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, 2004
                                       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               (I.R.S. Employer Identification No.)
of incorporation or organization)

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

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

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

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

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

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

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

     As of March 10, 2005,  6,620,850  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  June  30,  2004  was  $36,622,000.  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 18, 2005 are  incorporated by reference into Part
III of this Form 10-K.

<PAGE>


                                TABLE OF CONTENTS                          Page


                                     PART I

Item 1.   Business.....................................................       3
Item 2.   Properties...................................................      24
Item 3.   Legal Proceedings............................................      24
Item 4.   Submission of Matters to a Vote of Security Holders..........      26

                                     PART II

Item 5.   Market for Registrant's Common Equity, Related Stockholder
          Matters and Issuer Purchases of Equity Securities............      26
Item 6.   Selected Financial Data......................................      27
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations....................................      29
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk...      53
Item 8.   Financial Statements and Supplementary Data..................      53
Item 9.   Changes in and Disagreements With Accountants on Accounting
          and Financial Disclosure.....................................      53
Item 9A.  Controls and Procedures......................................      53
Item 9B.  Other Information............................................      53

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant...........      53
Item 11.  Executive Compensation.......................................      53
Item 12.  Security Ownership of Certain Beneficial Owners and Management
          and Related Stockholder Matters..............................      53
Item 13.  Certain Relationships and Related Transactions...............      53
Item 14.  Principal Accountant Fees and Services.......................      53

                                     PART IV

Item 15.  Exhibits and Financial Statement Schedules...................      53


<PAGE>
                                     PART I

Item 1.  Business

Matrix Bancorp, Inc.

     General.  Matrix Bancorp, Inc.  (occasionally referred to in this document,
on a consolidated  basis, as "us," "we," the "Company" or similar  terms),  is a
unitary  thrift  holding  company  that,  through our  subsidiaries,  focuses on
traditional banking, trust activities, lending activities,  mortgage banking and
other fee-based services. Our traditional banking activities include originating
and  servicing   commercial,   multifamily,   construction  and  Small  Business
Administration  ("SBA") loans, and purchasing and servicing  residential and SBA
loans, and providing a broad range of depository services.  Our mortgage banking
activities  consist  of  purchasing  and  selling  residential  mortgage  loans;
offering  brokerage,  consulting and analytical  services to financial  services
companies  and  financial  institutions;   and  servicing  residential  mortgage
portfolios  for  investors.   Our  trust   activities  focus  primarily  on  the
administration  of  self-directed  individual  retirement  accounts,   qualified
business  retirement plans and custodial and directed trust accounts.  Our other
fee-based   services  and  lending  activities  include  providing  real  estate
brokerage services, primarily on foreclosed residential real estate on behalf of
unaffiliated financial institutions,  and providing outsourced business services
to charter  schools.  We also  offer a limited  amount of  financing  to charter
schools for the purchase of school sites and equipment.

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

Sale of Interest in Matrix Settlement and Clearance Services, LLC

     On November 30, 2004, the Company and certain of its  subsidiaries  entered
into  definitive  agreements  to sell  our 45%  membership  interest  in  Matrix
Settlement  and Clearance  Services,  LLC, as well as  substantially  all of the
assets of the trust operations of Matrix Capital Bank, to MG Colorado  Holdings,
Inc. ("MGCH"), which is an entity controlled by one of the original co-owners of
Matrix Settlement and Clearance Services, LLC along with the Company.

     In  consideration  of the sale of the 45%  membership  interest  in  Matrix
Settlement and Clearance Services,  LLC, the Company has received  approximately
5% of the  outstanding  common  stock of MGCH,  and cash.  This  portion  of the
transaction closed December 1, 2004.

     As a  result  of the  sale  of the 45%  membership  interest,  the  Company
recorded a pre-tax gain of approximately $8.3 million,  which is included in the
gain on sale of assets for the year ended  December 31,  2004.  The 5% ownership
interest retained is accounted for using the cost basis of accounting.

     In  consideration  of the sale of the  assets  of the trust  operations  of
Matrix  Capital Bank,  MGCH will issue common stock of  approximately  2% of the
outstanding common stock of MGCH.  Consummation of the sale of the assets of the
trust  operations of Matrix  Capital Bank is  conditioned  on customary  closing
conditions,  including  receipt of  applicable  regulatory  approvals  and other
necessary  third party  consents and  approvals.  In the event that such closing
conditions  are not met prior to December 1, 2005, the parties shall be relieved
from any further  obligations  in connection  with the sale of the assets of the
trust operations.

     The  parties  have  also  entered  into an  agreement  that  continues  the
depository  relationship  of the companies  through at least September 30, 2006.
Custodial accounts of Matrix Settlement and Clearance  Services,  LLC maintained
at Matrix Capital Bank total approximately $118.1 million at December 31, 2004.

     The   Contribution   Agreement   entered  into   provides   for   customary
indemnification   by  each  party  to  the  other  for  taxes  and  breaches  of
representations  and  warranties.  The  indemnifications  are subject to certain
conditions and limitations,  including a cap on  indemnification  related to the
sale of the assets of the trust operations of $750 thousand.

     The Company and its  subsidiaries,  and former members of Matrix Settlement
and  Clearance  Services  LLC have  agreed  that for a period of four years from
December 1, 2004,  they will not compete with MGCH in the provision of automated
mutual fund clearing and  settlement  services  through the National  Securities
Clearing  Corporation  ("NSCC"),  or in the  provision  of  custodial  and trust
services to outside third party  administrators  or record keepers in connection
with the NSCC  services.  Additionally,  in  connection  with the receipt of the
common stock of MGCH, the Company and other  stockholders of MGCH have agreed to

                                       3
<PAGE>
transfer and voting  restrictions  on their shares of MGCH common stock and have
agreed to sell their shares along with the majority  shareholders  of MGCH if so
requested.

     For further  discussion and detail of the  accounting  for, and effects of,
the sale of the interest in Matrix Settlement and Clearance  Services,  LLC, and
the assets of the trust  operations of Matrix  Capital  Bank,  see Note 4 to the
consolidated financial statements included elsewhere in this document.

Sale of Majority Interest in Matrix Asset Management Corporation

     On September 10, 2004, the Company and its wholly owned subsidiary,  Matrix
Asset Management Corporation,  entered into a Contribution and Sale Agreement to
sell  substantially  all  of the  assets  and  operations  of  its  real  estate
disposition and management services business line for cash and a note receivable
payable in quarterly installments over three years to First American Real Estate
Solutions,   LLC,  ("First  American"),  a  subsidiary  of  The  First  American
Corporation.  After the sale, we have retained a 25% interest in the new company
created by First American operating as Matrix Asset Management,  LLC, as well as
our remaining  operations in Matrix Asset Management  Corporation,  now known as
MTXC Realty Corp.,  of a real estate  brokerage  office focusing on the Colorado
front range area.  As part of the  transaction,  referrals  for the sale of real
estate  managed by Matrix  Asset  Management,  LLC in the Denver metro area will
generally be referred to our brokerage office.

     As a result of the  sale,  the  Company  recorded  a pre-tax  gain of $13.5
million,  which is  included  in the gain on sale of assets  for the year  ended
December 31, 2004.  The 25% ownership  interest  retained is accounted for using
the equity method of accounting, and the equity earnings for the period from the
sale date to December 31, 2004  approximately $440 thousand is included in other
income for the year ended December 31, 2004.

     The Company  may require  First  American to purchase  its 25%  interest in
Matrix Asset Management, LLC at anytime, the purchase price of which may be paid
by  First  American,  at its  option,  in cash or a  combination  of cash and an
unsecured  promissory note. First American,  in turn, may require the Company to
sell  its 25%  interest  to First  American  for  cash at any  time  during  the
30-calendar  day period  beginning  on  December  26th of each year,  commencing
December 26, 2007. The purchase price for the 25% interest will be determined in
accordance  with a fair value formula that  considers the earnings and net worth
of Matrix Asset Management, LLC, as set forth in Matrix Asset Management,  LLC's
Operating Agreement.

     The parties have also entered into an agreement  calling for First American
to maintain  deposits at Matrix  Capital  Bank  through a date as defined in the
Contribution and Sale Agreement. Deposits maintained by First American at Matrix
Capital Bank at December 31, 2004 total $25.1 million.

     For further  discussion and detail of the  accounting  for, and effects of,
the sale of the majority  interest in Matrix Asset Management  Corporation,  see
Note 3 to the  consolidated  financial  statements  included  elsewhere  in this
document.

Sale of Matrix Capital Bank Branches

     On January 30,  2004,  the  Company,  through its wholly  owned  subsidiary
Matrix  Capital  Bank,  entered  into a  definitive  agreement  to sell  its two
branches in Las Cruces, New Mexico to FirstBank,  a subsidiary of Access Anytime
BanCorp,  Inc. The sale closed on May 1, 2004. The sale included deposits of the
Las Cruces  branches  that totaled  approximately  $78.5  million,  and loans of
approximately  $22.8 million,  as well as the real estate,  equipment and leases
associated  with the Las Cruces  branches.  As a result of the sale, the Company
recorded a pre-tax gain of approximately $5.1 million which is included in gains
on sale of assets for the year ended December 31, 2004.

     On July 12, 2004, the Company  through its wholly owned  subsidiary  Matrix
Capital  Bank,  entered  into a  definitive  agreement to sell its branch in Sun
City,  Arizona to FirstBank,  a subsidiary of Access Anytime  BanCorp,  Inc. The
sale  closed on  November 1, 2004.  The sale  included  deposits of the Sun City
branch that totaled  approximately $104.0 million, a nominal amount of loans, as
well as the real estate,  equipment and leases  associated with the branch. As a
result of the sale, the Company  recorded a pre-tax gain of  approximately  $4.9
million which is included in gains on sale of assets for the year ended December
31, 2004.

