................................    $   18,665         $  3,296
Interest-earning deposits....................................................         8,120            6,337
Loans held for sale, net.....................................................       754,226          456,978
Loans held for investment, net...............................................        94,222           54,394
Mortgage servicing rights, net...............................................        58,147           36,440
Other receivables............................................................        40,018           22,695
Federal Home Loan Bank of Dallas stock.......................................        15,643            8,700
Premises and equipment, net..................................................        10,328            9,012
Other assets.................................................................        13,271            8,893
                                                                                 ----------         --------
Total assets.................................................................    $1,012,640         $606,745
                                                                                 ==========         ========
LIABILITIES AND SHAREHOLDERS' EQUITY                                     
Liabilities:                                                             
   Deposits..................................................................    $  490,516         $224,982
   Custodial escrow balances.................................................        96,824           53,760
   Drafts payable............................................................         5,423            7,506
   Payable for purchase of mortgage servicing rights.........................        12,103            8,660
   Federal Home Loan Bank of Dallas borrowings...............................       168,000          171,943
   Borrowed money............................................................       178,789           89,909
   Other liabilities.........................................................        11,283            9,192
   Income taxes payable......................................................           348              183
                                                                                 ----------         --------
Total liabilities............................................................       963,286          566,135

Commitments and contingencies

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 6,723,911 and 6,703,880 shares at December 31, 1998 and
      1997, respectively.....................................................             1                1
   Additional paid in capital................................................        22,416           22,185
   Retained earnings.........................................................        26,937           18,424
                                                                                 ----------         --------
Total shareholders' equity...................................................        49,354           40,610
                                                                                 ----------         --------
Total liabilities and shareholders' equity...................................    $1,012,640         $606,745
                                                                                 ==========         ========
</TABLE>

See accompanying notes.

                                      F-3
<PAGE>
 
                              Matrix Bancorp, Inc.

                       Consolidated Statements of Income

              (Dollars in thousands except per share information)

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED DECEMBER 31,
                                                                          ---------------------------------------------
                                                                             1998            1997               1996
                                                                          ---------        ----------        ----------
<S>                                                                       <C>              <C>               <C>
INTEREST INCOME
Loans and mortgage backed securities....................................  $  59,452        $   31,096        $   16,084
Interest earning deposits...............................................      1,242             1,053               465
                                                                          ---------        ----------        ----------
Total interest income...................................................     60,694            32,149            16,549

INTEREST EXPENSE
Savings and time deposits...............................................     11,789             5,098             3,292
Demand and money market deposits........................................      4,432             3,278               468
FHLB borrowings.........................................................      8,554             3,435             2,039
Borrowed money..........................................................     11,729             6,450             4,691
                                                                          ---------         ---------         ---------
Total interest expense..................................................     36,504            18,261            10,490
                                                                          ---------         ---------         ---------
Net interest income before provision for loan and valuation losses......     24,190            13,888             6,059
Provision for loan and valuation losses.................................      4,607               874               143
                                                                          ---------         ---------         ---------
Net interest income.....................................................     19,583            13,014             5,916

NONINTEREST INCOME
Loan administration.....................................................     17,411            16,007             8,827
Brokerage...............................................................      7,054             3,921             4,364
Trust services..........................................................      4,169             3,561             3,061
Gain on sale of loans and mortgage backed securities....................      3,108             2,441             3,121
Gain on sale of mortgage servicing rights...............................        803             3,365             3,232
Loan origination........................................................      5,677             4,694             1,809
Other...................................................................      8,523             4,040             2,173
                                                                          ---------         ---------         ---------
Total noninterest income................................................     46,745            38,029            26,587

NONINTEREST EXPENSE
Compensation and employee benefits......................................     22,194            14,724            12,722
Amortization of mortgage servicing rights...............................     10,563             6,521             2,432
Occupancy and equipment.................................................      3,059             2,132             1,776
Postage and communication...............................................      2,393             1,522             1,214
Professional fees.......................................................      1,439               976               666
Data processing.........................................................      1,344               843               642
Losses related to recourse sales........................................         --             1,237               787
Federal Deposit Insurance Corporation premiums..........................        211               107               635
Other general and administrative........................................     11,736             9,684             5,781
                                                                          ---------         ---------         ---------
Total noninterest expense...............................................     52,939            37,746            26,655
                                                                          ---------         ---------         ---------
Income before income taxes..............................................     13,389            13,297             5,848
Provision for income taxes..............................................      4,876             5,159             2,278
                                                                          ---------        ---------          ---------
Net income..............................................................  $   8,513        $    8,138         $   3,570
                                                                          =========        ==========         =========
Net income per common share.............................................  $    1.27             $1.22              $.69
                                                                          =========        ==========         =========
Net income per common share - assuming dilution.........................  $    1.24             $1.20              $.68
                                                                          =========        ==========         =========
Weighted average common shares..........................................  6,704,991         6,681,269         5,034,788
                                                                          =========        ==========         =========
Weighted average common shares - assuming dilution......................  6,881,890         6,781,808         5,077,321
                                                                          =========        ==========         =========
</TABLE>


See accompanying notes.

                                      F-4
<PAGE>
 
                              Matrix Bancorp, Inc.

                Consolidated Statements of Shareholders' Equity

                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                   COMMON STOCK           ADDITIONAL 
                                                               ---------------------        PAID IN        RETAINED 
                                                               SHARES         AMOUNT        CAPITAL        EARNINGS        TOTAL
                                                               ------         ------        -------        --------        -----  
<S>                                                            <C>            <C>         <C>              <C>             <C>
Balance at December 31, 1995.................................  4,668,531       $  --         $ 3,769         $ 6,917       $10,686
Issuance of stock, net of issuance costs of $1,934...........  2,012,500           1          18,190              --        18,191
Cash dividends paid by pooled company prior to merger........         --          --              --            (201)         (201)
Capital contribution into pooled company prior to merger.....         --          --              24              --            24
Net income...................................................         --          --              --           3,570         3,570
                                                               ---------       -----          ------          ------       -------
Balance at December 31, 1996.................................  6,681,031           1          21,983          10,286        32,270
Issuance of stock related to employee stock purchase 
  plan and options...........................................     22,849          --             202              --           202
 
Net income                                                            --          --              --           8,138         8,138
                                                               ---------       -----          ------          ------       -------  
Balance at December 31, 1997.................................  6,703,880           1          22,185          18,424        40,610
Issuance of stock related to employee stock purchase 
  plan and options...........................................     20,031          --             231              --           231
Net income...................................................         --          --              --           8,513         8,513
                                                               ---------       -----         -------         -------       -------
Balance at December 31, 1998.................................  6,723,911       $   1         $22,416         $26,937       $49,354
                                                               =========       =====         =======         =======       =======
</TABLE>


See accompanying notes.

                                      F-5
<PAGE>
 
                             MATRIX BANCORP, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                              YEAR ENDED DECEMBER 31,
                                                                                         ---------------------------------
                                                                                            1998        1997        1996
                                                                                         ---------   ---------   ---------
<S>                                                                                      <C>         <C>         <C>
OPERATING ACTIVITIES
Net income..........................................................................     $   8,513   $   8,138   $   3,570
Adjustments to reconcile net income to net cash used by                                  
 operating activities:                                                                   
  Depreciation and amortization.....................................................         2,519       1,382       1,106
  Provision for loan and valuation losses...........................................         4,607         874         143
  Amortization of mortgage servicing rights.........................................        10,563       6,521       2,432
  Accretion of premium on deposits..................................................             -           -          (7)
  Deferred income taxes.............................................................            48          (2)        (54)
  Gain on sale of loans and mortgage backed securities..............................        (3,108)     (2,441)     (3,121)
  Gain on sale of mortgage servicing rights.........................................          (803)     (3,365)     (3,232)
  Losses related to recourse sales..................................................             -       1,237         787
  Loans originated for sale, net of loans sold......................................       (76,544)    (18,800)      8,099
  Loans purchased for sale..........................................................      (678,150)   (493,693)   (159,015)
  Proceeds from sale of loans purchased for sale....................................       319,430     198,010      57,147
  Gain on sale of premises and equipment............................................             -           -         (78)
  Originated mortgage servicing rights, net.........................................            24        (818)       (441)
  Increase in other receivables and other assets....................................       (23,743)    (13,279)       (796)
  Increase (decrease) in other liabilities and income taxes payable.................         2,256       2,832      (2,320)
                                                                                         ---------   ---------   ---------
Net cash used by operating activities...............................................      (434,388)   (313,404)    (95,780)
                                                                                         
INVESTING ACTIVITIES                                                                     
Loans originated and purchased for investment.......................................       (82,547)    (56,793)    (15,048)
Principal repayments on loans.......................................................       176,520      73,908      22,982
Purchase of Federal Home Loan Bank of Dallas stock..................................        (6,943)     (5,829)       (917)
Purchases of premises and equipment.................................................        (3,028)     (2,295)     (2,695)
Purchase of land under development..................................................             -           -      (1,431)
Purchase of revenue anticipation warrants...........................................             -           -        (818)
Purchase of residential homes.......................................................             -           -      (1,003)
Acquisition of mortgage servicing rights............................................       (31,388)    (36,535)    (10,410)
Proceeds from sale of mortgage servicing rights.....................................         5,160      19,817       8,410
Proceeds from sale of available for sale securities.................................             -           -      21,548
                                                                                         ---------   ---------   ---------
Net cash provided (used) by investing activities....................................        57,774      (7,727)     20,618
                                                                                         
FINANCING ACTIVITIES                                                                     
Net increase in deposits............................................................       265,534     134,803      41,309
Net increase in custodial escrow balances...........................................        43,064      15,879      10,870
Increase in revolving lines and repurchase agreements, net..........................        64,564     137,527      17,151
Repayments of notes payable.........................................................       (64,539)    (34,347)    (13,923)
Proceeds from notes payable.........................................................        85,078      45,148       6,924
Proceeds from senior notes, net.....................................................             -      19,100           -
Repayment of financing arrangements.................................................          (166)       (157)       (564)
Dividends paid by pooled company prior to merger....................................             -           -        (201)
Capital contribution into pooled company prior to merger............................             -           -          24
Proceeds from issuance of common stock related to employee stock                         
  purchase plan and options.........................................................           231         202      18,191
                                                                                         ---------   ---------   ---------
Net cash provided by financing activities...........................................       393,766     318,155      79,781
                                                                                         ---------   ---------   ---------
(Decrease) increase in cash and cash equivalents....................................        17,152      (2,976)      4,619
Cash and cash equivalents at beginning of the year..................................         9,633      12,609       7,990
                                                                                         ---------   ---------   ---------
Cash and cash equivalents at end of the year........................................     $  26,785   $   9,633   $  12,609
                                                                                         =========   =========   =========

SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITY                                              
Payable for purchase of mortgage servicing rights...................................     $  12,103   $   8,660   $   8,044
                                                                                         =========   =========   =========
Drafts payable......................................................................     $   5,423   $   7,506   $   5,961
                                                                                         =========   =========   ========= 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                         
Cash paid for interest expense......................................................     $  34,547   $  17,379   $  10,598
                                                                                         =========   =========   ========= 
Cash paid for income taxes..........................................................     $   4,664   $   6,019   $   2,298
                                                                                         =========   =========   =========
</TABLE>


See accompanying notes.

                                      F-6
<PAGE>
 
                             MATRIX BANCORP, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               December 31, 1998

1.   ORGANIZATION

     Matrix Bancorp, Inc. (Company) is a unitary thrift holding company that,
through its subsidiaries, is a diversified financial services company. In
December 1998, the Company changed its name to "Matrix Bancorp, Inc." from
Matrix Capital Corporation. The Company's operations are conducted primarily
through Matrix Capital Bank (Matrix Bank), Matrix Financial Services Corporation
(Matrix Financial), United Financial, Inc. (United Financial) and The Vintage
Group, Inc. (Vintage), all of which are wholly owned.