     For further  discussion and detail of the  accounting  for, and effects of,
the sale of the branches of Matrix Capital Bank, see Note 5 to the  consolidated
financial statements included elsewhere in this document.

                                       4
<PAGE>
Discontinued Operations

     On February 28, 2003,  Matrix  Capital Bank and Matrix  Financial  Services
Corporation  entered into a Purchase and Assumption  Agreement,  as amended (the
"Purchase  Agreement") to sell  substantially  all of Matrix Financial  Services
Corporation's assets associated with its wholesale mortgage origination platform
(the  "Platform") to AmPro  Mortgage  Corporation  ("AmPro" or the "Buyer").  On
September  2, 2003,  the Company  announced  the final  closing and  substantial
completion  of the sale by Matrix  Capital  Bank and Matrix  Financial  Services
Corporation of  substantially  all of its assets and operations  associated with
its  wholesale  mortgage  origination  platform.  The  effective  sale  date for
accounting purposes was August 31, 2003. Included in the sale were the wholesale
production   offices,   the  back  office  personnel  that  processed  the  loan
originations  and  a  significant  portion  of  the  corporate   operations  and
personnel. After the sale, our remaining operations at Matrix Financial Services
Corporation consist of our mortgage servicing  platform,  where we service loans
for ourselves and third parties.

     For the year ended  December  31, 2003,  the Company  recorded an after tax
loss on the sale of the  Platform  of $(2.7)  million,  or $(0.43)  per  diluted
share,  which is  included in the income from  discontinued  operations  of $3.3
million,  net of tax effect, on the consolidated  statements of operations.  For
comparative  purposes,  the  operating  income  of the  discontinued  production
platform is reflected in discontinued  operations beginning in the first quarter
of 2002, and the consolidated financial statements have been restated to reflect
the production platform as a discontinued operation. For the year ended December
31, 2004,  the Company  recorded  income from  discontinued  operations  of $137
thousand after tax,  representing  the production  premium earned in 2004. We do
not anticipate  earning any future  revenues from the production  platform.  For
further discussion and detail of the accounting for, and effects of, the sale of
the  Platform,  see Note 6 to the  consolidated  financial  statements  included
elsewhere in this document.

     Prior to and at the time of the  signing  of the  Purchase  Agreement,  and
throughout the period from signing of the Purchase  Agreement through August 31,
2003, (the "Transition  Period"),  Matrix Capital Bank provided a warehouse line
of credit for substantially all of the loans originated by the Platform.  At the
end of the  Transition  Period,  the Buyer was  required to utilize  third party
financings  to fund new  originations  by the buyer and the  warehouse  line was
required to be paid-off.  With the warehouse line paid-off,  Matrix Capital Bank
had a significant  amount of liquidity to re-invest,  which has been re-invested
primarily  in  bulk  loan  portfolios  of  adjustable  rate  residential  loans,
guaranteed portions of SBA loans and mortgaged-backed securities.

     For a period of two years from February 28, 2003,  Matrix  Capital Bank has
agreed that neither Matrix  Capital Bank nor any of its  affiliates  will engage
in,  directly or  indirectly,  the  single-family  retail or wholesale  mortgage
origination  business in those states in which the acquired division operated or
was  located as of such  date.  However,  this  non-compete  provision  does not
prohibit Matrix Capital Bank or its affiliates from engaging in such business in
order to comply with applicable law, rule, regulation,  directive,  agreement or
order from the Office of Thrift Supervision ("OTS") or another party where it is
necessary to resolve  regulatory  or  supervisory  concerns.  Additionally,  the
non-compete  provision  does not apply in the event of a change  in  control  of
Matrix Capital Bank or the Company.

The Subsidiaries

     Our  core  business   operations   are  conducted   through  the  operating
subsidiaries described below.

     Matrix  Capital Bank.  With its branch and  headquarter  offices in Denver,
Colorado,  Matrix  Capital  Bank  ("Matrix  Bank")  serves  local  and  regional
communities  by  providing  a broad range of personal  and  business  depository
services,  offering  residential  loans,  multifamily and commercial real estate
loans, including SBA loans. In 2002, Matrix Bank relocated its domicile from Las
Cruces,  New Mexico to  Denver,  Colorado  where it offers  all of its  existing
banking  services in the Denver market.  In connection  with the  relocation,  a
subsidiary of Matrix Bank,  Matrix Tower  Holdings,  LLC,  purchased a high rise
building in downtown  Denver,  Colorado in June 2002,  renamed Matrix  Financial
Center.  In addition to Matrix Bank, the Company and several of its subsidiaries
relocated their offices to Matrix Financial Center during 2002 and 2003.

     Matrix Bank holds the noninterest-bearing custodial escrow deposits related
to the residential mortgage loan portfolio serviced by Matrix Financial Services
Corporation, the interest-bearing money market accounts administered by Sterling
Trust Company and the deposits  resulting from transactions in which Matrix Bank
acts as the  clearing  bank for  clients  of  Matrix  Settlement  and  Clearance
Services,  LLC. These deposits,  as well as other  institutional and traditional
deposits and  borrowings  from the Federal Home Loan Bank, are used primarily to
fund bulk  purchases of  residential  mortgage loan  portfolios  throughout  the
United  States,  a  portion  of which are  serviced  for  Matrix  Bank by Matrix
Financial Services  Corporation.  As of December 31, 2004, Matrix Bank had total
assets of $1.82 billion.

                                       5
<PAGE>
     Matrix  Bank  and  several  of  our  other  subsidiaries  have  significant
experience in purchasing mortgage loans, originating multifamily and other loans
secured by real estate,  including  Small Business  Administration  loans,  have
familiarity  with real  estate  markets  throughout  the United  States and have
traditionally  had access to low-cost  deposits.  We believe that the  resulting
knowledge  and  activities  permit Matrix Bank to manage its funding and capital
position in a way that enhances its performance.

     Matrix  Financial   Services   Corporation.   Matrix   Financial   Services
Corporation ("Matrix  Financial"),  which is a wholly owned subsidiary of Matrix
Bank,  historically has acquired mortgage servicing rights on a nationwide basis
through  purchases in the secondary  market,  has retained  originated  mortgage
servicing  rights,  and serviced the loans  underlying  the  purchased  mortgage
servicing  rights and a portion of our  originated  mortgage  servicing  rights.
Effective  November  1, 2004,  the  majority  of the daily  servicing  functions
performed by Matrix  Financial were  transferred to a third party  sub-servicer.
Associated with the transfer, Matrix Financial recorded charges of approximately
$1.4  million   related  to  write-offs  for  furniture,   fixtures,   leasehold
improvements and retention packages which is included in noninterest expense for
the year ended December 31, 2004.

     As of December 31, 2004,  Matrix  Financial was  responsible  for servicing
approximately  38,000 borrower  accounts  representing $2.3 billion in principal
balances.  As a servicer  of  mortgage  loans,  Matrix  Financial  generally  is
required to establish  custodial  escrow  accounts for the deposit of borrowers'
payments.  These  custodial  accounts are maintained at Matrix Bank. At December
31, 2004,  the custodial  escrow  accounts  related to our  servicing  portfolio
maintained at Matrix Bank were $51.6 million.

     Prior to the  sale of the  production  platform  as  discussed  in "Item 1.
Business--Discontinued  Operations",  Matrix  Financial  originated  residential
mortgage  loans through its wholesale  loan  origination  network,  with offices
located in Atlanta, Dallas, Denver, Houston, Jacksonville,  Phoenix, Sacramento,
Santa Ana and St. Louis.  The mortgage loans originated by Matrix Financial were
generally sold in the secondary market.

     Matrix Bancorp Trading,Inc.   Matrix Bancorp Trading, Inc. ("Matrix Bancorp
Trading") provides brokerage and consulting  services to financial  institutions
and  financial  services  companies  in the  mortgage  banking  industry.  These
services include:

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

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

     First Matrix  Investment  Services Corp. First Matrix  Investment  Services
Corp. ("First Matrix"), which became a wholly owned subsidiary of Matrix Bancorp
Trading  in  October  2001,  is  registered  with the  National  Association  of
Securities  Dealers  ("NASD")  as a  fully  disclosed  broker-dealer,  with  its
headquarters  in Denver,  Colorado  and a branch  office in Memphis,  Tennessee.
First Matrix focuses on the acquisition,  brokering,  securitization and sale of
SBA loans and loan pools and interest only strips  associated with the SBA loans
and loan pools.  SBA loans are  acquired by Matrix  Bank  through the  brokerage
activities of First Matrix.

     MTXC Realty Corp.   MTXC Realty Corp. ("MTXC  Realty"),  formerly  known as
Matrix Asset Management  Corporation,  provides real estate  brokerage  services
primarily  for  foreclosed  real  estate on behalf of other  financial  services
companies.  MTXC Realty 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.
Currently, the business focuses on the Colorado front-range market.

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<PAGE>
     Prior to the sale of the  majority  interest  in  Matrix  Asset  Management
Corporation  as discussed  in "Item 1.  Business--Sale  of Majority  Interest in
Matrix  Asset  Management  Corporation",  Matrix  Asset  Management  Corporation
provided   nationwide  real  estate  management  and  disposition   services  on
foreclosed properties owned by financial services companies,  mortgage companies
and financial institutions.

     Sterling Trust Company.  Sterling Trust,  headquartered in Waco, Texas, was
incorporated  in 1984 as a Texas  non-bank  trust  company  specializing  in the
administration  of  self-directed  individual  retirement  accounts,   qualified
business  retirement  plans and custodial  and directed  trust  accounts.  As of
December 31, 2004,  Sterling Trust administered  approximately  41,000 accounts,
with assets under  administration of approximately $2.9 billion.  As of December
31, 2004,  approximately $236.0 million of the $2.9 billion represented deposits
held at Matrix Bank.

     ABS  School  Services, LLC.  ABS  School  Services,  LLC  ("ABS")  provides
outsourced business services to charter schools, and operates under the name The
GEO  Group.  Charter  schools  are public  schools  that are an  alternative  to
traditional   public  schools.   The  primary   services  offered  include  fund
accounting,  cash management,  budgeting,  governmental  reporting,  payroll and
accounts  payable.  The GEO Group also offers  administrative  and instructional
leadership and consults with schools and offers assistance in technology, policy
development  and  grant  administration.  Additionally,  The  GEO  Group  has  a
financing  division,  which  offers a limited  amount of  financing  to  charter
schools for the purchase of school sites and equipment.

     Please see Note 24 to the  consolidated  financial  statements  for further
financial information about our subsidiaries.

Lending Activities

     Purchase  and Sale of Bulk Loan  Portfolios.  The  majority  of our  assets
consist of  residential  mortgage loans that we generally  acquire  through bulk
acquisitions  in the secondary  market  through Matrix Bank. We believe that our
structure  provides  advantages  over our  competitors  in the  purchase of bulk
mortgage loan packages.  Matrix Bancorp Trading,  through its networking  within
the  mortgage  banking  and  financial  services  industries,  is able to  refer
companies that are interested in selling  mortgage loan  portfolios  directly to
Matrix Bank.  This direct contact  reduces the number of portfolios that must be
purchased  through  competitive  bid  situations,   thereby  reducing  the  cost
associated with the acquisition of bulk residential mortgage loan portfolios.

     Approximately  77% of the  single-family  residential  mortgage  loans that
Matrix Bank owns at  December  31, 2004 are  classified  as held for sale.  This
accounting classification requires Matrix Bank to carry loans classified as held
for sale at the lower of aggregate  cost or market  value.  The  purchased  loan
portfolios  typically  include both fixed and  adjustable  rate mortgage  loans.
Although Matrix Bank reviews many loan  portfolios for prospective  acquisition,
it  focuses  on  acquiring  first  lien  priority  loans  secured  primarily  by
one-to-four  single-family residential properties. To the extent that adjustable
rate loans are available,  Matrix Bank generally  targets  adjustable over fixed
rate portfolios.  Due to the accounting treatment required,  we believe that the
focus on adjustable rate loans generally reduces the effect of changing interest
rates on the portfolio's market value.  During the year ended December 31, 2004,
at Matrix Bank and Matrix Financial we purchased approximately $628.5 million of
mortgage loans.

     Matrix Bank purchases  mortgage loan  portfolios  from various  sellers who
have either  originated the loans or acquired the loan portfolios from others in
bulk  purchases.  Matrix Bank  considers  several  factors  prior to a purchase,
including 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,  yield, the current liquidity of
Matrix Bank and the product mix in its  existing  mortgage  loan  portfolio.  In
addition,  the various  sellers are evaluated for their ability to perform under
the representations and warranties provided to us.

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

                                       7
<PAGE>
process helps Matrix Bank determine  whether the mortgage loan  portfolio  meets
its  investment  criteria  and,  if it  does,  the  range  of  pricing  that  is
appropriate.

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

     Retail  Originations.  Matrix  Bank's  lending  office in Denver,  Colorado
primarily  originates SBA loans and multifamily  loans on a national basis,  and
residential  construction  loans and commercial  loans generally in the Colorado
market place.  Prior to the sale of the Matrix Bank branches in Las Cruces,  New
Mexico as noted in "Item 1. Business--Sale of Matrix Bank Branches",  the retail
loans originated by Matrix Bank consisted of a broad range of residential loans,
at both fixed and adjustable  rates,  consumer loans and commercial  real estate
loans.

     Sale of Originated  Residential  Loans. Prior to the sale of the Las Cruces
branches of Matrix Bank as discussed in "Item 1.  Business--Sale  of Matrix Bank
Branches",  we  generally  sold all of the  residential  mortgage  loans that we
originated.  Prior  to the  sale  of the  Platform  as  discussed  in  "Item  1.
Business--Discontinued  Operations", under programs established with Fannie Mae,
Freddie Mac and Ginnie Mae,  conforming  conventional  and government loans were
sold on a cash basis or pooled by us and exchanged for securities  guaranteed by
Fannie Mae, Freddie Mac or Ginnie Mae. We then sold those securities to national
or regional  broker-dealers.  Mortgage loans sold to Fannie Mae,  Freddie Mac or
Ginnie Mae were sold on a nonrecourse basis, except for standard representations
and warranties,  so that foreclosure  losses were generally borne by Fannie Mae,
Freddie Mac or Ginnie Mae and not by us.

     Prior to the sale of the Production Platform and the Las Cruces branches as
noted above,  we also sold  nonconforming  and conforming  residential  mortgage
loans on a nonrecourse basis to other secondary market investors.  Nonconforming
loans  are  typically  first  lien  mortgage  loans  that do not meet all of the
agencies'  underwriting  guidelines,   and  are  originated  instead  for  other
institutional  investors  with  whom  we  have  previously  negotiated  purchase
commitments and for which we occasionally paid a fee.

     In the past, we sold residential mortgage loans on a servicing-retained  or
servicing-released  basis. In 2004, all loans were sold servicing released, with
the exception of loans under the New Mexico Housing Authority program. See "Item
1. Mortgage Servicing Activities--Residential Mortgage Loan Servicing."

     In connection with our residential mortgage loan originations and sales, we
make customary representations and warranties.  Due to our recent experience and
due to the  increased  originations  activity  that  occurred  in  2001  through
February 2003, we have experienced an increase in loan repurchases.  The Company
has  established  a reserve  for  anticipated  losses  related to our  customary
representations and warranties. There can be no assurance that the current level
of reserves  that are based on  estimates  will be  sufficient  to cover  future
losses related to the customary  representations  and warranties claims made. We
remain  responsible  for all  loans  originated  through  the  Platform  through
February 28, 2003, as discussed in "Item 1. Business--Discontinued Operations."

     The sale of  originated  loans may generate a gain or loss for us. Gains or
losses result primarily from two factors. First we may make a loan to a borrower
at a rate  resulting in a price that is higher or lower than we would receive if
we  had  immediately  sold  the  loan  in  the  secondary  market.  These  price
differences occur primarily as a result of competitive pricing conditions in the
market place.  Second, gains or losses may result from changes in interest rates
that  consequently  change the market  value of our loans  originated  for sale.
Since  the  sale  of  the  Production   Platform,   as  discussed  in  "Item  1.
Business--Discontinued   Operations",   the  Company  no  longer   originates  a
significant  amount of mortgage loans. Sales of originated loans come from early
buy-outs from GNMA loan pools of the Matrix Financial  servicing  portfolio.  In
addition, Matrix Bank sells in the secondary market certain of the SBA loans and
multifamily  loans it  originates.  During the year ended  December 31, 2004, we
sold  approximately  $164.7  million of 1-4 family  (principally  related to FHA
loans  purchased from our servicing  portfolio),  multifamily and originated SBA
loans.

     Commercial and Other  Lending.  We have sought to diversify and enhance the
yield of our loan portfolio by originating  multifamily and commercial loans and
by  offering a full range of lending  products  to our  customers.  The  Company
offers  a  variety  of  commercial  loan  products,   including:   single-family

                                       8
<PAGE>
construction loans;  commercial real estate loans; business and SBA loans; and a
limited  amount of financing to charter  schools for the purchase of real estate
and  equipment.  Matrix  Bank's  loan  production  office  in  Denver,  Colorado
principally originates  single-family  construction,  multifamily and commercial
real estate loans.

     Matrix Bank's small business  lending  division,  headquartered  in Denver,
Colorado,  offers the following  loan products:  SBA 7a loans;  first trust deed
loans  through the 504  program;  and Business  and  Industry  Guaranteed  Loans
offered through the United States Department of Agriculture,  as well as certain
secondary  market  qualified  conventional  lending.  Matrix Bank has been a SBA
Preferred  lender in the  Colorado  market  area  since  1999,  and was  awarded
expansion of that delegation into New Mexico, Utah, Arizona, Oregon, Washington,
Idaho and Texas.  Preferred lender status allows Matrix Bank delegated authority
to approve SBA guaranteed loan applications without prior approval from the SBA,
in most cases, thereby accelerating the approval process for small business loan
applications.  Preferred lenders also are granted certain  unilateral  servicing
powers over the term of those loans.  During 2004,  Matrix Bank originated $47.2
million in SBA loans.

     Matrix Bank generally desires that its commercial lending is collateralized
by   income-producing   real  estate   properties.   The   repayment   of  loans
collateralized  by  income-producing  properties  depends  upon  the  successful
operation  of the related  real estate  property  and also on the credit and net
worth of the borrower. Thus, repayment is subject to the profitable operation of
the borrower's  business,  conditions in the real estate  market,  interest rate
levels and overall economic  conditions.  Loans on  income-producing  properties
must generally meet internal  underwriting  guidelines that include:  a limit on
the loan-to-value  ratio of 75%-80% depending on asset type and use of proceeds;
a review  of the  borrower  with  regard  to  credit  score,  management  depth,
integrity, experience and available financial resources; and, in most instances,
a personal guarantee from the borrower.

     Matrix Bank also  originates  loans to  builders  for the  construction  of
single-family  properties,  and to a  lesser  extent,  for the  acquisition  and
development of improved  residential  lots.  Matrix Bank  generally  makes these
loans on commitment  terms that last from nine to eighteen  months and typically
adjust  with  the  prime  rate of  interest.  In  many  cases,  the  residential
properties have been pre-sold to the homeowner.  It is generally considered that
construction  lending  involves a higher level of risk than  secured  lending on
existing  properties  because the  properties  securing  construction  loans are
usually more speculative and more difficult to evaluate and monitor.