     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 and consumer
loans and providing, on a limited basis, commercial real estate loans.

     The Company's mortgage banking business is conducted through Matrix
Financial, and was established with the primary objective of acquiring,
originating and servicing residential mortgage loan servicing rights. Servicing
mortgage loans involves the contractual right to receive a fee for processing
and administering mortgage loan payments. The Company acquires servicing rights
primarily in the secondary market as well as through Matrix Financial's
wholesale loan origination offices in the Atlanta, Denver, Las Vegas and Phoenix
metropolitan areas.

     United Financial 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.

     Vintage's operations, which are located in Texas, consist of a nonbank
trust company specializing in the administration of self-directed qualified
retirement plans, individual retirement accounts, custodial and directed trust
accounts, and a NASD broker/dealer that provides services to individuals and
deferred contribution plans.

2.   SIGNIFICANT ACCOUNTING POLICIES

     The accounting and reporting policies of the Company and its subsidiaries
conform to generally accepted accounting principles and to general practices
within the financial services industry.  The following is a description of the
more significant policies which the Company follows in preparing and presenting
its consolidated financial statements.

Basis of Presentation

     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and the accompanying notes. Actual results could differ from these
estimates.

Pooling of Interests Accounting

     On February 5, 1997, the Company completed the merger of Vintage with the
issuance of 779,592 shares of the Company's common stock, which was accounted
for as a pooling of interests.  The financial information for all prior periods
presented has been restated to present the combined financial condition and
results of operations of both companies as if the merger of Vintage had been in
effect for all periods presented.

                                      F-7
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     The following table sets forth separate company financial information for
the year ended December 31, 1996. The separate company financial information for
Vintage for 1997 was not significant due to the pooling occurring on February 5,
1997.

<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                           DECEMBER 31, 1996
                                                           -----------------
                                                             (In thousands)
                                                          COMPANY     VINTAGE
                                                          -------     -------
<S>                                                       <C>         <C>
Net interest income....................................   $ 5,859     $    57  
Total noninterest income...............................    22,471       4,116  
Total noninterest expense..............................    22,951       3,704  
Net income.............................................     3,273         297  
</TABLE>


Loans Held for Sale

     Loans originated or purchased with the intent for sale in the secondary
market are carried at the lower of cost, net of discounts or premiums and a
valuation allowance, or estimated market value in the aggregate. Market value is
determined using forward sale commitments to permanent investors or current
market rates for loans of similar quality and type. Net unrealized losses, if
any, would be recognized in a valuation allowance by charges to income.
Discounts or premiums on loans held for sale are not accreted or amortized into
income on an interest method, however discounts and premiums related to payments
of loan principal are recorded in interest income. The loans are primarily
secured by one to four family residential real estate located throughout the
United States.

     The Company includes in loans held for sale first mortgage loans which are
acquired under several purchase/repurchase facilities.  The Company earns
interest income on all the facilities and on some of the facilities receives a
profit participation when the loans are subsequently sold which is included in
interest income.

     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 fair value of any assets or liabilities that are newly created as a
result of the transaction. Losses related to recourse provisions in excess of
the amount originally provided are accrued as a liability at the time such
additional losses are determined, and recorded as part of noninterest expense.

Loans Held for Investment

     Loans held for investment are stated at unpaid principal balances, less
unearned discounts and premiums, deferred loan fees, loans in process and
allowance for loan losses.

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 any qualitative evaluations of individual classified assets, geographic
portfolio concentrations, new products or markets, 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. After
an allowance has been established for the loan portfolio, management establishes
an unallocated portion of the allowance for loan losses, which is attributable
to factors that cannot be associated with a specific loan or loan portfolio.
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, when taken as a
whole, is adequate to absorb reasonably foreseeable 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. The Company evaluates its
residential loans

                                      F-8
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


collectively due to their homogeneous nature. Accordingly, potential impaired
loans of the Company include only commercial, real estate construction and
commercial real estate mortgage loans classified as nonperforming loans.
Impairment allowances are considered by the Company in determining the overall
adequacy of the allowance for loan losses. When a loan is identified as
"impaired," accrual of interest ceases. The Company had no impaired loans as of
or for the years ended December 31, 1998, 1997 and 1996.

     Loans are placed on nonaccrual status when full payment of principal or
interest is in doubt, or generally when they are past due ninety days as to
either principal or interest, unless the interest is guaranteed 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 (MSRs)

     Effective January 1, 1997, Statement of Financial Accounting Standards
(Statement) No. 122, Accounting for Mortgage Servicing Rights, was superseded by
Statement No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities.  The Company adopted Statement No. 125 in
1997 and recognizes originated mortgage servicing rights (OMSRs) as an asset
separate from the underlying originated mortgage loan by allocating the total
cost of originating a mortgage loan between the loan and the servicing right
based on their respective fair values.  MSRs are carried at the lower of cost
(allocated cost for OMSRs), less accumulated amortization, or fair value.  MSRs
are amortized in proportion to and over the period of the estimated future net
servicing income.

     The 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 and investor to reflect the predominant risk characteristics. To
determine the fair value of MSRs, the Company uses a valuation model that
calculates the present value of future cash flows to determine the fair value of
the MSRs. In using this valuation method, 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, the discount rate,
float value, an inflation rate, ancillary income per loan, prepayment speeds and
default rates.  As of December 31, 1998, no valuation allowance was required and
the fair value of the aggregate MSRs was approximately $61,000,000.

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 three to seven years for office furniture,
equipment and software and 30 years for buildings.

Foreclosed Real Estate

     Real estate acquired through foreclosure, deed in lieu of foreclosure or in
judgment is carried at the lower of fair value, minus 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 fair
value, minus estimated costs to sell.  The net carrying value of foreclosed real
estate, which is classified in other assets, was $916,000 and $1,242,000 at
December 31, 1998 and 1997, respectively.  All of the Company's foreclosed
properties relate to residential real estate as of December 31, 1998.

Acquired Real Estate

     Costs directly attributable to the acquisition, development, and
construction of land development are capitalized. Such costs include
preacquisition costs, direct project costs and holding costs. The investment in
land development is carried at the lower of cost, which includes capitalized
costs, or net realizable value. Net unrealized losses, if any, would be
recognized in a valuation allowance. As of December 31, 1998 there was no
valuation allowance necessary for the land development.

                                      F-9
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


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. 

     The Company follows Statement No. 109, Accounting for Income Taxes, which
uses the 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.

Drafts Payable

     Drafts payable represent the in transit outstanding funding of a new loan
by the Company via a negotiable instrument, however, the instrument has not yet
been presented to the bank for payment. Presentation to the bank generally
occurs within one to three days.

Loan Administration Income

     Loan administration income represents service fees and other income earned
from servicing loans for various investors. 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. Income is
recognized when the related payments are received.

Brokerage Income

     Brokerage income represents fees earned related to servicing brokerage and
consulting services.  Brokerage income is recognized when earned.

Trust Services Income

     Trust services income represents fees earned related to services provided
for self-directed IRA, qualified benefit plans and escrow arrangements. Trust
services income is recognized when earned.

Gain on Sale of Servicing Rights

     Gain on sale of servicing rights is recognized when substantially all the
risks and rewards inherent in owning the MSRs have been transferred to the
buyer, and any protection provisions retained by the Company are minor and can
be reasonably estimated.

Loan Origination Income

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

     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-10
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Stock Based Compensation

     The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly,
recognizes no compensation expense for stock option grants.

Cash and Cash Equivalents

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

Hedging of Mortgage Servicing Rights

     The Company hedges a segment of its servicing portfolio using exchange
traded futures and options. A change in the market value of the futures contract
is deferred and amortized in proportion to and over the period of the estimated
future net servicing income of the hedged servicing portfolio. The option
premium or cost is amortized ratably over the period of the option. If any of
the hedged servicing portfolio is sold, then the realized and unrealized gain or
loss from the futures and options attributable to the portion sold is included
in the basis of the MSRs sold for purposes of calculating gain or loss on sale.
These realized and unrealized hedging gains and losses are considered in the
determination of the fair value of the MSRs.

Net Income Per Share

     As of December 31, 1997, the Company adopted Statement No. 128, Earnings
per Share, and restated all prior period earnings per share (EPS) data, as
required. Statement No. 128 replaced the presentation of primary and fully
diluted EPS pursuant to APB Opinion No. 15, Earnings per Share, with the
presentation of basic and diluted EPS. Basic EPS, or net income per common
share, excludes dilution and is computed by dividing net 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 period and the
dilutive effect, if any, of stock options and warrants outstanding for the
period.

Comprehensive Income

     The Company adopted Statement No. 130, Reporting Comprehensive Income, as
of January 1, 1998. Statement No. 130 establishes new rules for the reporting
and display of comprehensive income and its components, however, the adoption of
this Statement did not result in any change in presentation and had no impact on
the Company's net income or shareholders' equity. Statement No. 130 requires
reclassification of financial statements for earlier periods provided for
comparative purposes.

Segment Reporting

     Effective January 1, 1998, the Company adopted Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. Statement
No. 131 superceded FASB Statement No. 14, Financial Reporting for Segments of a
Business Enterprise. Statement No. 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. Statement No.
131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. The adoption of Statement No.
131 did not affect results of operations or financial position.

Impact of Recently Issued Accounting Standards

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Statement No. 133
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Company expects to adopt the new Statement 

                                      F-11
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

effective January 1, 2000. Statement No. 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.

     The Company has not yet determined what effect Statement No. 133 will have
on the earnings and financial position of the Company.

Reclassifications

     Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation.

3.   NET INCOME PER SHARE

     The following table sets forth the computation of net income per share and
net income per share, assuming dilution:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                   ------------------------------------------
                                                      1998            1997            1996
                                                   ----------      ----------      ----------   
                                                             (Dollars in thousands)
<S>                                                <C>             <C>             <C>
Numerator:
 Net income.....................................   $    8,513      $    8,138      $    3,570
 Less: preferred stock dividends from pooled
  company.......................................            -               -            (112)
                                                   ----------      ----------      ----------   
 Net income available to common shareholders....   $    8,513      $    8,138      $    3,458
                                                   ==========      ==========      ==========    

Denominator:
 Weighted average shares outstanding............    6,704,991       6,681,269       5,034,788
Effect of dilutive securities:
 Common stock options...........................      150,478          89,333          42,533
 Common stock warrants..........................       26,421          11,206               -
                                                   ----------      ----------      ----------   
Dilutive potential common shares................      176,899         100,539          42,533
                                                   ----------      ----------      ----------   
Denominator for net income per share,
 assuming dilution..............................    6,881,890       6,781,808       5,077,321
                                                   ==========      ==========      ==========     
</TABLE>

                                      F-12
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4.   LOANS RECEIVABLE

Loans Held for Investment

     Loans held for investment consist of the following:

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                        1998             1997
                                                                     --------          ------- 
                                                                           (IN THOUSANDS)
<S>                                                                  <C>               <C>
Residential loans...............................................     $  5,563          $ 7,523
Multi-family, commercial real estate, and commercial............       56,130           32,189
Construction loans..............................................       43,672           14,878
Consumer loans and other........................................        9,997           10,942
                                                                     --------          ------- 
                                                                      115,362           65,532
Less:                                                                
Loans in progress...............................................       18,941            9,784
Purchase discounts, net.........................................          212              236
Unearned fees on loans (excluding consumer).....................          524              220
Unearned fees on consumer loans.................................          327              209
Allowance for loan losses.......................................        1,136              689
                                                                     --------          ------- 
                                                                       21,140           11,138
                                                                     --------          ------- 
                                                                     $ 94,222          $54,394
                                                                     ========          ======= 
</TABLE>

Activity in the allowance for loan losses is summarized as follows:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                       --------------------------------
                                                        1998         1997         1996
                                                       ------       ------       ------
                                                                (IN THOUSANDS)
<S>                                                    <C>          <C>          <C>
Balance at beginning of period...................      $  689        $ 270        $ 227
Provision for loan losses........................       1,178          554           34
Charge-offs......................................        (789)        (166)          (6)
Recoveries.......................................          58           31           15
                                                       ------       ------       ------
Balance at end of period.........................      $1,136        $ 689        $ 270
                                                       ======       ======       ======
</TABLE>

     Nonaccrual loans in the loans held for investment portfolio totaled
approximately $376,000 and $381,000 or 0.4 percent and 0.7 percent of the total
loans held for investment portfolio at December 31, 1998 and 1997, respectively.