     Matrix Bank originates  loans on multifamily  residential  properties.  The
properties  are  located  throughout  the  United  States and are  generally  on
properties  of between 5 to 150 units.  In 2004,  Matrix Bank  originated  $79.6
million of  multifamily  loans and sold $62.2 million of multifamily  loans.  At
December 31, 2004, Matrix Bank had a multifamily loan portfolio of approximately
$60.9 million.

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

     ABS offers  limited  financing  to charter  schools  located  primarily  in
Arizona, Colorado,  Missouri, Florida and Texas for the purchase of real estate,
modular space and equipment. The offered financing is generally fully amortizing
and  completed on a  tax-exempt  basis.  On occasion,  we also provide cash flow
loans  to  charter  schools.  During  2003,  we  began  limiting  the  financing
activities at ABS. We expect this trend to continue for the  foreseeable  future
because our  objective is to reduce the overall size of our charter  school loan
portfolio.  In 2004, through a majority owned subsidiary,  ABS was awarded $50.0
million of New Market Tax Credits to be utilized  primarily for the  origination
of loans to charter schools.  Currently, we are analyzing the various options to
utilize  the tax  credits.  As of  December  31,  2004,  we had a total of $30.4
million loans  outstanding to charter schools with no new loans originated under
the New Market Tax Credit program.  Charter school financing  involves  inherent
risks such as:

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

                                       9
<PAGE>
Mortgage Servicing Activities

     Residential  Mortgage  Loan  Servicing.   Historically,  we  conducted  our
residential   mortgage  loan  servicing  activities  through  Matrix  Financial,
including the residential mortgage loan servicing that Matrix Financial provided
as  subservicer  for Matrix Bank's  servicing  portfolio.  In November  2004, we
transferred the servicing function to a third party subservicer. At December 31,
2004,  including  loans  owned by  Matrix  Bank  and  Matrix  Financial,  Matrix
Financial  serviced  approximately  $2.3 billion of mortgage loans which are now
being subserviced.

     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.

     As compensation  for its mortgage  servicing  activities,  Matrix Financial
receives  servicing  fees,  plus  any late  charges  collected  from  delinquent
borrowers and other fees  incidental to the services  provided.  In the event of
default by the borrower,  Matrix Financial  receives no servicing fees until the
default  is  cured.   At  December   31,   2004,   Matrix   Financial's   annual
weighted-average servicing fee, including ancillary fees, was 0.55%.

     Servicing is provided on mortgage loans on a recourse or nonrecourse basis.
Our policy is to accept only a limited number of servicing  assets on a recourse
basis. As of December 31, 2004, on the basis of outstanding  principal balances,
approximately  0.98% of our owned mortgage servicing contracts involved recourse
servicing.  To the extent that  servicing  is done on a recourse  basis,  we are
exposed to credit  risk with  respect to the  underlying  loan in the event of a
repurchase.  Additionally,  many of our nonrecourse mortgage servicing contracts
owned require us to advance all or part of the  scheduled  payments to the owner
of the mortgage loan in the event of a default by the  borrower.  Many owners of
mortgage loans also require the servicer to advance  insurance  premiums and tax
payments on schedule even though  sufficient  escrow funds may not be available.
Therefore,  we must bear the funding costs associated with making such advances.
If the  delinquent  loan does not become  current,  these advances are typically
recovered at the time of the foreclosure sale.  Foreclosure expenses,  which may
include legal fees or property maintenance, are generally not fully reimbursable
by  Fannie  Mae,  Freddie  Mac or Ginnie  Mae,  for which  agencies  we  provide
significant amounts of mortgage loan servicing.  As of December 31, 2004, we had
advanced approximately $9.0 million in funds on behalf of third party investors.
For the VA  loans  sold  and  serviced  for  Ginnie  Mae,  which  are  sold on a
nonrecourse  basis,  the VA loan  guarantees may not cover the entire  principal
balance and, in that case,  we are  responsible  for the losses which exceed the
VA's  guarantee.  Estimated  losses  related to  foreclosure  are  estimated and
reserved for, and included in the consolidated financial statements.

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

     As noted  earlier,  during the fourth  quarter  of 2004,  Matrix  Financial
transferred the daily servicing function to a third party  subservicer.  As part
of the transfer,  we recorded a charge  included in noninterest  expense for the
year  ended  December  31,  2004 of  approximately  $1.4  million.  This  charge
represents the write-off of fixed assets related to the servicing  function that
will no longer be used,  anticipated  cost of  subleasing  our office  space and
retention  bonuses.  The  servicing  transfer was done in an effort to lower the
overall cost of servicing  by  eliminating  many of the fixed costs of servicing
the loans  in-house.  We pay the  subservicer  a fixed fee per loan that  varies
based on whether the loan is a fixed rate or adjustable  rate, or if the loan is
delinquent.  As part of the agreement,  the custodial deposits are maintained at
Matrix  Bank.  We have  retained  a small  servicing  staff at Matrix  Financial
primarily to monitor the servicing activities of the subservicer.

                                       10
<PAGE>
     The  following   table  sets  forth  certain   information   regarding  the
composition of our mortgage servicing portfolio, excluding loans subserviced for
others, as of the dates indicated:
<TABLE>
<CAPTION>
                                                                                As of December 31,
                                                                 ---------------------------------------------------
                                                                     2004              2003              2002
                                                                 --------------    --------------    ---------------
                                                                              (Dollars in thousands)
<S>                                                              <C>               <C>               <C>
FHA insured/VA guaranteed residential                            $     887,281     $  1,318,485      $   2,128,363
Conventional loans                                                   1,326,648        1,742,096          3,053,368
Other loans                                                             44,911          122,955            151,896
                                                                 --------------    --------------    ---------------
     Total mortgage servicing portfolio                          $   2,258,840     $  3,183,536      $   5,333,627
                                                                 ==============    ==============    ===============
Fixed rate loans                                                 $   1,757,427     $  2,697,892      $   4,688,672
Adjustable rate loans                                                  501,413          485,644            644,955
                                                                 --------------    --------------    ---------------
     Total mortgage servicing portfolio                          $   2,258,840     $  3,183,536      $   5,333,627
                                                                 ==============    ==============    ===============
</TABLE>

     The following table shows the delinquency statistics for the mortgage loans
serviced through Matrix Financial, excluding loans subserviced for others, as of
the dates  presented.  Delinquencies  and  foreclosures  for the mortgage  loans
serviced  by us  generally  exceed  the  national  average  due to high rates of
delinquencies   and  foreclosures  on  certain  bulk  loan  and  bulk  servicing
portfolios.  The  higher  levels of  delinquencies  result  in a higher  cost of
servicing,  however, a portion of the higher cost is offset by the collection of
late fees.
<TABLE>
<CAPTION>
                                                              As of December 31,
                        -----------------------------------------------------------------------------------------------
                                     2004                           2003                             2002
                        ------------------------------ -------------------------------- -------------------------------
                           Number       Percentage        Number         Percentage        Number        Percentage
                             of        of Servicing         of          of Servicing         of         of Servicing
                           Loans         Portfolio        Loans          Portfolio         Loans          Portfolio
                        ------------- --------------   -------------  ---------------   -------------  --------------
<S>                     <C>           <C>              <C>            <C>               <C>            <C>
Loans delinquent for:
   30-59 days                2,389            6.29%         3,366             6.62%          4,276              5.65%
   60-89 days                  693            1.82          1,018             2.00           1,021              1.35
   90 days and over          1,225            3.22          1,433             2.82             647              0.86
                        ------------- --------------   -------------  ---------------   -------------  --------------
   Total delinquencies       4,307           11.34%         5,817            11.44%          5,944              7.86%
                        ============= ==============   =============  ===============   =============  ==============
   Foreclosures                362            0.95%           438             0.86%            540              0.71%
                        ============= ==============   =============  ===============   =============  ==============
</TABLE>

     The following table sets forth certain information regarding the number and
aggregate  principal  balance of the  mortgage  loans  serviced  through  Matrix
Financial,  including  both fixed and  adjustable  rate loans,  excluding  loans
subserviced for others, at various interest rates:
<TABLE>
<CAPTION>
                                                                As of December 31,
                                   2004                                 2003                                2002
                    ----------------------------------- ------------------------------------ ----------------------------------
                                           Percentage                          Percentage                          Percentage
                     Number    Aggregate  of Aggregate   Number    Aggregate  of Aggregate   Number   Aggregate   of Aggregate
                       of      Principal   Principal       of      Principal    Principal      of     Principal    Principal
       Rate          Loans     Balance      Balance      Loans     Balance       Balance     Loans    Balance      Balance
       ----         --------  ----------  -----------  --------  -----------  ----------- ---------  -----------  -------------
                                                             (Dollars in thousands)
<S>                 <C>       <C>         <C>          <C>       <C>          <C>          <C>       <C>          <C>
Less than 7.00%       14,228  $1,201,651       53.20%    17,240  $ 1,446,158      45.43%     23,345  $ 2,196,944      41.19%
 7.00%--7.99%          7,356     516,887       22.88     10,950      846,330      26.58      19,043    1,634,054      30.64
 8.00%--8.99%          5,915     238,491       10.56      8,492      390,254      12.26      13,424      724,053      13.57
 9.00%--9.99%          4,523     119,447        5.29      6,237      215,188       6.76       8,755      349,308       6.55
10.00% and over        5,936     182,364        8.07      7,936      285,606       8.97      11,080      429,268       8.05
                    --------  ----------  ----------   --------  -----------  ---------   ---------  -----------  ---------
  Total               37,958  $2,258,840      100.00%    50,855  $ 3,183,536     100.00%     75,647  $ 5,333,627     100.00%
                    ========  ==========  ==========   ========  ===========  =========   =========  ===========  =========
</TABLE>

     Loan   administration  fees  decrease  as  the  principal  balance  on  the
outstanding  loan  decreases and as the  remaining  time to maturity of the loan
shortens.  The  following  table sets forth  certain  information  regarding the
remaining  contractual  maturity of the mortgage loans  serviced  through Matrix
Financial, excluding loans subserviced for others, as of the dates shown.