     The Company had commitments to extend credit on consumer, commercial and
construction loans of approximately $40,768,000 at December 31, 1998.

                                      F-13
<PAGE>
 
                             MATRIX BANCROP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. LOANS RECEIVABLE (CONTINUED)

Loans Held for Sale

     Loans held for sale consist of the following as of:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                          1998             1997
                                                      ------------    ------------   
                                                             (IN THOUSANDS) 
     <S>                                              <C>             <C>
     Residential loans..............................  $    730,247    $    456,552       
     Commercial loans, leases and other.............        30,268           2,728       
                                                      ------------    ------------       
                                                           760,515         459,280       
     Less:                                                                               
          Purchase discounts, net...................         3,715           1,235       
          Valuation allowance.......................         2,574           1,067       
                                                      ------------    ------------       
                                                             6,289           2,302       
                                                      ------------    ------------       
                                                      $    754,226    $    456,978       
                                                      ============    ============       
</TABLE>

     Included in loans held for sale are approximately $49,459,000 and
$36,352,000 at December 31, 1998 and 1997, respectively, of first mortgage loans
which the Company has acquired under purchase/repurchase facilities with several
parties. The terms of the purchase/repurchase facilities vary with each seller
but include provisions which require the seller to repurchase the loans within a
defined period of time, provide, at the Company's option, the ability, on short
notice, to require the seller to repurchase the loans, or in some cases, allow
the seller to repurchase the loans.

     Activity in the valuation allowance is summarized as follows:

<TABLE>
<CAPTION>
      
                                                          YEAR ENDED DECEMBER 31,            
                                            -----------------------------------------------     
                                                1998              1997             1996      
                                            ------------       -----------     ------------  
                                                             (IN THOUSANDS)                          
     <S>                                    <C>                <C>             <C>           
     Balance at beginning of period....     $      1,067       $       769     $        716  
     Provision for valuation allowance.            3,429               320              109  
     Charge-offs.......................           (1,922)              (22)             (64) 
     Recoveries........................                -                 -                8  
                                            ------------       -----------     ------------  
     Balance at end of period..........     $      2,574       $     1,067     $        769  
                                            ============       ===========     ============   
</TABLE>

     Nonaccrual loans related to the loans and direct financing leases held for
sale portfolio aggregated approximately $12,833,000 and $4,609,000 at December
31, 1998 and 1997, respectively. Interest income that would have been recorded
for all nonaccrual loans was approximately $524,000, $89,000 and $120,000 during
the years ended December 31, 1998, 1997 and 1996, respectively.

     During 1996, the Company formed two mortgage-backed securities with an
unpaid principal balance of approximately $21,000,000 from its loans held for
sale portfolio. During the year ended December 31, 1996, the Company recognized
a gross gain on the sale of mortgage-backed securities of approximately $171,000
and the taxes related to this sale were approximately $68,000.

     During 1996, the Company purchased numerous automobile retail installment
contracts and sold approximately $18,500,000 of such contracts, subject to
certain recourse provisions. During 1997 and 1996, the Company was required to
repurchase approximately $4,000,000 of automobile installment contracts and
repossessed automobiles pursuant to the recourse provisions.

     In December 1997, the Company sold the remaining automobile retail
installment contracts including its repossessed assets and the charged-off
accounts for $800,000, to an independent third party. The Company received
$260,000 in cash and financed the remaining balance, with recourse limited to
the assets sold. The Company realized a loss of approximately $54,000 upon the
sale. The Company recorded losses of $-0-, $1,237,000 and $787,000 for the years
ended December 31, 1998, 1997 and 1996, respectively, related to the repurchase
and ultimate disposition of the loans and automobiles.

                                      F-14
<PAGE>
 
                             MATRIX BANCROP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. PREMISES AND EQUIPMENT

     Premises and equipment consist of the following:
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           1998         1997
                                                         ----------  ----------
                                                             (IN THOUSANDS) 
     <S>                                                 <C>         <C>
     Land..............................................  $      684  $      684
     Buildings.........................................       4,486       4,348
     Leasehold improvements............................       1,116         460
     Office furniture and equipment....................       7,697       5,485
     Other equipment...................................       1,297       1,268
                                                         ----------  ----------
                                                             15,280      12,245
     Less:  accumulated depreciation and amortization..       4,952       3,233
                                                         ----------  ----------
                                                         $   10,328  $    9,012
                                                         ==========  ==========
</TABLE>

     Included in occupancy and equipment expense is depreciation and
amortization expense of premises and equipment of approximately $1,712,000,
$1,170,000 and $828,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.

6. MORTGAGE SERVICING RIGHTS

     The activity in the MSRs is summarized as follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                 ------------------------------------------
                                                     1998           1997           1996
                                                 ------------   -------------  ------------        
                                                             (IN THOUSANDS) 
     <S>                                         <C>            <C>            <C>
     Balance at beginning of year............    $     36,440   $      23,680  $     13,817
     Purchases...............................          34,831          37,151        17,142
     Originated, net of OMSRs sold...........             (24)            818           441
     Amortization............................         (10,563)         (6,521)       (2,432)
     Transfer of MSRs to FHLMC...............               -               -          (110)
     Sales...................................          (2,537)        (18,688)       (5,178)
                                                 ------------   -------------  ------------
     Balance at end of year..................    $     58,147   $      36,440  $     23,680
                                                 ============   =============  ============
</TABLE>

     Accumulated amortization of MSRs aggregated approximately $26,921,000 and
$17,223,000 at December 31, 1998 and 1997, respectively.

     The Company's servicing activity is diversified throughout 50 states with
concentrations at December 31, 1998 in California, Florida and Texas of
approximately 19.9 percent, 9.5 percent and 8.3 percent, respectively, based on
aggregate outstanding unpaid principal balances of the mortgage loans serviced.
As of December 31, 1998 and 1997, the Company subserviced loans for others of
approximately $9,900,000 and $239,000,000, respectively.

     The Company's servicing portfolio (excluding subserviced loans) comprised
the following:

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,
                                                              1998                              1997
                                                 -------------------------------    ------------------------------
                                                                     PRINCIPAL                         PRINCIPAL
                                                    NUMBER            BALANCE         NUMBER            BALANCE
                                                   OF LOANS         OUTSTANDING      OF LOANS         OUTSTANDING
                                                 ------------     --------------    ----------       -------------
                                                                      (DOLLARS IN THOUSANDS)
     <S>                                         <C>              <C>               <C>              <C>
     FHLMC.....................................        19,227         $1,221,074        13,134       $     715,513
     FNMA......................................        23,198          1,419,345        18,000           1,168,199
     GNMA......................................        17,552            838,081        15,845             615,234
     Other VA, FHA, and conventional loans.....        18,369          1,879,229        14,538             849,116
                                                 ------------     --------------    ----------       -------------
                                                       78,346         $5,357,729        61,517       $   3,348,062
                                                 ============     ==============    ==========       =============
</TABLE>

                                      F-15
<PAGE>
 
                             MATRIX BANCROP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. MORTGAGE SERVICING RIGHTS (CONTINUED)

     The Company's custodial escrow balances shown in the accompanying
consolidated balance sheets at December 31, 1998 and 1997 pertain to escrowed
payments of taxes and insurance and the float on principal and interest payments
on loans serviced on behalf of others of approximately $6,111,000 and
$6,801,000, respectively, and owned by the Company of approximately $89,546,000
and $42,878,000, respectively. The Company also has custodial accounts on
deposit from other mortgage companies aggregating approximately $1,167,000 and
$4,081,000 at December 31, 1998 and 1997, respectively. The Companies custodial
accounts are maintained at Matrix Bank in noninterest-bearing accounts. The
balance of the custodial accounts fluctuate 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.

7. DEPOSITS

     Deposit account balances are summarized as follows:

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                            ---------------------------------------------------------------------------
                                                          1998                                    1997
                                            -----------------------------------     -----------------------------------  
                                                                      (DOLLARS IN THOUSANDS)                          

                                                                     WEIGHTED                                 WEIGHTED   
                                                                      AVERAGE                                  AVERAGE   
                                              AMOUNT     PERCENT       RATE           AMOUNT    PERCENT         RATE     
                                            ----------  ---------   ----------      ---------  ---------     ----------  
     <S>                                    <C>         <C>         <C>             <C>        <C>           <C>         
     Passbook accounts..................    $    2,830       0.58%        3.58%     $   2,851       1.27%          3.95% 
     NOW accounts.......................        42,178       8.60         1.63         26,382      11.73           1.62  
     Money market accounts..............       170,957      34.85         3.13         99,899      44.40           2.96  
                                            ----------  ---------   ----------      ---------  ---------     ----------  
                                               215,965      44.03         2.84        129,132      57.40           2.70  
     Certificate accounts...............       274,551      55.97         5.52         95,850      42.60           5.94  
                                            ----------  ---------   ----------      ---------  ---------     ----------  
                                            $  490,516     100.00%        4.37%     $ 224,982     100.00%          4.09% 
                                            ==========  =========   ==========      =========  =========     ==========   
</TABLE>

     Included in NOW accounts are noninterest-bearing DDA accounts of
$22,672,000 and $9,218,000 for the years ended December 31, 1998 and 1997,
respectively.

     Contractual maturities of certificate accounts as of December 31, 1998:

<TABLE>
<CAPTION>
                                         UNDER 12      12 TO 36      36 TO 60
                                          MONTHS        MONTHS        MONTHS
                                     --------------  ------------  ------------
                                                     (In thousands)
     <S>                             <C>             <C>           <C>
     4.00-4.99%...................   $      127,469  $        294  $
     5.00-5.99%...................          106,772        15,607         5,970
     6.00-6.99%...................            7,210         4,620         6,481
     7.00-7.99%...................                -           126             2
                                     --------------  ------------  ------------
                                     $      241,451  $     20,647  $     12,453
                                     ==============  ============  ============
</TABLE>

     Approximately $137,043,000 and $108,990,000 of assets under administration
by Vintage are included in NOW, DDA and money market accounts as of December 31,
1998 and 1997, respectively. Included in certificate accounts is $148,676,000 of
brokered deposits as of December 31, 1998. Additionally, included in money
market accounts is approximately $47,078,000 from a title company.

                                      F-16
<PAGE>
 
                             MATRIX BANCROP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. DEPOSITS (CONTINUED)

     Interest expense on deposits is summarized as follows:

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                             1998          1997         1996
                                          -----------  -----------  ------------
                                                     (IN THOUSANDS)
     <S>                                  <C>          <C>          <C>
     Passbook accounts................    $       102  $       113  $         82
     NOW accounts.....................            522          795            63
     Money market.....................          3,910        2,483           405
     Certificates of deposit..........         11,687        4,985         3,210
                                          -----------  -----------  ------------
                                              $16,221  $     8,376  $      3,760
                                          ===========  ===========  ============
</TABLE>

     The aggregate amount of deposit accounts with a balance greater than
$100,000 (excluding brokered deposits) was approximately $17,622,000 and
$7,185,000 at December 31, 1998 and 1997, respectively.