                                       11
<PAGE>
<TABLE>
<CAPTION>
                                                               As of December 31,
               --------------------------------------------------------------------------------------------------------------------
                                2004                                   2003                                   2002
               --------------------------------------  -------------------------------------   ------------------------------------
                                            Percentage                              Percentage                           Percentage
               Number Percentage  Unpaid    Unpaid     Number Percentage Unpaid     Unpaid    Number Percentage Unpaid    Unpaid
               of      of Number  Principal Principal  of      of Number Principal  Principal  of    of Number  Principal Principal
    Maturity   Loans   of Loans   Amount    Amount     Loans   of Loans  Amount     Amount    Loans  of Loans   Amount    Amount
    ---------  ------- --------   --------- ---------  ------ ---------- ---------- --------  ------ --------- ---------- ---------
                                                                (Dollars in thousands)
<S>            <C>     <C>        <C>       <C>        <C>     <C>       <C>        <C>       <C>    <C>       <C>        <C>
 1-- 5 years   9,057   23.86%  $  123,858     5.48%   11,431    22.48%  $  190,283   5.98%     11,647   15.40% $  188,463     3.53%
 6--10 years   3,199    8.43       99,337     4.40     4,958     9.75      169,379   5.32       8,954   11.84     271,438     5.09
11--15 years   5,596   14.74      286,816    12.70     7,055    13.87      394,119  12.38      10,728   14.18     662,439    12.42
16--20 years   4,141   10.91      257,277    11.39     8,080    15.89      620,435  19.49      12,914   17.07   1,042,962    19.56
21--25 years   4,260   11.22      302,877    13.41     1,274     2.51       87,013   2.73       1,588    2.10     134,967     2.53
More than 25
  years       11,705   30.84    1,188,675    52.62    18,057    35.50    1,722,307  54.10      29,816   39.41   3,033,358    56.87
              ------- -------   ---------- --------   -------  -------   ---------- ------     ------ -------   --------- --------
  Total       37,958  100.00%  $2,258,840  100.00%    50,855   100.00%  $3,183,536 100.00%     75,647  100.00% $5,333,627   100.00%
              ======= =======   ========== =======    =======  =======   ========== ======     ====== =======  ========== ========
</TABLE>

     Our  servicing  activity  is  diversified  throughout  all 50  states  with
concentrations  in Texas,  Missouri,  California,  New  Mexico  and  Arizona  of
approximately 13.89%,  13.82%, 13.64%, 9.90% and 6.22%,  respectively,  based on
aggregate  outstanding  unpaid principal balances of the mortgage loans serviced
at December 31, 2004.

     Acquisition of Servicing Rights.  Prior to 2001, we acquired  substantially
all of our  mortgage  servicing  rights in the  secondary  market.  The industry
expertise  of  Matrix  Bancorp  Trading  and  Matrix  Financial  allowed  us  to
capitalize upon  inefficiencies in this market when acquiring mortgage servicing
rights. Prior to acquiring mortgage servicing rights, we analyze a wide range of
characteristics  of each  portfolio  considered  for purchase.  Due diligence is
performed  either by our employees or a designated  independent  contractor on a
representative sample of the mortgages involved.  The purchase price is based on
the  present  value of the  expected  future  cash flow,  calculated  by using a
discount  rate,  loan  prepayment,  default rate and other  assumptions  that we
consider to be appropriate to reflect the risk  associated  with the investment.
In 2000 and through the sale of our  production  platform in February  2003,  we
retained  a  portion  of  the  mortgage  servicing  rights  generated  from  the
origination  platform.  The  decision on which  servicing  to retain or sell was
based on factors including  interest rate environment,  secondary market pricing
for the servicing, our capital levels and liquidity. As of December 31, 2004, in
terms of unpaid principal amount, approximately $913.0 million of the underlying
mortgage loans in our servicing portfolio were from loans originated and sold by
Matrix Financial prior to the sale of the production  platform,  as discussed in
"Item 1. Business--Discontinued Operations". Based on the fact that we have sold
our production platform,  and transferred our servicing to a subservicer,  it is
unlikely that we will acquire or add  significantly to our servicing  portfolio.
To the extent  that any  additions  to our  servicing  portfolio  are done,  the
acquisitions are likely to be portfolios with characteristics of more seasoning,
lower  balances and higher  escrows.  Any future  acquisitions  will be based on
availability of desired product,  our capital levels,  our current investment in
mortgage servicing assets and the prevalent interest rate environment.

     Historically,  our strategy with respect to mortgage servicing was to focus
on acquiring servicing for which the underlying mortgage loans tended to be more
seasoned and to have higher interest rates,  lower principal balances and higher
custodial escrow balances than newly originated mortgage loans. We believed this
strategy  allowed us to reduce our prepayment risk, while allowing us to capture
relatively  high  custodial  escrow  balances  in  relation  to the  outstanding
principal balance.  During periods of declining  interest rates,  prepayments of
mortgage  loans  usually  increase  as  homeowners  seek to  refinance  at lower
interest rates, resulting in a decrease in the value of the servicing portfolio.
Mortgage loans with higher interest rates and/or higher  principal  balances are
more likely to result in  prepayments  because the cost  savings to the borrower
from  refinancing  can be  significant.  Due to the  prevalent low interest rate
environment, including 2004, the actual prepayment activity experienced has been
greater  than  initially  modeled  when the  servicing  was either  acquired  or
capitalized.  Based on the high prepayment activity  experienced,  the servicing
investment has not been profitable in the periods presented.

                                       12
<PAGE>
     The following  table shows  quarterly and annual  average  prepayment  rate
experience on the mortgage loans serviced by Matrix  Financial,  excluding loans
subserviced by and for others:

<TABLE>
<CAPTION>
                              For the Years Ended December 31,
                    -----------------------------------------------------
                         2004               2003              2002
                    ----------------   ----------------  ----------------
<S>                 <C>                <C>               <C>
Quarter ended:
   December 31             23.6  %            30.3  %           31.0  %
   September 30            26.6               41.2              23.3
   June 30                 32.4               38.9              19.0
   March 31                27.4               31.3              21.6
                    ----------------   ----------------  ----------------
Annual average             27.5  %            35.4  %           23.7  %
                    ================   ================  ================
</TABLE>

     Sales of  Servicing  Rights.  Historically,  we have sold a portion  of our
purchased  mortgage  servicing  portfolios  and sold a portion  of the  mortgage
servicing  rights on loans that we originated  prior to the sale of the Platform
as discussed in "Item 1.  Business--Discontinued  Operations",  and as mentioned
above.  Sales  generate cash at the time of sale but reduce future cash flow and
servicing  fee income.  We did not have any sales of mortgage  servicing  rights
during  2004 due to the  prevailing  market  conditions.  Prospectively,  we may
pursue  strategic  sales of segments of our portfolio if market  conditions  are
favorable.

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

     Hedging of Servicing Rights. Our investment in mortgage servicing rights is
exposed to  potential  impairment  in certain  interest  rate  environments.  As
previously discussed,  the prepayment of mortgage loans increases during periods
of declining  interest rates as homeowners seek to refinance their loan to lower
interest  rates. If the level of prepayment or the estimated  future  prepayment
activity on segments of our mortgage  servicing  portfolio reaches levels higher
than we projected for an extended  period of time, the  associated  basis in the
mortgage servicing rights may be impaired. To mitigate a portion of this risk of
impairment  due to declining  interest  rates,  through  December  31, 2000,  we
initiated a hedging strategy that used a program of exchange-traded  futures and
options,  and our hedging program qualified for hedge accounting treatment based
on a  high  degree  of  statistical  correlation  and  then  current  accounting
guidance.  With the required  adoption of the Statement of Financial  Accounting
Standards  ("SFAS") 133,  "Accounting  for  Derivative  Instruments  and Hedging
Activities",  on  January  1, 2001,  we did not  attempt  to  qualify  for hedge
accounting  treatment due to the requirements in the standard that are necessary
to do so. Consistent with the program implemented in the fourth quarter of 2002,
in 2003 we elected to reinstate our hedging program to mitigate a portion of our
investment in mortgage  servicing rights from further  impairment,  identical to
the  previously  used program.  The decision was based on the  historically  low
interest rates, the continued  weakening economy,  the geopolitical  environment
and the impairment that we incurred to-date.  During the second quarter of 2004,
the Company made the decision to remove the hedge and did not  reconstitute  the
hedging  position  throughout  the remainder of 2004. The decision to remove the
hedge was based on the underlying  characteristics  of the servicing  portfolio,
the fact that no new servicing was being added to our investment,  the estimated
value change in the underlying asset, and other  considerations of the remaining
asset  liability  mix  of  our  balance  sheet  under  different  interest  rate
scenarios.  We will continue to monitor the servicing  investment  for potential
hedging opportunities.

     Our servicing portfolio is valued at least quarterly in accordance with the
guidelines  set forth in SFAS 140,  "Accounting  for  Transfers and Servicing of
Financial Assets and  Extinguishments  of  Liabilities".  Under SFAS 140, we are
required to record our investment in mortgage  servicing  rights at the lower of
cost or fair value.  The fair value of mortgage  servicing  rights is determined
based on the discounted  future servicing income stratified based on one or more
predominant  risk  characteristics  of the  underlying  loans.  We stratify  our
mortgage   servicing  rights  by  product  type  and  investor  to  reflect  the

                                       13
<PAGE>
predominant  risks.  To determine  the fair value of this  investment,  we use a
valuation  model that  calculates  the present value of  discounted  future cash
flows.  In fiscal year 2004, we made no changes to the  significant  assumptions
inherent  in  the  valuation  of  the  servicing  portfolio.  These  significant
assumptions  are more fully  described in Note 2 to the  consolidated  financial
statements included elsewhere in this document.