8. BORROWED MONEY

     Borrowed money is summarized as follows:

<TABLE>
<CAPTION>
                                                                                                        DECEMBER 31,    
                                                                                                    1998           1997 
                                                                                                 -----------   -----------   
     <S>                                                                                         <C>           <C>      
                                                                                                       (IN THOUSANDS)    
     Revolving Lines
     $90,000,000 revolving warehouse loan agreement with banks, secured by
       mortgage loans held for sale, interest at federal funds rate plus 0.85-2.00
       percent (6.01 percent average rate at December 31, 1998); $17,843,000
       available at December 31, 1998.......................................................       $ 72,157     $ 45,962
                                                                                                                 
     $10,000,000 working capital facility with banks secured by mortgage loans                                   
       held for sale, MSRs, eligible servicing advance receivables and eligible                                  
       delinquent mortgage receivables; interest at federal funds rate plus 1.5                                  
       percent (6.18 percent at December 31, 1998); $5,521,000 available                                         
       at December 31, 1998.................................................................          4,479        2,376
                                                                                                                 
     $11,500,000 revolving line of credit with a third party financial institution,                              
       secured by common stock of Matrix Bank; interest due monthly at prime;                                    
       $1,200,000 available at December 31, 1998............................................         10,300            -
                                                                                                   --------      -------
     Total revolving lines..................................................................         86,936       48,338
                                                                                                                 
     Term Notes Payable                                                                                          
     Servicing acquisition loan agreement with a bank, secured by                                                
       MSRs, due at the earlier of the maturity of the MSRs or amortized over five                               
       to six years from the date of the borrowing through January 31, 2003;                                     
       interest at federal funds rate plus 2.00 percent (6.68 percent at December 31,                            
       1998); $14,137,000 available at December 31, 1998....................................         26,974       12,348
                                                                                                                 
      Senior notes, interest at 11.50 percent payable semiannually, unsecured and                                
       maturing September 30, 2004..........................................................         20,000       20,000
                                                                                                                 
     Senior subordinated notes, interest at 14 percent payable semiannually,                                     
       unsecured and maturing July 2002, with mandatory redemptions of $727,500 on                               
       each of July 15, 1999, 2000 and 2001.................................................          2,910        2,910
                                                                                                                 
     $8,500,000 note payable to a third party financial institution (revised bank                                
       stock loan) due in quarterly installments of $303,591, plus interest, through                             
       June 30, 2001, collateralized by the common stock of Matrix Bank; interest at                             
       prime................................................................................          7,893        1,786
</TABLE> 
 
                                     F-17
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. BORROWED MONEY (CONTINUED)

<TABLE> 
<CAPTION> 
                                                                                                 DECEMBER 31,
                                                                                              1998           1997
                                                                                           ---------      ---------
                                                                                              (IN THOUSANDS)
     <S>                                                                                   <C>            <C>
     Notes payable to banks, secured by a deeds of trust on real estate, interest at
       prime plus 1.0 percent...........................................................   $   1,715      $   1,740

     Other..............................................................................       1,296          1,465
                                                                                           ---------      ---------
     Total term notes...................................................................      60,788         40,249

     Other
     Agreements with a bank to sell mortgage loans and direct financing leases
       originated by the Company under agreements to repurchase.  The agreement
       can be terminated upon 90 days written notice by either party; interest at the
       higher of the prime rate or note rate on the loans and 8 percent on direct lease
       financing.  Total commitment amount of these agreements is $25,000,000, with
       $9,933,000 available at December 31, 1998.  Increases are at the discretion of
       the bank.........................................................................      15,067              -

     Financing agreement with a bank, secured by Ft. Lupton Subordinated Series
       1996 A1 revenue anticipation warrants, interest is at 5 percent and is due based
       on the semi-annual bonds payments, unpaid principal due at bond maturity.........         800            800

     MSR financing, collateralized by MSR's with unpaid principal balances of
       $42,900,000 at December 31, 1998.................................................         356            522

     Agreement with bank to finance direct financing leases to charter schools,
       interest is at 7 percent and can be terminated at any time by either party.
       Total commitment amount is at the option of the bank.............................       1,125              -

     Financing agreement, collateralized by direct financing leases, interest variable..      13,717              -
                                                                                           ---------      ---------
     Total other........................................................................      31,065          1,322
                                                                                           ---------      ---------
     Total borrowed money...............................................................   $ 178,789      $  89,909
                                                                                           =========      =========
</TABLE>

     The Company may redeem the senior subordinated notes, in whole or in part,
at any time after July 15, 1998 at a redemption price of 102 percent of par
through July 14, 1999 and, thereafter, at par, plus accrued and unpaid interest.

     As of December 31, 1998 the maturities of term notes payable during the
next five years and thereafter are as follows:

<TABLE>
<CAPTION>
                                                                   (IN THOUSANDS)
<S>                                                                <C>
1999........................................................          $ 9,531
2000........................................................            8,519
2001........................................................           12,192
2002........................................................            4,984
2003........................................................            4,959
Thereafter..................................................           20,603
                                                                      -------
                                                                      $60,788 
                                                                      =======
</TABLE>

     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 worth and other amounts as defined in the credit
agreements limiting the Company's ability to declare dividends (and its
subsidiaries) or incur additional debt, and establishes 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 $44.4 million, maintain adjusted debt to shareholders' equity of less
than 4:1 and

                                      F-18
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. BORROWED MONEY (CONTINUED)

maintain the requirements necessary such that Matrix Bank will not be classified
as other than "well capitalized," as defined. At December 31, 1998, the Company
was in compliance with these covenants.

     On February 22, 1999, the Company renegotiated the revolving credit
facilities for its $90,000,000 warehouse loan agreement, the $10,000,000 working
capital loan agreement and its $45,000,000 servicing acquisition loan agreement.
With this renegotiation, the aggregate amount of revolving warehouse lines of
credit facilities was increased to $120,000,000 and the aggregate amount of the
servicing acquisition facility and the aggregate amount of the working capital
facility were unchanged. The new credit facility agreement requires Matrix
Financial to maintain, among other things, (i) total shareholder's equity of at
least $13,000,000 plus 90 percent of capital contributed after January 1, 1999,
plus 90 percent of cumulative quarterly net income, (ii) adjusted net worth, as
defined, of at least $25,000,000, (iii) a servicing portfolio of at least
$4,000,000,000, (iv) principal debt of term line borrowings of no more than the
lesser of 70 percent of the appraised value of the mortgage servicing portfolio
or 1.25 percent of the unpaid principal balance of the mortgage servicing
portfolio, (v) a ratio of total adjusted debt to adjusted tangible net worth of
no more than eight to one, (vi) a ratio of cash flow to current maturities of
long-term debt and any capital leases of at least 1.3 to 1.0, (vii) a ratio of
outstanding term-line borrowings outstanding to adjusted net worth of no more
than 2.5 to 1.0 and (viii) principal debt of working capital borrowings and term
line borrowings of no more than the lesser of 95 percent of the appraised value
of the mortgage servicing portfolio or 1.25 percent of the unpaid principal
balance of the mortgage servicing portfolio.

Direct Financing Leases Financing Agreement

     During 1998, the Company placed tax-exempt direct financing leases it
originated to charter schools into a partnership trust, USBI, Trust Series 1998
(Trust). The Trust then issued Class "A" Certificates and Class "B"
Certificates, with the Class "A" Certificates being sold under a private
placement at a price of par.

     The "A" Certificates are guaranteed by a letter of credit issued by the
Guarantor, which is a third party investment bank (Investment Bank) and the
underlying leases. 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 Trust is short-term in nature with an average
life of one year or less.

     The "B" Certificates are owned in part by the Company and in part by the
Investment Bank. The interest rate paid on the "A" Certificates and the "B"
Certificates owned by the Investment Bank is considered the Company's financing
cost. The approximate cost of the financing at December 31, 1998 was 6.88
percent. The interest that the Company receives through its part ownership of
the "B" Certificates is tax-exempt.

     Although the Investment Bank acts as Guarantor to the "A" Certificates, the
Company provides full recourse to the Investment Bank 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 Trust, the transaction has
been treated as a financing.

9. FEDERAL HOME LOAN BANK OF DALLAS BORROWINGS

     Federal Home Loan Bank of Dallas (FHLB) borrowings aggregated $168,000,000
and $171,943,000 at December 31, 1998 and 1997, respectively. Advances of
$121,000,000 bear interest at rates which adjust daily and are based on the
mortgage repo rate. Advances of $47,000,000 at December 31, 1998, were borrowed
under a Short Option Advance (SOA) Agreement with the FHLB. These SOA borrowings
have a term of ten years, but are callable by the FHLB beginning after a six
month or one year lock-out period depending on the particular SOA borrowing.
After the expiration of the lock-out period, the SOA borrowings are callable at
three month 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. The interest rates
on the SOA borrowings ranged from 4.85 percent to 4.94 percent at December 31,
1998 and their possible call dates varied from January 15, 1999 to April 14,
1999. 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. All advances are secured by first mortgage loans of Matrix
Bank and all of its FHLB stock.

                                      F-19
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9.   FEDERAL HOME LOAN BANK OF DALLAS BORROWINGS (CONTINUED) 

     Matrix Bank has a commitment from the FHLB for advances of approximately
$310,700,000 at December 31, 1998.  Matrix Bank adopted a collateral pledge
agreement whereby it has agreed to keep on hand, at all times, first mortgages
free of all other pledges, liens and encumbrances with unpaid principal balances
aggregating no less than 170 percent of the outstanding secured advances from
the FHLB.  However, in 1999, Matrix Bank has been notified that it will be
placed on full blanket status, which will be phased-in during 1999 by 25 percent
at each quarter end.  Management believes that this decision will not affect
Matrix Bank's borrowing capabilities from the FHLB, but will impact where the
collateral that secures the FHLB borrowings will be held.

10.  INCOME TAXES

     The income tax provision consists of the following:

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                    1998        1997         1996
                                               ------------  ----------   -----------
                                                            (In thousands)
     <S>                                       <C>           <C>          <C>
     Current
         Federal.............................  $      3,837  $    4,108   $    1,871
         State...............................           991       1,053          461
     Deferred
         Federal.............................            42          (2)         (42)
         State...............................             6           -          (12)
                                               ------------  ----------   ----------
                                               $      4,876  $    5,159   $    2,278
                                               ============  ==========   ==========
</TABLE>

     A reconciliation of the provision for income taxes with the expected income
taxes based on the statutory federal income tax rate follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                     1998           1997           1996     
                                                ------------    -----------    -----------  
                                                              (IN THOUSANDS)                
     <S>                                        <C>             <C>            <C>          
     Expected income tax provision............  $      4,552    $     4,521    $     1,988  
     Effect of federal tax brackets...........            13              -              -                  
     State income taxes.......................           660            694            296  
     Other....................................          (349)           (56)            (6) 
                                                ------------    -----------    -----------  
                                                $      4,876    $     5,159    $     2,278  
                                                ============    ===========    ===========   
</TABLE>

                                      F-20
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10. INCOME TAXES (CONTINUED)

     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,
                                                                                  1998             1997
                                                                               ---------         --------- 
                                                                                   (IN THOUSANDS)
     <S>                                                                       <C>             <C>
     Deferred tax assets:
       Allowance for losses..................................................   $   1,383        $     475
       Discounts and premiums................................................         144              106
       Amortization of servicing rights......................................           -              156
       Deferred fees.........................................................         718              328
       Delinquent interest...................................................         215               52
       Other.................................................................          30                6
                                                                                ---------        --------- 
     Total deferred tax assets...............................................       2,490            1,123

     Deferred tax liabilities:
       Gain on sale of loans.................................................        (931)            (732) 
       Amortization of servicing rights......................................      (1,025)               - 
       Depreciation..........................................................        (526)            (335) 
                                                                                ---------        --------- 
     Total deferred tax liabilities..........................................      (2,482)          (1,067) 
                                                                                ---------        ---------   
     Net deferred tax asset..................................................   $       8        $      56 
                                                                                =========        ========= 
</TABLE>

11.  REGULATORY

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

     Matrix Bank is also 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,
actions by regulators that, if undertaken, could have a direct material effect
on Matrix Bank"s financial statements.  Under capital adequacy guidelines 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 items 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,
1998 and 1997, that Matrix Bank meets all capital adequacy requirements to which
it is subject.

     As of December 31, 1998, 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

                                      F-21
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 


11. REGULATORY (CONTINUED)

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
                                          -------        -------       --------       -------      ---------      -------- 
                                                                          (In thousands)
<S>                                       <C>            <C>           <C>            <C>          <C>            <C>
As of December 31, 1998
  Total Capital
  (to Risk Weighted Assets)..............   $54,148       11.7%         *$36,938         *8.0%      *$46,173         *10.0%
  Core Capital                                                                                                       
  (to Adjusted Tangible Assets)..........    51,163        6.2%         * 32,828         *4.0%      * 41,035         * 5.0%
  Tangible Capital                                                                                                   
  (to Tangible Assets)...................    51,163        6.2%         * 12,310         *1.5%           N/A          
  Tier I Capital                                                                                                     
  (to Risk Weighted Assets)..............    51,163       11.1%             N/A                     * 27,704         *  6.0%
                                                                                                                     
As of December 31, 1997                                                                                              
  Total Capital                                                                                                      
  (to Risk Weighted Assets)..............    29,714       10.8%         * 21,969         *8.0%      * 27,462         *10.0%
  Core Capital                                                                                                       
  (to Adjusted Tangible Assets)..........    27,958        5.7%         * 19,498         *4.0%      * 24,372         * 5.0%
  Tangible Capital                                                                                                   
  (to Tangible Assets)...................    27,958        5.7%         *  7,312         *1.5%           N/A           
  Tier I Capital                                                                      
  (to Risk  Weighted Assets)..............   27,958       10.2%              N/A                    * 16,477         * 6.0%
</TABLE>

* Denotes greater than or equal to

     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 balances with the Federal Reserve Bank
of Dallas in a noninterest-earning account based on a percentage of deposit
liabilities. Such balances averaged $6,860,000 and $6,897,000 in 1998 and 1997,
respectively.

     Matrix Bank is required by Federal regulations to maintain a minimum level
of liquid assets of four percent. Matrix Bank exceeded the Federal requirement
at December 31, 1998 and 1997, respectively.

     Matrix Financial is 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 $3,089,000 at December 31, 1998 and $2,587,000 at December 31, 1997.

12. SHAREHOLDERS' EQUITY

Common Stock

     The authorized common stock of the Company consists of 50,000,000 shares
with a par value of $.0001 per share. There were 6,723,911, 6,703,880 and
6,681,031 shares of common stock outstanding at December 31, 1998, 1997 and
1996, respectively. Holders of common stock are entitled to receive dividends
when, and if, declared by the board of directors. Each share of common stock
entitles the holders thereof to one vote, and cumulative voting is not
permitted.

                                      F-22
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


12. SHAREHOLDERS' EQUITY (CONTINUED)

Preferred Stock

     The authorized preferred stock of the Company consists of 5,000,000 shares
with a par value of $.0001 per share. The board of directors is authorized,
without further action of the shareholders of the Company, to issue from time to
time shares of preferred stock in one or more series and with such relative
rights, powers, preferences and limitations as the board of directors may
determine at the time of issuance. Such shares may be convertible into common
stock and may be superior to the common stock in the payment of dividends,
liquidation, voting and other rights, preferences and privileges.

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 because, as discussed below, the alternative fair value accounting
provided for under Statement No. 123, Accounting for Stock-Based Compensation,
requires use of option valuation models that were not developed for use in
valuing employee stock options.  Under APB 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 has authorized the grant
of options to substantially all of the Company's full-time employees and
directors for up to 525,000 shares of the Company's common stock.  All options
granted 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 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-up, 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. 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.

     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.

     Pro forma information regarding net income and earnings per share is
required by Statement No. 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. 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 1998, 1997 and 1996, respectively: risk-free interest rates of
5.4 percent, 5.7 percent and 6.0 percent; a dividend yield of zero percent;
volatility factors of the expected market price of the Company's common stock of
 .39, .38 and .39; and a weighted-average expected life of the option of four
years.

     The Black-Scholes option valuation model was developed for use 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.

                                      F-23
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


12. SHAREHOLDERS' EQUITY (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.  The Company's pro
forma information follows:

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                               1998           1997           1996
                                           ------------   ------------   ------------
                                           (Dollars in thousands except per share data)
<S>                                        <C>            <C>            <C> 
Pro forma net income....................    $8,256           $7,960         $3,534
Pro forma earnings per share:
 Basic..................................      1.23             1.19           0.67
 Diluted................................      1.20             1.17           0.67
</TABLE>

A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,                                  
                                        --------------------------------------------------------------------------------------
                                                   1998                            1997                          1996             
                                        ----------------------------     ---------------------------     ---------------------    
                                                        WEIGHTED                     WEIGHTED                    WEIGHTED         
                                                        AVERAGE                      AVERAGE                     AVERAGE          
                                          OPTIONS    EXERCISE PRICE    OPTIONS    EXERCISE PRICE    OPTIONS    EXERCISE PRICE     
                                        ----------  ----------------  ---------  ----------------  ---------  ----------------    
<S>                                     <C>         <C>               <C>        <C>               <C>        <C>                 
Outstanding, beginning of year........    330,150       $10.55         209,100       $ 8.15          79,500         $ 5.13          
Granted...............................     63,000        12.96         149,500        14.12         129,600          10.00          
Exercised.............................     (1,725)       12.25          (2,100)       10.00               -              -          
Forfeited.............................     (3,725)       14.00         (26,350)       11.93               -              -
                                         --------                      -------                     --------
Outstanding, end of year..............    387,700       $10.90         330,150       $10.55         209,100         $ 8.15          
                                         ========                     ========                     ========                         

Exercisable at end of year............    167,350       $ 8.49         117,700       $ 6.75          87,000         $ 5.55          
 
Weighted average fair value of options 
  granted during the year                   $6.03                        $6.67                     $   4.06
</TABLE>

Options outstanding at December 31, 1998 have exercise prices ranging from $5.13
to $26.50 per share, with a weighted average exercise price of $10.90 per share,
as outlined in the following table:

<TABLE>
<CAPTION>
                                    WEIGHTED              WEIGHTED                               WEIGHTED
   RANGE OF       NUMBER OF         AVERAGE                AVERAGE             NUMBER OF          AVERAGE
   EXERCISE       OPTIONS        EXERCISE PRICE          REMAINING              OPTIONS        EXERCISE PRICE
    PRICES       OUTSTANDING       PER SHARE          CONTRACTUAL LIFE        EXERCISABLE         PER SHARE
------------   ---------------   ----------------    --------------------   ----------------   ---------------- 
<S>            <C>               <C>                 <C>                    <C>                <C>
 $  5.13           79,500            $ 5.13                   6.00              79,500             $ 5.13
    8.13           25,000              8.13                   9.79                   -                  -  
   10.00          110,700             10.00                   7.83              59,850              10.00
 10.38-13.88       74,000             13.20                   8.22              14,000              13.17  
 14.25-17.25       95,500             15.20                   8.56              12,500              15.17
   26.50            3,000             26.50                   9.33               1,500              26.50 
               ---------------   ----------------    --------------------   ----------------   ---------------- 
                  387,700            $10.90                   7.85             167,350             $ 8.49
               ===============   ================    ====================   ================   ================         
</TABLE>          
            
Restricted Net Assets

As a result of the regulatory requirements and debt covenants, substantially all
of the net assets of the Company are restricted at December 31, 1998 and 1997.

                                      F-24
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 


12. STOCKHOLDERS' EQUITY (CONTINUED)

Warrants

     The Company issued warrants exercisable for an aggregate of 75,000 shares
of its common stock to its primary underwriters upon the closing of the
Company's initial public offering. The warrants are exercisable from time to
time during the four years after the one year anniversary of their date of
grant, and are not transferable during the first year after their grant. The
exercise price for the shares of common stock underlying such warrants is $12
per share. The shares of common stock underlying such warrants are entitled to
certain demand and incidental registration rights.

Employee Stock Purchase Plan

     In September 1996, the board of directors and shareholders adopted the
Matrix Bancorp, Inc. Employee Stock Purchase Plan (Purchase Plan) and reserved
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 percent of
the lower of the fair market value per share of common stock on the enrollment
or the purchase date.

13. 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, 1998 are approximately as follows:


                                              (In thousands)     
                    1999......................    $  770             
                    2000......................       692             
                    2001......................       599             
                    2002......................       384             
                    2003......................        22             
                                                  ------
                                                  $2,467             
                                                  ======              

     Total rent expense aggregated approximately $955,000, $631,000 and $541,000
for the years ended December 31, 1998, 1997 and 1996, respectively.

Hedging of Pipeline

     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 nonmandatory forward commitments to sell loans. At December 31,
1998, the Company had $133,724,000 in Pipeline and funded loans offset with
mandatory forward commitments of $110,006,000 and nonmandatory forward
commitments of $10,057,000. At December 31, 1997, the Company had $72,803,000 in
Pipeline and funded loans offset with mandatory forward commitments of
$45,622,000 and nonmandatory forward commitments of $9,070,000. The inherent
value of the forward commitments is considered in the determination of the lower
of cost or market for the Pipeline and funded loans.

Hedging of MSRs

     Ownership of MSRs exposes the Company to impairment of its 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 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. To mitigate this risk of 
impairment due to declining interest rates, the Company hedged a segment of its 
mortgage servicing portfolio beginning in September 1997. As of December 31, 
1998, the Company had identified and

                                      F-25
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)

hedged approximately $674 million of its mortgage servicing portfolio using a 
program of exchange traded futures and options.

     At December 31, 1998, the Company had the following open options:

<TABLE> 
<CAPTION> 
                                                         Expiration    Open Positions      Notional    Fair Value
                                                            Date     (No. of Contracts)     Amount     by Contract
                                                        -----------  ------------------  -----------   -----------
     <S>                                                <C>          <C>                 <C>           <C>       
     Ten year Treasury Note futures..................   March 1999          205          $20,500,000    $ (42,656)
     Ten year Treasury Note put  options.............   February 1999       188           18,800,000     (185,782)
                                                                                                                 
     Ten year Treasury Note call  options............   February 1999       157           15,700,000      112,219 
</TABLE>

     During 1997, the Company closed a portion of its hedge positions which
resulted in a realized gain of approximately $250,000 being recognized in
connection with the sale of a portion of the hedged servicing portfolio. At
December 31, 1998 the net realized deferred gains and the unrealized deferred
losses of the open positions was approximately $420,000.

Land Development Commitment

     In June 1996, the Company purchased 154 acres of land for $1.3 million in
cash for the purpose of developing residential and multi-family lots in Ft.
Lupton, Colorado. As part of the acquisition, the Company entered into a Planned
Unit Development Agreement (Development Agreement) with the City of Ft. Lupton
(City). The Development Agreement is a residential and golf course Development
Agreement providing for the orderly planning, engineering and development of a
golf course and surrounding residential community. The City is responsible for
the development of the golf course and the Company is responsible for the
development of the surrounding residential lots and certain offsite
infrastructure (estimated at $1,300,000 as of December 31, 1998). The
Development Agreement also provides for the rebate of certain Development Fees,
Infrastructure Fees and Storm Drainage Fees from the City to the Company
(estimated at $1,635,000 as of December 31, 1998).

     The Development Agreement sets forth a mandatory obligation on the part of
the Company to secure future payment to the City of pledged Golf Course
Enhancement Fees of $600,000. These pledged Enhancement Fees require successor
homebuilders to pay the City a $2,000 fee with the issuance of each building
permit. In the event that less than thirty (30) permits are issued per year, the
Company is obligated to pay the balance of $60,000 in assessment fees per year
beginning in the year 1998 through the year 2007. The Company, has to date,
posted a $300,000 letter of credit to secure those referenced Enhancement Fees.