     During  2002,  based on a valuation  model which  incorporates  among other
things, prepayment speeds, we recorded provisions for impairment on our mortgage
servicing rights totaling  approximately  $14.2 million.  Prepayment  speeds are
highly  impacted by changes in interest  rates,  as when interest  rates decline
there is a greater incentive for the homeowners to refinance their mortgages. In
2003,  we recorded a net  recovery  of $2.9  million.  During the quarter  ended
September  30,  2003,  we  recorded  a  direct  write-down  to the  value of the
servicing  asset  of  $5.0  million  as we  determined  the  likelihood  of  the
impairment recovery to be remote.  During 2004, based on our servicing valuation
model, we recorded a net recovery of $440 thousand. In addition, during 2004, we
determined  that  it  was  remote  that  $2.6  million  of  previously  recorded
impairment would be recovered, and thus recorded an additional direct write-down
to the value of the  servicing  asset for such amount.  All of these  impairment
charges and  recoveries  are highly  correlated to the changes in interest rates
and resultant  mortgage loan prepayment speeds that occurred during the periods.
Our  impairment  reserve  as of  December  31,  2004 was $3.4  million.  Further
decreases  in interest  rates,  or other  factors  that result in an increase in
anticipated future prepayment speeds, may cause additional impairment charges in
future years.

Brokerage, Consulting and Outsourcing Services

     Brokerage Services. We provide brokerage services through our subsidiaries,
Matrix Bancorp Trading and First Matrix.

     Matrix Bancorp  Trading.  Matrix Bancorp Trading operates as a full-service
mortgage  servicing  and  mortgage  loan  broker.  It is capable  of  analyzing,
packaging,  marketing and closing transactions  involving mortgage servicing and
loan portfolios and selected merger and  acquisition  transactions  for mortgage
banking entities.  Matrix Bancorp Trading promotes its services to all types and
sizes of market participants, thereby developing diverse relationships.

     Matrix  Bancorp  Trading  brokers and principals all types of loan products
with the majority of the loan products  centering on residential  mortgages.  In
most cases, Matrix Bancorp Trading acts as the intermediary  between the sellers
and buyers of the various loan products.

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

     We  believe  that the  client  relationships  developed  by Matrix  Bancorp
Trading through its national network of contacts with commercial banks, mortgage
companies,  savings  associations and other institutional  investors represent a
significant  competitive  advantage  and  form  the  basis  for  Matrix  Bancorp
Trading's  national market  presence.  These contacts also enable Matrix Bancorp
Trading to  identify  prospective  clients for our other  subsidiaries  and make
referrals when appropriate.  The overwhelming  majority of the loan acquisitions
completed by Matrix Bank are done through Matrix Bancorp  Trading.  See "Item 1.
Business--Consulting and Analytic Services."

     The sale and transfer of mortgage  servicing rights occurs in a market that
is inefficient  and often requires an  intermediary to match buyers and sellers.
Prices are unpublished and closely guarded by market  participants,  unlike most
other  major  financial  secondary  markets.  This lack of  pricing  information
complicates an already  difficult process of  differentiating  between servicing
product  types,  evaluating  regional,  economic  and  socioeconomic  trends and
predicting  the  impact  of  interest  rate  movements.  Due to its  significant
contacts,  reputation and market penetration,  Matrix Bancorp Trading has access
to information on the availability of mortgage servicing portfolios, which helps
it bring interested buyers and sellers together.  Due to the consolidation  that
has taken place in the mortgage banking  industry,  as well as the continued low
interest  rate  environment  experienced  in 2004  that  depressed  the value of
servicing,  the overall  market,  including  the number of buyers and sellers of
servicing,  further  compressed.  Although  higher in 2004, we have  experienced
continued  low  levels in both the  portfolios  brokered  and the  corresponding
revenue.  As interest  rates  increase,  and the level of mortgage  originations
decrease,  we would  expect  that the market  for bulk  servicing  trades  would
increase. If that occurs, we believe we are well positioned to take advantage of
the increased  brokerage  activity.

                                       14
<PAGE>
     Consulting and Analytic Services.  Matrix Bancorp Trading continues to make
significant  commitments  to  its  analytics  department,  which  has  developed
expertise  in  helping  companies  implement  and track  their  "mark-to-market"
valuations and analyses on servicing portfolios. Matrix Bancorp Trading utilizes
a nationally  recognized  valuation  model to fit its customers'  many different
needs and unique situations in performing  valuations and analyses. In addition,
Matrix Bancorp Trading has the infrastructure and management  information system
capabilities  necessary to undertake the complex analyses  required by SFAS 140.
Many of the companies affected by the implementation of SFAS 140 have outsourced
this function to a third party rather than  dedicate the resources  necessary to
develop systems for and perform their own SFAS 140 valuations.

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

     We believe that the services offered by the analytics  department of Matrix
Bancorp  Trading  provide us with a  competitive  advantage  in  attracting  and
retaining clients because we are able to offer financial  services companies and
financial institutions a more complete package of services than our competitors.
Because of our analytics capabilities,  we are able to attract brokerage clients
that we may not  otherwise  be able to  attract.  In  addition,  Matrix  Bancorp
Trading is able to refer clients to Matrix Bank for bulk loan acquisitions.  The
full range of services  offered by Matrix  Bancorp  Trading  and its  affiliates
further strengthens Matrix Bancorp Trading's client relationships.

     First Matrix Investment  Services Corp. First Matrix is registered with the
NASD as a fully  disclosed  broker-dealer,  headquartered  in Denver,  Colorado.
First  Matrix  primarily  provides  brokerage  services  through SBA pooling and
structured finance  transactions.  Through the SBA groups in Memphis and Denver,
First Matrix has  diversified its client base and its product mix. First Matrix,
acting as agent for Matrix  Bank,  purchases  the  guaranteed  portion of SBA 7A
loans  from bank and  non-bank  lenders  around  the  country.  These  loans are
assembled and later pooled into SBA securities which are sold into the secondary
market to  institutional  and  sophisticated  investors.  This trading  strategy
enables Matrix Bank to earn attractive yields on high credit quality assets with
reduced  exposure to the  traditional  risks  associated  with  investing in any
commercial loan assets.

     Real Estate Management and Disposition  Services.  Prior to the sale of the
majority  interest in Matrix Asset Management  Corporation as discussed in "Item
1. Business--Sale of Majority Interest in Matrix Asset Management  Corporation",
we provided  real  estate  management  and  disposition  services on  foreclosed
properties  owned  by  financial  services  companies,  mortgage  companies  and
financial  institutions  across the United  States,  including  Matrix  Bank and
Matrix  Financial.  After the sale of our  majority  interest,  we retained  the
brokerage  division,  MTXC Realty.  MTXC Realty  provides real estate  brokerage
services to clients  either in the Denver market or  institutional  clients that
have foreclosed residential real estate in the Denver market,  including the new
company formed with the sale of our majority interest in Matrix Asset Management
Corporation  noted above. As of December 31, 2004, MTXC Realty had approximately
300 properties under listing.

     School  Services.  In addition to  providing  limited  financing to charter
schools as mentioned in "Lending  Activities  - Commercial  and Other  Lending,"
ABS,  operating  under the name The GEO Group,  also  provides a wide variety of
outsourced business and consulting  services to charter schools.  The most basic
services  offered by ABS include fund accounting,  cash  management,  budgeting,
governmental   reporting   and  payroll   and   accounts   payable   processing.
Additionally,  we consult with and offer programs to charter  schools  including
facility and safety management, student enrollment reporting, technology, policy
development and grant administration.

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

                                       15
<PAGE>
Self-Directed Trust and Custody Activities

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

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

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

     During  2002,  Matrix  Bank  expanded  the  variety  and depth of its trust
services, primarily by partnering with Matrix Settlement & Clearance Services in
providing trust and custodial  services to over 50 nationally  recognized  third
party  administrators,  broker-dealers  and banks.  Trust and custodial services
range from accepting qualified  retirement plan contributions,  facilitating the
trading and settlement of plan  securities,  making  distributions to individual
plan  participants,  to withholding state and federal taxes and producing annual
tax  forms.  As  discussed  in "Item 1.  Business--Sale  of  Interest  in Matrix
Settlement and Clearance  Services,  LLC," during the fourth quarter of 2004, we
sold our interest in Matrix Settlement and Clearance Services,  and have agreed,
pending customary closing conditions, including receipt of applicable regulatory
approvals and other  necessary  third party consents and approvals,  to sell the
assets of the trust  operations of Matrix Bank,  which we  anticipate  occurring
prior to the end of 2005. The clearing and custody  services  provided by Matrix
Settlement  and Clearance  Services and Matrix Bank generate  deposits and trust
and  custodial  fees for Matrix Bank.  As part of the sale  agreement,  deposits
continue to be maintained at Matrix Bank by the new company.

     At December 31, 2004,  Sterling Trust had 40,690 accounts with assets under
administration of approximately $2.9 billion, and the trust department of Matrix
Bank had 19,538 accounts with assets under administration of approximately $15.3
billion.

Competition

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

     We believe that Matrix Bank's most direct  competition  for deposits  comes
from other financial  institutions.  Institutional customers distinguish between
market  participants based both on price and the quality of service.  We believe
that we have the systems and  processes  in place to compete for and retain such
relationships.

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

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

                                       16
<PAGE>
     In  originating  mortgage  loans,  Matrix  Financial  and Matrix  Bank have
historically  competed mainly with other mortgage companies,  finance companies,
savings  associations and commercial banks.  Customers  distinguish among market
participants  based  primarily on price and, to a lesser extent,  the quality of
customer service and name recognition.  With the sale of the Production Platform
in 2003, we agreed with the Buyer not to compete in certain respects.  We do not
believe,  however,  that this stipulation has had any substantial  impact on the
ability of Matrix Bank to effectively  serve its local market or customers.  See
"Item 1. Business--Discontinued Operations," for further details.