     The Company also entered into a development management agreement with a
local developer to complete the development of the land. The terms of the
agreement specify that the Company is to earn a preferred rate of return on its
investment and, once the initial amount of its investment plus the preferred
rate of return has been paid, the remaining profits are split equally. As of
December 31, 1998 and 1997, the Company has included in its basis in the
development $197,000 and $118,000, respectively, in capitalized interest costs.
At December 31, 1998 and 1997, the total basis of the land development is
$4,055,000 and $2,835,000, respectively, and is classified in other assets in
the accompanying consolidated balance sheets.

Financing Agreement

     In 1996, the Company purchased $800,000 of City of Fort Lupton Subordinated
Series 1996 A1 revenue anticipation warrants, with interest at 9.75 percent and
due December 15, 2015. The warrants are classified as other receivables in the
accompanying consolidated balance sheets. The Company entered into an agreement
with a bank to sell the warrants, subject to certain repurchase obligations
resulting from the bank's annual remarketing of the bonds, with interest at five
percent. The Company entered into a letter of credit agreement of $825,000 to
guarantee its repurchase obligation.

Contingencies

     The Company is a defendant is a lawsuit that was commenced on or about May
23, 1997 in which the plaintiff-buyer alleges that the Company, as broker for
the seller, made false representations regarding the GNMA certification of
certain

                                      F-26
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13.COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS (CONTINUED)

mortgage pools the servicing rights of which were offered for sale in a written
offering. The plaintiff further alleges that it relied on the Company's
representations in purchasing the servicing rights from the seller. Trial was
conducted during the week of July 12, 1998. The jury returned a verdict in favor
of the Company on four counts and in favor of the plaintiff on one count and
awarded the plaintiff $75,000. On July 31, 1998, the plaintiff filed a motion
for judgment notwithstanding the verdict, or alternatively, a new trial. On
November 6, 1998, the court denied the plaintiff's motion. Plaintiff has
appealed the court's ruling and the Company is considering an appeal of the
$75,000 award to the plaintiff.

     The Company has been named defendant in an action which commenced on or
about February 7, 1999. The plaintiff alleges that the Company, as seller of
certain mortgage loans to the plaintiff, breached a representation and warranty
given to the plaintiff by the Company under the purchase agreement relating to
such loans. The action relates to approximately $700,000 in principal amount of
mortgage loans and plaintiff has requested specific performance of the
repurchase obligations of the Company under the purchase agreement and/or an
unspecified amount of damages.

     The Company and its subsidiaries are parties to various other litigation
matters, in most cases involving ordinary and routine claims incidental to the
business of the Company. The ultimate legal and financial liability of the
Company, if any, with respect to the foregoing litigation cannot be estimated
with certainty, but the Company believes, based on its examination of such
matters, that such ultimate liability will not have a material adverse effect on
the consolidated financial position, results of operations or cash flows of the
Company.

Related Party Transactions

     The Company had a note receivable from an affiliate of $750,000 at December
31, 1997, which bore interest at 13 percent and was due October 1, 2000. In
January 1998, the note was paid in full. The Company had leased office space to
the affiliate for approximately $8,500 per month. In January 1998, the space was
leased to a third party.

     At December 31, 1998, the Company had unsecured loan receivables from an
executive officer, a director and a shareholder of $57,500, $85,000 and
approximately $80,000, respectively, which all bear interest at the prime rate
and are renewable at the Company's option. Due dates on the loan receivables are
as follows: $50,000 due February 15, 1999, $7,500 due September 29, 1999,
$85,000 due September 8, 1999 and approximately $80,000 due December 31, 1999.

     The Company occupies office space under a lease agreement expiring June 30,
2001, at a monthly rental payment of $13,553, in which four officers of
subsidiaries of the Company own an equity interest in the lessor.

14. 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
pretax contributions to the Plan up to 15 percent of such participant's earnings
with a maximum of $10,000 in 1998. The Company makes a matching contribution of
25 percent of the participant's total contribution. Matching contributions made
by the Company vest over six years. The cost of the plan approximated $162,000,
$116,000 and $110,000 during the years ended December 31, 1998, 1997 and 1996,
respectively.

15. FINANCIAL INSTRUMENTS

Off-Balance Sheet Risk and Concentration of Commitments

     The Company is a party to financial instruments with off-balance sheet risk
in the normal course of its business. These instruments are commitments to
originate or purchase first mortgage loans and forward loan sale commitments
(see Note 13) and involve credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheet.

     Commitments to originate or purchase mortgage loans amounted to
approximately $50,254,000 at December 31, 1998. The Company plans to fund the
commitments in its normal commitment period. The Company evaluates each
customer's creditworthiness on a case-by-case basis.

                                      F-27
<PAGE>
 
                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. FINANCIAL INSTRUMENTS (CONTINUED)

     The Company's credit risks comprised the outstanding loans held for sale
and loans held for investment as shown in the consolidated balance sheets. The
loans are located throughout the United States and are collateralized primarily
by a first mortgage on the property.

Fair Value of Financial Instruments

     The carrying amounts and estimated fair value of financial instruments are
     as follows:

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                1998                          1997
                                                   --------------------------    -----------------------------
                                                     CARRYING         FAIR         CARRYING          FAIR
                                                     AMOUNT          VALUE         AMOUNT           VALUE
                                                  ------------    ----------     -----------     ---------------
                                                                      (In thousands)
<S>                                               <C>             <C>            <C>              <C>
Financial assets:
  Cash..........................................    $ 18,665       $ 18,665       $  3,296        $  3,296
  Interest-earning deposits.....................       8,120          8,120          6,337           6,337
  Loans held for sale, net......................     754,226        758,279        456,978         459,231
  Loans held for investment, net................      94,222         94,476         54,394          54,975
  Federal Home Loan Bank of Dallas stock........      15,643         15,643          8,700           8,700
Financial liabilities:                            
  Deposits......................................     490,516        492,003        224,982         225,780
  Custodial escrow balances.....................      96,824         96,824         53,760          53,760
  Drafts payable................................       5,423          5,423          7,506           7,506
  Payable for purchase of MSRs..................      12,103         12,103          8,660           8,660
  Federal Home Loan Bank of Dallas                
   borrowings...................................     168,000        171,544        171,943         171,943
 Borrowed money.................................     178,789        178,789         89,909          89,909
 </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 balance sheet for cash, interest-
earnings deposits, FHLB stock, drafts payable, payable for purchase of MSRs,
FHLB borrowings and borrowed money approximate those assets' and liabilities'
fair values.

     The fair values of loans are based on quoted market prices where available
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 value of forward sale commitments are included in the
determination of the fair value of loans held for sale.

     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, 1998 and 1997 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).

                                      F-28
<PAGE>
 
                             MATRIX BANCORP, INC.
            
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION

     Condensed financial information of Matrix Bancorp, Inc. (Parent Company) is
     as follows:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                       1998          1997          1996
                                                     ---------  ------------   -----------     
                                                                (In thousands)
<S>                                                  <C>       <C>            <C> 
CONDENSED BALANCE SHEETS
Assets:
 Cash..............................................     $   158       $ 1,459       $    45
 Other receivables.................................         105         1,040           872
 Premises and equipment, net.......................       2,393         1,481         1,405
 Other assets......................................       1,601         1,840           507
 Investment in and advances to subsidiaries........      88,791        62,042        36,199
                                                     ----------  ------------  ------------  
Total assets.......................................     $93,048       $67,862       $39,028
                                                     ==========  ============  ============  
Liabilities and shareholders' equity:
 Borrowed money (a)................................     $42,275       $26,002       $ 6,372
 Other liabilities.................................       1,419         1,250           386
                                                     ----------  ------------  ------------
Total liabilities..................................      43,694        27,252         6,758
Shareholders' equity:
 Common stock......................................           1             1             1
 Additional paid in capital........................      22,416        22,185        21,983
 Retained earnings.................................      26,937        18,424        10,286
                                                     ----------  ------------  ------------
Total shareholders' equity.........................      49,354        40,610        32,270
                                                     ----------  ------------   -----------   
Total liabilities and shareholders' equity.........     $93,048       $67,862       $39,028
                                                     ==========  ============   ===========  
</TABLE>
______________
(a) The Parent's debt is set forth below. The Parent also guarantees the
    revolving warehouse and servicing acquisition loan agreements and the
    financing related to the direct financing leases to charter schools. See
    Note 8 for additional information regarding the debt.

<TABLE>
<CAPTION>
                                                                 December 31,
                                                       1998          1997          1996
                                                     ----------  ------------  ------------  
                                                                (In thousands)
<S>                                                    <C>       <C>           <C> 
Revolving line of credit...........................     $10,300  $          -  $          -
Senior subordinated notes..........................       2,910         2,910         2,910
Bank stock loan....................................       7,893         1,786         2,003
Note payable to a bank secured by real estate......         870           895           938
Notes payable secured by MSRs......................         302           411           521
Senior notes.......................................      20,000        20,000             -
                                                     ----------  ------------  ------------  
                                                        $42,275       $26,002        $6,372
                                                     ==========  ============  ============  
</TABLE>

As of December 31, 1998, the maturities of term notes payable during the next
five years and thereafter are as follows:
                                                             (In thousands)
                      1999....................................     $ 2,922
                      2000....................................       2,052
                      2001....................................       6,275
                      2002....................................         726
                      2003....................................           -
                      Thereafter..............................      20,000
                                                                   -------
                                                                   $31,975
                                                                   =======

                                      F-29
<PAGE>
 
16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                       1998              1997              1996
                                                                     --------         --------          --------
                                                                                    (IN THOUSANDS)
<S>                                                                  <C>              <C>               <C>
CONDENSED STATEMENTS OF INCOME
Income:
 Interest income on loans.....................................        $    17           $   118           $   142
 Other........................................................            463               352               130
                                                                    ---------         ---------         ---------
Total income..................................................            480               470               272

Expenses:
 Compensation and employee benefits...........................          2,412             1,700             1,344
 Occupancy and equipment......................................            600               333               299
 Interest on borrowed money...................................          3,601             1,593               805
 Professional fees............................................            295               279               138
 Other general and administrative (b).........................          1,416             1,353               328
                                                                    ---------         ---------         ---------
Total expenses................................................          8,324             5,258             2,914
                                                                    ---------         ---------         ---------
Loss before income taxes and equity income of
subsidiaries..................................................         (7,844)           (4,788)           (2,642)
Income taxes (a)..............................................             --                --                --
                                                                    ---------         ---------         ---------
Loss before equity income of subsidiaries.....................         (7,844)           (4,788)           (2,642)
Equity income of subsidiaries.................................         16,357            12,926             6,212
                                                                    ---------         ---------         ---------
Net income....................................................        $ 8,513           $ 8,138           $ 3,570
                                                                    =========         =========         =========
</TABLE>

________
(a) 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 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 carryback of
    such loss, calculated on the basis of the subsidiary filing a separate
    return.  Accordingly, the Parent's condensed statements of income do not
    include any income tax benefit for the current losses.

(b) The Parent Company has entered into a subaccounting agreement with third
    parties which require the Parent Company to pay a fee to the third party
    company for record keeping services performed related to custodial escrow
    deposits directed by that company and maintained at Matrix Bank.  The total
    amount of the subaccounting fees paid by the Parent Company are
    approximately $199,000, $544,000 and $-0- for the years ended 1998, 1997 and
    1996, respectively.