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

     MTXC Realty competes against other real estate  brokerage  companies in the
local market. The affiliation with Matrix Asset Management,  LLC provides market
opportunities that other competitors do not have. See "Item 1. Business--Sale of
Majority Interest in Matrix Asset Management Corporation," for further details.

     ABS competes with other  outsourcing  companies and educational  management
organizations, as well as schools that prefer to perform the services offered by
ABS in-house.

Employees

     At December 31, 2004,  the Company had 302  employees.  We believe that our
relations  with  our  employees  are  good.  The  Company  is not  party  to any
collective bargaining agreement.

Regulation and Supervision

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

     Aspects of the Company's public disclosure, corporate governance principles
and internal control  environment are subject to the  Sarbanes-Oxley Act of 2002
and  related  regulations  and rules of the SEC and the  NASDAQ.  Any  change in
applicable laws,  regulations or regulatory  policies may have a material effect
on our business, operations and prospects.

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

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

                                       17
<PAGE>
     The Change in Bank Control Act, as amended, provides that no person, acting
directly or indirectly or through or in concert with one or more other  persons,
may acquire  control of a savings  association  unless the OTS has been given 60
days prior  written  notice.  The Home Owners' Loan Act provides that no company
may acquire control of a savings  association  without the prior approval of the
OTS. Any company that acquires  such control  becomes a savings and loan holding
company subject to registration, examination and regulation by the OTS. Pursuant
to federal  regulations,  control of a savings  association  (which includes its
holding  company) is  conclusively  deemed to have been acquired by, among other
things,  the  acquisition  of more than 25% of any class of voting  stock of the
association  or the  ability  to  control  the  election  of a  majority  of the
directors  of the  association.  Moreover,  control  is  presumed  to have  been
acquired,  subject to  rebuttal,  upon the  acquisition  of more than 10% of any
class of  voting  stock,  but less  than 25% of any  class of stock of a savings
association,  where certain  enumerated  control factors are also present in the
acquisition.  The OTS may prohibit an  acquisition of control if it would result
in a monopoly or substantially  lessen  competition,  the financial condition of
the  acquiring   person  might   jeopardize  the  financial   stability  of  the
association, or the competence,  experience or integrity of the acquiring person
indicates  that it would not be in the interest of the  depositors or the public
to permit the acquisition of control by such person.

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

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

     The USA  PATRIOT  Act was signed  into law on  October  26,  2001.  The USA
PATRIOT Act gives the federal government new powers to address terrorist threats
through enhanced  domestic  security  measures,  expanded  surveillance  powers,
increased information sharing and broadened anti-money laundering  requirements.
The USA PATRIOT Act also  requires  the  federal  banking  agencies to take into
consideration  the effectiveness of controls designed to combat money laundering
activities  in  determining  whether  to  approve a merger or other  acquisition
application of a member  institution.  Accordingly,  if we engage in a merger or
other  acquisition,  our controls  designed to combat money  laundering would be
considered as part of the application  process.  We have  established  policies,
procedures and systems designed to comply with these regulations.

     The  Sarbanes-Oxley  Act of 2002 was signed into law on July 30, 2002.  The
Sarbanes-Oxley  Act  of  2002  is a law  that  addresses,  among  other  issues,
corporate  governance,  auditing and  accounting,  executive  compensation,  and
enhanced and timely disclosure of corporate information.  As directed by Section
302(a) of Sarbanes-Oxley  Act of 2002, the Company's Co-Chief Executive Officers
and Chief  Financial  Officer are each  required to certify  that the  Company's
quarterly and annual  reports do not contain any untrue  statement of a material
fact.  The rules have several  requirements,  including  having  these  officers
certify that: they are responsible for  establishing,  maintaining and regularly
evaluating the  effectiveness of our internal  controls;  they have made certain
disclosures  to our auditors  and the audit  committee of the Board of Directors
about our internal controls; and they have included information in our quarterly
and  annual  reports  about  their   evaluation  and  whether  there  have  been
significant  changes in our  internal  controls or in other  factors  that could
significantly affect internal controls subsequent to the evaluation.  We will be
subject  to  further  reporting  and  audit  requirements  with the year  ending
December 31, 2006 under the  requirements  of  Sarbanes-Oxley.  We have existing
policies,  procedures and systems designed to comply with these regulations, and
are further  enhancing and documenting such policies,  procedures and systems to
ensure continued compliance with these regulations.

                                       18
<PAGE>
     The Company maintains an Internet website located at  www.matrixbancorp.com
on which,  among other  things,  the Company  makes  available,  free of charge,
various  reports that it files with or furnishes to the  Securities and Exchange
Commission,  including its Annual Report of Form 10-K, quarterly reports on Form
10-Q,  and current  reports on Form 8-K. The Company has also made  available on
its  website its Audit,  Compensation  and  Nominating  Committee  charters  and
corporate  governance  guidelines.  These reports are made  available as soon as
reasonably  practicable  after these  reports are filed with or furnished to the
Securities and Exchange Commission.

     Federal  Savings  Bank  Operations.  Matrix  Bank is subject  to  extensive
regulation,  examination  and  supervision  by the OTS, as its  primary  federal
regulator,   and  potentially  by  the  Federal  Deposit  Insurance  Corporation
("FDIC"),  which insures its deposits up to applicable  limits.  Such regulation
and supervision:

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

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

     Transactions  with Affiliates.  Sections 23A and 23B of the Federal Reserve
Act and its implementing  regulations,  govern  transactions  between depository
institutions  and their  affiliates.  These  provisions  are made  applicable to
savings  associations,  such as Matrix Bank,  by the Home Owners' Loan Act. In a
holding  company  context,  in general,  the parent holding company of a savings
association  and any companies that are controlled by the parent holding company
are affiliates of the savings  association.  However, the OTS has the discretion
to treat  subsidiaries  of savings  associations as affiliates on a case-by-case
basis.  Section  23A limits the extent to which the savings  association  or its
subsidiaries  may  engage in certain  transactions  with its  affiliates.  These
transactions  include,  among  other  things,  the  making  of  loans  or  other
extensions  of  credit  to an  affiliate  and the  purchase  of  assets  from an
affiliate. Generally, these transactions between the savings association and any
one affiliate cannot exceed 10% of the savings  association's  capital stock and
surplus,  and these transactions  between the savings institution and all of its
affiliates  cannot,  in the aggregate,  exceed 20% of the savings  institution's
capital  stock and surplus.  Section 23A also  establishes  specific  collateral
requirements  for  loans  or  extensions  of  credit  to an  affiliate,  and for
guarantees or acceptances on letters of credit issued on behalf of an affiliate.
Applicable  regulations  prohibit  a savings  association  from  lending  to any
affiliate  engaged in activities not  permissible  for a bank holding company or
for the purpose of acquiring  the  securities  of most  affiliates.  Section 23B
requires  that  transactions  covered by  Section  23A and a broad list of other
specified  transactions be on terms and under  circumstances  substantially  the
same, or no less  favorable to the savings  association  or its  subsidiary,  as
similar  transactions  with  non-affiliates.  In addition to the restrictions on
transactions  with  affiliates  that Sections 23A and 23B of the Federal Reserve
Act impose on depository institutions, the regulations of the OTS also generally
prohibit a savings association from purchasing or investing in securities issued
by an affiliate. Matrix Bank engages in transactions with its affiliates,  which
are structured with the intent of complying with these rules.

                                       19
<PAGE>
     Insurance  of Accounts  and  Regulation  by the Federal  Deposit  Insurance
Corporation.  Matrix Bank is a member of the Savings Association Insurance Fund,
which is administered  by the FDIC. The deposits of Matrix Bank are insured,  up
to $100  thousand,  per depositor by the FDIC.  This  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 institutions  insured by the FDIC. 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 insurance  fund. 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 FDIC's  deposit  insurance  premiums are assessed  through a risk-based
system under which all insured  depository  institutions  are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well  capitalized,  as defined  below,  and  considered  healthy  pay the lowest
premium while institutions that are less than adequately capitalized, as defined
below,  and  considered  of  substantial  supervisory  concern  pay the  highest
premium.  Risk classification of all insured depository  institutions is made by
the FDIC for each semi-annual assessment period.

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

     Since January 1, 1997, the premium schedule for insured institutions in the
Bank Insurance Fund and the Savings Association Insurance Fund has ranged from 0
to 27  basis  points.  However,  Savings  Association  Insurance  Fund  and Bank
Insurance Fund insured institutions are required to pay a Financing  Corporation
or "FICO"  assessment,  in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s.  For the quarter ended December 31, 2004, the FICO
assessment for both Savings  Association  Insurance Fund and Bank Insurance Fund
insured  institutions  was equal to 1.46 basis  points for each $100 in domestic
deposits maintained at the institution.  These assessment, which will be revised
based upon the level of Savings  Association  Insurance  Fund and Bank Insurance
Fund deposits, will continue until the bonds mature in the year 2019.

     Brokered Deposits.  Under the FDIC regulations governing brokered deposits,
well capitalized associations,  such as Matrix Bank, are not subject to brokered
deposit limitations,  while adequately  capitalized  associations are subject to
certain brokered deposit limitations and  undercapitalized  associations may not
accept brokered  deposits.  At December 31, 2004, Matrix Bank had $247.9 million
of  brokered  deposits.  In the event  Matrix  Bank is not  permitted  to accept
brokered  deposits in the future,  it would have to find replacement  sources of
funding. It is possible that such alternatives,  if available, would result in a
higher cost of funds.