                                     F-30
<PAGE>
 
16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED DECEMBER 31,
                                                                                1998                1997               1996
                                                                              ---------          ---------          ---------
                                                                                             (IN THOUSANDS)
<S>                                                                           <C>                <C>                <C>
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
 Net income.............................................................       $  8,513           $  8,138           $  3,570
 Adjustments to reconcile net income to net cash used by
  operating activities:
   Equity income of subsidiaries........................................        (16,357)           (12,926)            (6,212)
   Dividend from subsidiaries...........................................          4,534              2,916              1,843
   Depreciation and amortization........................................            281                192                127
   Increase (decrease) in other liabilities.............................            169                864                (78)
   Decrease (increase) in other receivables and other
    assets..............................................................            945               (701)              (133)
                                                                              ---------          ---------          ---------
Net cash used by operating activities...................................         (1,915)            (1,517)              (883)

Investing activities:
 Purchases of premises and equipment....................................           (964)              (168)               (88)
 Investment in and advances to subsidiaries.............................        (14,926)           (15,833)           (16,630)
                                                                              ---------          ---------          ---------
Net cash used by investing activities...................................        (15,890)           (16,001)           (16,718)
Financing activities:
 Repayments of notes payable and revolving line of credit...............        (14,774)            (7,870)              (438)
 Proceeds from notes payable and revolving line of credit...............         31,047              7,500                 59
 Dividends paid by pooled company prior to merger.......................             --                 --               (201)
 Capital contribution by pooled company prior to merger.................             --                 --                 24
 Proceeds from senior notes, net........................................             --             19,100                 --
 Proceeds from issuance of common stock.................................            231                202                 --
 Proceeds from the sale of common stock.................................             --                 --             18,191
                                                                              ---------           --------           --------
Net cash provided by financing activities...............................         16,504             18,932             17,635
                                                                              ---------           --------           --------
Increase (decrease) in cash.............................................         (1,301)             1,414                 34
Cash at beginning of year...............................................          1,459                 45                 11
                                                                              ---------           --------           --------
Cash at end of year.....................................................       $    158           $  1,459           $     45
                                                                              =========           ========           ========
</TABLE>

                                     F-31
<PAGE>
 
                             MATRIX BANCORP, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                  1998                                                      1997                    
                             -------------------------------------------------       -----------------------------------------------
                             FOURTH       THIRD         SECOND        FIRST           FOURTH         THIRD     SECOND       FIRST   
                             QUARTER      QUARTER       QUARTER       QUARTER         QUARTER        QUARTER   QUARTER      QUARTER 
                             ---------    --------      --------      --------       ---------      ---------  --------     --------
                                                              (Dollars in thousands, except per share data)                         
<S>                          <C>          <C>           <C>           <C>            <C>          <C>          <C>          <C>     
Operations                                                                                                                          
Net interest income after                                                                                                           
  provision for loan and                                                                                                            
  valuation losses.......    $   4,326    $  6,445      $  4,973      $  3,839       $   3,863    $   3,677    $  3,216     $  2,258
Noninterest income.......       13,154      11,326        11,346        10,919          10,605        9,069       9,412        8,943
Noninterest expense......       15,273      13,802        12,630        11,234          10,760        9,057       9,603        8,326
                             ---------    --------      --------      --------       ---------    ---------    --------     --------
                                                                                                                                    
Income before income 
  taxes..................        2,207       3,969         3,689         3,524           3,708        3,689       3,025        2,875
Income taxes.............          762       1,432         1,343         1,339           1,424        1,459       1,155        1,121
                             ---------    --------      --------      --------       ---------    ---------    --------     --------
Net income...............    $   1,445    $  2,537      $  2,346      $  2,185       $   2,284    $   2,230    $  1,870     $  1,754
                             =========    ========      ========      ========       =========    =========    ========     ========
                                                                                                                                    
Net Income per Share Data                                                                                                           
Basic....................    $     .22    $    .38      $    .35      $    .33       $     .34    $     .33    $    .28     $    .26
                             =========    ========      ========      ========       =========    =========    ========     ========
Diluted..................    $     .21    $    .37      $    .34      $    .32       $     .34    $     .33    $    .28     $    .26
                             =========    ========      ========      ========       =========    =========    ========     ========
                                                                                                                                    
                                                                                                                                    
Balance Sheet                                                                                                                       
Total assets.............   $1,012,640  $  929,607    $  834,657    $  698,517       $ 606,745    $ 525,511    $502,563     $422,476
Total loans, net.........      848,448     753,464       696,358       573,586         511,372      426,007     394,537      319,489
Shareholders' equity.....       49,354      47,699        45,158        42,797          40,610       38,124      35,894       34,024
</TABLE>

    The net income per share for the first three quarters of 1997 have been
restated to comply with the requirements of Statement No. 128.

18. TRANSACTIONS WITH MCA MORTGAGE CORPORATION

    During recent years, the Company entered into several purchase transactions
with MCA Mortgage Corporation (MCA), a Michigan-based mortgage banking entity.
At December 31, 1998, the Company was carrying approximately $5,000,000 of
residential mortgage loans on its balance sheet that were purchased from MCA on
a servicing retained basis. The Company also had an outstanding receivable
relating to brokerage and consulting services provided to MCA. In January 1999,
the Company learned that MCA was closing its operations. Additionally, in
February 1999, the Company learned that MCA had declared bankruptcy and it
appeared likely that some of the loans purchased by the Company had been sold
multiple times or pledged multiple times as security for repayment of various
credit facilities. The Company also discovered that there appeared to be
servicing issues relating to some of the purchased loans. The servicing issues
consisted of instances in which loans owned by the Company and serviced by MCA
had previously paid off, but for which MCA had continued to remit monthly
principal and interest, rather than the payoff proceeds. As a result of the
above MCA issues, the Company recorded a provision for valuation losses of
approximately $2,200,000 as of December 31, 1998. Additionally, the Company
wrote off approximately $100,000 of accounts receivable and accrued interest
relating to MCA as of December 31, 1998.

19. SEGMENTS OF THE COMPANY AND RELATED INFORMATION

    The Company has three reportable segments under Statement No. 131: the
Company's traditional banking subsidiary, the Company's mortgage banking
subsidiary and the Company's servicing brokerage and consulting subsidiaries.
The Company's traditional banking subsidiary provides deposit and lending
services to its customers and also makes investments in residential mortgage
loans and residential MSRs. The Company's mortgage banking subsidiary acquires
residential MSRs and services the mortgage loans underlying those MSRs, and in
addition, originates residential mortgage loans through its wholesale loan
origination offices. The Company's servicing brokerage subsidiary offers
brokerage, consulting and risk management services for residential MSRs. The
remaining subsidiaries of the Company are included in the "all other" category
for purposes of the Statement No. 131 disclosures and consist of the Company's
trust operations, real estate disposition services, a broker/dealer and the
Parent Company operations.

                                     F-32
<PAGE>

                              MATRIX BANCORP, INC

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. SEGMENTS OF THE COMPANY AND RELATED INFORMATION (CONTINUED)

     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
                                              BANKING       BANKING       CONSULTING      ALL OTHERS      TOTAL
                                            -----------     ---------    -------------    ----------    ---------
<S>                                         <C>             <C>          <C>              <C>           <C>
                                                                        (In thousands)
1998
Revenues from external customers:                                                         
    Interest income........................   $ 52,445      $  8,227     $        -       $    22       $   60,694 
    Noninterest income.....................      7,603        22,017          9,993         7,132           46,745 
                                                                                                                   
Intersegment revenues......................       (133)          991            501         1,665            3,024 
                                                                                                                   
Interest expense...........................     24,972         7,895              1         3,636           36,504 
                                                                                                                   
Depreciation/amortization..................      1,516        10,334            227         1,005           13,082 
                                                                                                                   
Segment profit (loss)......................     21,470        (4,725)         4,119        (7,475)          13,389 
                                                                                                                   
Segment assets (a).........................    821,448       181,883          3,143        28,304        1,034,778 

                                                                                                                   
1997                                                                                                               
Revenues from external customers:                                                                                  
   Interest income.........................     27,313         4,664              -           172           32,149 
   Noninterest income......................      6,410        21,623          4,283         5,713           38,029 
                                                                                                                   
Intersegment revenues......................         33         1,213            230         1,141            2,617 
                                                                                                                   
Interest expense...........................     11,812         4,781              1         1,667           18,261 
                                                                                                                   
Depreciation/amortization..................      1,344         5,835            214           510            7,903 
                                                                                                                   
Segment profit (loss)......................     10,290         6,269          1,393        (4,655)          13,297 
                                                                                                                   
Segment assets (a).........................    486,857       111,228          1,225        24,759          624,069 

                                                                                                                   
1996                                                                                                               
Revenues from external customers:                                                                                  
   Interest income.........................     12,697         3,653              -           199           16,549 
   Noninterest income......................      5,107        12,372          4,462         4,646           26,587 
                                                                                                                   
Intersegment revenues......................          -           448            169           365              982 
                                                                                                                   
Interest expense...........................      5,811         3,811              -           868           10,490 
                                                                                                                   
Depreciation/amortization..................        428         2,622             72           416            3,538 
                                                                                                                   
Segment profit (loss)......................      4,635         2,166          1,420        (2,373)           5,848 
                                                                                                                   
Segment assets (a).........................    196,874        70,880          2,107        16,606          286,467  
</TABLE> 

________________
(a) See reconciliation to total consolidated assets in the following table.

                                     F-33
<PAGE>

                             MATRIX BANCORP, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 
19. SEGMENTS OF THE COMPANY AND RELATED INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                                                                1998                 1997                1996     
                                                                           -------------       --------------       --------------
    <S>                                                                    <C>                 <C>                  <C>           
                                                                                               (In thousands)
    REVENUES FOR YEAR ENDED DECEMBER 31,                                                                                          
    Interest income for reportable segments............................    $      60,672       $       31,977       $       16,350
    Noninterest income for reportable segments.........................           39,613               32,316               21,941
    Intersegment revenues for reportable segments......................            1,359                1,476                  617
    Other revenues.....................................................            8,819                7,026                5,210
    Elimination of intersegment revenues...............................           (3,024)              (2,617)                (982)
                                                                           -------------       --------------       --------------
    Total consolidated revenues........................................          107,439               70,178               43,136
                                                                                                                                  
    PROFIT OR LOSS FOR YEAR ENDED DECEMBER 31,                                                                                    
    Total profit or loss for reportable segments.......................           20,864               17,952                8,221
    Other profit or loss...............................................           (7,367)              (4,531)              (2,373)
    Adjustment to intersegment profit (loss) in consolidation..........             (108)                (124)                   -
                                                                           -------------       --------------       --------------
    Income before income tax...........................................           13,389               13,297                5,848
                                                                                                                                  
    ASSETS AS OF DECEMBER 31,                                                                                                     
    Total assets for reportable segments...............................        1,006,474              599,310              269,861
    Other assets.......................................................           28,304               24,759               16,606
    Elimination of intercompany receivables............................          (21,905)             (17,200)             (11,908)
    Other eliminations.................................................             (233)                (124)                   -
                                                                           -------------       --------------       --------------
    Total consolidated assets..........................................        1,012,640              606,745              274,559
                                                                                                                                  
    OTHER SIGNIFICANT ITEMS FOR THE YEAR ENDED DECEMBER 31,                                                                       
    Depreciation/amortization expense:                                                                                            
        Segment totals.................................................           12,077                7,393                3,122
        Adjustments....................................................            1,005                  510                  416
                                                                           -------------       --------------       --------------
    Consolidated totals................................................           13,082                7,903                3,538
                                                                                                                                  
    Interest expense:                                                                                                             
         Segment totals................................................           32,868               16,594                9,622
         Adjustments...................................................            3,636                1,667                  868
                                                                           -------------       --------------       --------------
    Consolidated totals                                                           36,504               18,261               10,490 
</TABLE>

                                     F-34
<PAGE>
 
                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
<S>       <C>      <C>
  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     +        Specimen certificate for Common Stock of the Registrant (4.1)
  4.3     +.       Amended and Restated 1996 Stock Option Plan (4.2)
  4.4     ***.     Employee Stock Purchase Plan, as amended (4.4)
  4.5     +        Form of Common Stock Purchase Warrant by and between the
                   Registrant and Piper Jaffray, Inc. (4.4)
  4.6     +        Form of Common Stock Purchase Warrant by and between the
                   Registrant and Keefe, Bruyette & Woods, Inc. (4.5)
  10.1    +        Note and Agency Agreement, dated as of August 1, 1995, by and
                   between the Registrant and PHS Mortgage, Inc. as agent (10.1)
  10.2    +        First Amendment to Note and Agency Agreement, dated as of
                   August 2, 1995, by and between the Registrant and PHS
                   Mortgage, Inc., as agent (10.2)
  10.3    +        Form of 13% Senior Subordinated Note (10.3)
  10.4    +.       Executive Employment Agreement, dated as of January 1, 1996,
                   by and between the Registrant and David Kloos (10.4)
  10.5    +.       Employment Agreement, dated as of January 1, 1995, between
                   Matrix Capital Bank and Gary Lenzo and as amended January 1,
                   1996 (10.5)
  10.6    +        Multiple Advance Term Loan Agreement, dated as of June 27,
                   1994, by and between Matrix Capital Corporation and CorTrust
                   Bank (10.8)
  10.7    +        Multiple Advance Fixed Rate Term Loan Promissory Note, dated
                   as of June 30, 1994, from Matrix Capital Corporation, as
                   maker, to CorTrust Bank, as payee (10.9)
  10.8    +        Mortgage Loan Purchase and Servicing Agreement, dated as of
                   August 1, 1993, by and between Argo Federal Savings Bank,
                   FSB, and Matrix Financial Services Corporation (10.11)
  10.9    +        Multiple Advance Fixed Rate Term Loan Promissory Note, dated
                   as of October 19, 1994, from Matrix Capital Corporation, as
                   maker, to CorTrust, as payee (10.29)
  10.10   +        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)
  10.11   +        Development Management Agreement, dated as of June 28, 1996,
                   by and among Fort Lupton, L.L.C. and Matrix Funding Corp.
                   (10.31)
  10.12   *        Coyote Creek Planned Unit Development Agreement, dated as of
                   July 1, 1998, by and among Fort Lupton, L.L.C. and Matrix
                   Funding Corp.
  10.13   *.       Employment Agreement Addendum of Gary Lenzo, dated December
                   16, 1998
  10.14   *        Promissory Note, dated as of December 31, 1998, from D. Mark
                   Spencer, as maker, to the Registrant, as payee
  10.15   +        Fort Lupton Golf Course Residential and Planned Unit
                   Development Agreement, dated as of November 28, 1995 (10.36)
  10.16   +        Loan Agreement, dated as of June 21, 1996, by and between
                   Matrix Funding Corporation and The First Security Bank
                   (10.41)
  10.17   +        Loan Agreement, dated as of June 29, 1995, by and between the
                   Registrant and Bank One, Arizona, N.A. (10.42)
  10.18   +        Promissory Note, dated as of June 29, 1995, from the
                   Registrant to Bank One, Arizona, N.A. (10.43)
  10.19   +        Deed of Trust, Assignment of Rents, Security Agreement and
                   Fixture Filing, dated as of June 29, 1995, from the
                   Registrant to Arizona Trust Deed Corporation, as trustee
                   (10.44)
  10.20   *        Fourth Modification Agreement to the Loan Agreement, dated
                   February 28, 1999, by and between The Registrant and Bank
                   One, Arizona, N.A.
  10.21   +        Loan Agreement, dated July 10, 1992, by and between American
                   Strategic Income Portfolio Inc. and Matrix Financial Services
                   Corporation (10.45)
  10.22   +        Promissory Note, dated as of July 10, 1992, by Matrix
                   Financial Services Corporation, as maker, to American
                   Strategic Income Portfolio, Inc., as payee (10.46)
  10.23   **       Revolving Subordinated Loan Agreement, dated as of October
                   18, 1996, by and between Matrix Financial Services
                   Corporation and the Registrant (10.31)
  10.24   **       Amended and Restated Loan Agreement, dated as of January 31,
                   1997, by and between Matrix Financial Services Corporation,
                   as borrower, and Bank One, Texas, N.A., as agent, and certain
                   lenders, as lenders (10.32)
  10.25   **       Amended and Restated Swing Note, dated as of January 31,
                   1997, from Matrix Financial Services Corporation, as borrower
                   to the lenders under the Amended and Restated Loan Agreement
                   (10.34)
</TABLE> 
                                     II-1
<PAGE>
 
  10.26   **       Amended and Restated Guaranty, dated as of January 31, 1997,
                   from the Registrant to Bank One, Texas, N.A., as agent
                   (10.37)
  10.27   ***      Third Amendment to Amended and Restated Loan Agreement, dated
                   as of March 1, 1998, between Matrix Financial Services
                   Corporation, as borrower, Bank One, Texas, N.A., as agent,
                   and certain lenders, as lenders (10.39)
  10.28   ***      Overline Note, dated as of March 1, 1998, from Matrix
                   Financial Services Corporation, as borrower, to Bank One,
                   Texas, N.A., as lender (10.40)
  10.29   ##       Fourth Amendment to Amended and Restated Loan Agreement,
                   dated as of May 27, 1998, between Matrix Financial Services
                   Corporation, as borrower, Bank One, Texas, N.A., as agent,
                   and certain lenders, as lenders (10.6)
  10.30   ##       Fifth Amendment to Amended and Restated Loan Agreement, dated
                   as of June 26, 1998, between Matrix Financial Services
                   Corporation, as borrower, Bank One, Texas, N.A., as agent,
                   and certain lenders, as lenders (10.7)
  10.31   *        Sixth Amendment to Amended and Restated Loan Agreement, dated
                   as of October 31, 1998, between Matrix Financial Services
                   Corporation, as borrower, Bank One, Texas, N.A., as agent,
                   and certain lenders, as lenders
  10.32   *        Seventh Amendment to Amended and Restated Loan Agreement,
                   dated as of January 28, 1999, between Matrix Financial
                   Services Corporation, as borrower, Bank One, Texas, N.A., as
                   agent, and certain lenders, as lenders
  10.33   *        Eighth Amendment to Amended and Restated Loan Agreement,
                   dated as of February 12, 1999, between Matrix Financial
                   Services Corporation, as borrower, Bank One, Texas, N.A., as
                   agent, and certain lenders, as lenders
  10.34   *        Ninth Amendment to Amended and Restated Loan Agreement, dated
                   as of February 22, 1999, between Matrix Financial Services
                   Corporation, as borrower, Bank One, Texas, N.A., as agent,
                   and certain lenders, as lenders
  10.35   *        Warehouse Note, dated as of February 22, 1999, from Matrix
                   Financial Services Corporation, as borrower, to Bank One,
                   Texas, N.A., as lender
  10.36   *        Warehouse Note, dated as of February 22, 1999, from Matrix
                   Financial Services Corporation, as borrower, to U.S. Bank
                   National Association, as lender
  10.37   *        Warehouse Note, dated as of February 22, 1999, from Matrix
                   Financial Services Corporation, as borrower, to Residential
                   Funding Corporation, as lender
  10.38   *        Amended and Restated Term-Line Note, dated as of February 22,
                   1999, from Matrix Financial Services Corporation, as
                   borrower, to Bank One, Texas, N.A., as lender
  10.39   *        Amended and Restated Term-Line Note, dated as of February 22,
                   1999, from Matrix Financial Services Corporation, as
                   borrower, to U.S. Bank National Association, as lender
  10.40   *        Amended and Restated Term-Line Note, dated as of February 22,
                   1999, from Matrix Financial Services Corporation, as
                   borrower, to Residential Funding Corporation, as lender
  10.41   *        Amended and Restated Working-Capital Note, dated as of
                   February 22, 1999, from Matrix Financial Services
                   Corporation, as borrower, to Bank One, Texas, N.A., as lender
  10.42   *        Amended and Restated Working-Capital Note, dated as of
                   February 22, 1999, from Matrix Financial Services
                   Corporation, as borrower, to U.S. Bank National Association,
                   as lender
  10.43   *        Amended and Restated Working-Capital Note, dated as of
                   February 22, 1999, from Matrix Financial Services
                   Corporation, as borrower, to Residential Funding Corporation,
                   as lender
  10.44   **.      Employment Agreement, dated as of February 4, 1997, by and
                   between the Registrant and Paul Skretny (10.38)
  10.45   **       Credit Agreement, dated as of March 12, 1997, by and between
                   Matrix Capital Corporation, as borrower, and Bank One, Texas,
                   N.A., as agent, and certain lenders, as lenders (10.39)
  10.46   **       Guaranty Form, dated as of March 12, 1997, from each of the
                   Registrant's significant subsidiaries to Bank One, Texas,
                   N.A., as agent (10.42)
  10.47   #        Second Amendment to Credit Agreement, dated as of September
                   23, 1997, between Matrix Capital Corporation, as borrower,
                   and Bank One, Texas, N.A., as agent, and certain lenders, as
                   lenders (10.1)
  10.48   #        Third Amendment to Credit Agreement, dated as of March 12,
                   1998, between Matrix Capital Corporation, as borrower, and
                   Bank One, Texas, N.A., as agent, and certain lenders, as
                   lenders (10.2)
  10.49   ##       Fourth Amendment to Credit Agreement, dated as of June 29,
                   1998, between Matrix Capital Corporation, as borrower, and
                   Bank One, Texas, N.A., as agent, and certain lenders, as
                   lenders (10.1)
  10.50   ##       Term Note, dated as of June 29, 1998, from Matrix Capital
                   Corporation, as borrower, to U.S. Bank National Association,
                   as lender (10.2)
  10.51   ##       Term Note, dated as of June 29, 1998, from Matrix Capital
                   Corporation, as borrower, to Bank One, Texas, N.A., as lender
                   (10.3)
  10.52   ##       Revolving Note, dated as of June 29, 1998, from Matrix
                   Capital Corporation, as borrower, to U.S. Bank

                                     II-2
<PAGE>
 
                   National Association, as lender (10.4)
  10.53   ##       Revolving Note, dated as of June 29, 1998, from Matrix
                   Capital Corporation, as borrower, to Bank One, Texas, N.A.,
                   as lender (10.5)
  10.54   *        Fifth Amendment to Credit Agreement, dated as of November 12,
                   1998, between Matrix Capital Corporation, as borrower, and
                   Bank One, Texas, N.A., as agent, and certain lenders, as
                   lenders
  10.55   *        Sixth Amendment to Credit Agreement, dated as of January 29,
                   1999, between Matrix Capital Corporation, as borrower, and
                   Bank One, Texas, N.A., as agent, and certain lenders, as
                   lenders
  10.56   ***.     Agreement, dated October 1, 1997, with T. Allen McConnell
                   (10.37)
  10.57   +++      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)
  10.58   *        Promissory Note, dated as of February 15, 1999, from Thomas
                   P. Cronin, as maker, to the Registrant, as payee
  10.59   ###      Merger Termination Agreement between Matrix Capital
                   Corporation, Fidelity National Financial, Inc., and MCC
                   Merger Sub, Inc., dated August 28, 1998 (10.1)
  10.60   *        Promissory Note, dated as of September 30, 1998, from Thomas
                   P. Cronin, as maker, to the Registrant, as payee
  21      *        Subsidiaries of the Registrant
  23      *        Consent of Ernst & Young LLP
  27      *        Financial Data Schedule
__________________________
*    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.

++   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, 1997, 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 registration statement on Form S-1 (No. 333-34977), 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, 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 quarterly report on Form 10-Q for the quarter ended March
     31, 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, 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
     September 30, 1998, filed by the Registrant with the Commission.

 .    Management contract or compensatory plan or arrangement

                                      II-3