     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:

     o    "well  capitalized" if it has a total risk-based  capital ratio of 10%
          or greater and a leverage ratio of 5% or greater;

     o    "adequately capitalized" if it has a total risk-based capital ratio of
          8% or greater,  a Tier I risk-based capital ratio of 4% or greater and
          generally a leverage ratio of 4% or greater;

     o    "undercapitalized"  if it has a total risk-based capital ratio of less
          than 8%,  a Tier I  risk-based  capital  ratio  of less  than  4%,  or
          generally a leverage ratio of less than 4%;

     o    "significantly  undercapitalized" if it has a total risk-based capital
          ratio of less than 6%, a Tier I risk-based  capital ratio of less than
          3%, or a leverage ratio of less than 3%; and

     o    "critically undercapitalized" if it has a ratio of tangible equity (as
          defined in the  regulations)  to total assets that is equal to or less
          than 2%.

     As of December 31, 2004, Matrix Bank was a "well capitalized" institution.

                                       20
<PAGE>
     "Undercapitalized" institutions must adhere to growth, capital distribution
and  dividend  and  other  limitations  and are  required  to  submit a  capital
restoration  plan with the OTS  within  45 days  after an  association  receives
notice of such undercapitalization.  A savings institution's compliance with its
capital  restoration  plan is required  to be  guaranteed  by any  company  that
controls the "undercapitalized"  institution in an amount equal to the lesser of
5% of total  assets when deemed  "undercapitalized"  or the amount  necessary to
achieve the status of "adequately capitalized." If an "undercapitalized" savings
institution  fails to submit  an  acceptable  plan,  it is  treated  as if it is
"significantly  undercapitalized." "Significantly undercapitalized" institutions
must comply with one or more of a number of additional  restrictions,  including
an order  by the 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  to the  parent  holding  company.  "Critically  undercapitalized"
institutions  must comply with  additional  sanctions,  including,  subject to a
narrow exception,  the appointment of a receiver or conservator  within 270 days
after it obtains this status.

     The following table indicates Matrix Bank's regulatory capital ratios:
<TABLE>
<CAPTION>
                                                                                As of December 31, 2004
                                                                         ------------------------------------
                                                                               Core            Risk-Based
                                                                              Capital           Capital
                                                                         ------------------ -----------------
                                                                                (Dollars in thousands)
<S>                                                                      <C>                <C>
    Shareholder's equity/GAAP capital                                    $     117,741      $     117,741
    Disallowed assets                                                           (2,539)            (2,539)
    Unrealized gain on available for sale securities                              (126)              (126)
    Additional capital items:
       General valuation allowances                                                  -              7,356
    Regulatory capital as reported to the OTS                                  115,076            122,432
    Minimum capital requirement as reported to the OTS                          72,796             75,456
                                                                         ------------------ -----------------
    Regulatory capital--excess                                           $      42,280      $      46,976
                                                                         ================== =================
    Capital ratios                                                                6.32%             12.98%
    Well capitalized requirement                                                  5.00%             10.00%
</TABLE>

     FHLBank  System.  Matrix  Bank is a member  of the  FHLBank  system,  which
consists of 12 regional FHLBanks. The FHLBank provides a central credit facility
primarily for member  associations  and  administers  the home financing  credit
function  of  savings  associations.  The  FHLBank  advances  must be secured by
specified types of collateral.  The FHLBank funds its operations  primarily from
proceeds  derived  from  the sale of  consolidated  obligations  of the  FHLBank
system.  Matrix Bank, as a member of the FHLBank  system,  must acquire and hold
shares of  capital  stock in its  regional  FHLBank  in an  amount  equal to the
greater  of 1% of the  aggregate  principal  amount  of its  unpaid  residential
mortgage loans and similar  obligations  at the beginning of each year,  0.3% of
total assets, or 5% of its advances  ("borrowings")  from the FHLBank.  Prior to
relocating  its  domicile,  Matrix  Bank was a member of the  FHLBank of Dallas.
Effective March 25, 2002,  Matrix Bank became a member of the FHLBank of Topeka.
Matrix Bank was in compliance with the requirement  discussed with an investment
in FHLBank of Dallas and FHLBank of Topeka stock at December  31, 2004  totaling
$33.5 million.

     Federal Reserve System.  The Federal Reserve Board regulations  require all
depository  institutions to maintain  noninterest-earning  reserves at specified
levels against their  transaction  accounts  (primarily NOW and regular checking
accounts).  At December 31, 2004, Matrix Bank was in compliance with the Federal
Reserve Board's reserve requirements. Savings associations, such as Matrix Bank,
are authorized to borrow from the Federal Reserve Bank "discount window". Matrix
Bank is deemed by the Federal Reserve to be generally sound and thus is eligible
to obtain  primary  credit from its Federal  Reserve  Bank.  Generally,  primary
credit is extended on a very short-term basis to meet the liquidity needs of the
institution.  Loans must be secured by acceptable collateral and carry a rate of
interest of 100 basis points above the Federal Open Market  Committee's  federal
funds target rate.

     Check Clearing for the 21st Century Act. This Act,  which became  effective
in October 2003, gives the same legal weight to a digital image of a check as to
the actual check.  Matrix Bank is processing  customer checks in compliance with
the requirements of this Act.

                                       21
<PAGE>
     Mortgage Banking Operations.  Our mortgage banking operations are conducted
through Matrix Financial.  The rules and regulations  applicable to our mortgage
banking operations establish  underwriting  guidelines that, among other things,
include  anti-discrimination  provisions,  require  provisions for  inspections,
appraisals  and credit  reports on  prospective  borrowers  and fix maximum loan
amounts.  Moreover,  we  are  required  annually  to  submit  audited  financial
statements of Matrix Bank, the parent of Matrix  Financial,  to the HUD,  Fannie
Mae,  Freddie Mac and Ginnie Mae, and each regulatory  entity  maintains its own
financial guidelines for determining net worth and eligibility requirements. Our
operations are also subject to examination by the HUD,  Fannie Mae,  Freddie Mac
and Ginnie Mae at any time to assure compliance with the applicable regulations,
policies and procedures.  Mortgage loan  origination  activities are subject to,
among other laws, the Equal Credit Opportunity Act, the Federal Truth-in-Lending
Act and the Real Estate  Settlement  Procedures Act of 1974, and the regulations
promulgated  under  these laws that  prohibit  discrimination  and  require  the
disclosure of certain basic  information to mortgagors  concerning  credit terms
and settlement costs.  Moreover,  the OTS, as primary regulatory  authority over
Matrix Bank (the parent of Matrix  Financial),  examines  our  mortgage  banking
operations as well. See discussion of the sale of the production platform, which
was the  bulk of our  mortgage  banking  operations  as  discussed  in  "Item 1.
Business--Discontinued Operations."

     Regulation of Sterling  Trust Company.  Sterling  Trust provides  custodial
services and directed,  non-discretionary  trustee  services.  Sterling Trust is
chartered under the laws of the State of Texas,  and as a Texas trust company is
subject to supervision,  regulation and  examination by the Texas  Department of
Banking. Under applicable law, a Texas trust company, such as Sterling Trust, is
subject to virtually  all  provisions  of the Texas  Banking Act as if the trust
company were a state chartered bank. The activities of a Texas trust company are
limited  by  applicable  law  generally  to  acting  as  a  trustee,   executor,
administrator,  guardian or agent for the  performance of any lawful act, and to
lend and accumulate money when authorized  under applicable law. In addition,  a
Texas  trust  company  with  capital of $1.0  million or more,  such as Sterling
Trust, has the power to:

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

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

     Limitation on Capital  Distributions.  The Texas  Finance Code  prohibits a
Texas trust company from reducing its outstanding  capital and certified surplus
through  redemption  or other  capital  distribution  without the prior  written
approval of the Texas Banking Commissioner. Moreover, Sterling Trust did not pay
cash  dividends  in 2004 and  anticipates  that it will  not pay cash  dividends
during 2005.

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

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

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

     Enforcement.  Under  applicable  provisions of the Texas Finance Code,  the
Texas Banking  Commissioner has the power to issue enforcement actions against a
Texas  trust  company or any  officer,  employee  or  director  of a Texas trust
company. In addition, in certain  circumstances,  the Texas Banking Commissioner

                                       22
<PAGE>
may remove a present or former  officer,  director  or employee of a Texas trust
company  from office or  employment,  and may  prohibit a  shareholder  or other
persons  participating  in the  affairs  of a  Texas  trust  company  from  such
participation.  The Texas Banking Commissioner has the authority to assess civil
penalties of up to $500 per day against a Texas trust company (penalties against
individuals  may be higher) for  violations  of a cease and  desist,  removal or
prohibition order. The Texas Banking Commissioner may also refer violations of a
cease and desist order to the attorney general for enforcement by injunction.

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

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

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

     Capital  Requirements.  Applicable  law  generally  requires a Texas  trust
company to have and maintain minimum  restricted capital of at least $1 million.
Sterling Trust was in compliance with the requirement at December 31, 2004.

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

     Regulation  of First Matrix  Investment  Services  Corp.  First Matrix is a
registered  broker-dealer  subsidiary  that is  subject  to the  Securities  and
Exchange  Commission's  net capital  rule,  Rule 15c3-1,  promulgated  under the
Securities Exchange Act of 1934. The net capital rule is designed to measure the
general  financial  condition  and  liquidity  of a  broker-dealer.  Net capital
generally  is the net worth of a broker or dealer  (assets  minus  liabilities),
less  deductions  for certain  types of assets.  If a firm fails to maintain the
required  net  capital,  it  may be  subject  to  suspension  or  revocation  of
registration  by the  Securities  and  Exchange  Commission  and  suspension  or
expulsion by the NASD, and could ultimately lead to the firm's liquidation.  The
net capital  rule also limits the ability of  broker-dealers  to transfer  large
amounts of capital to parent  companies  and other  affiliates.  At December 31,
2004, First Matrix was in compliance with these requirements with net capital of
$1.1 million, which was approximately $1.0 million in excess of its required net
capital of $30 thousand.

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

                                       23
<PAGE>
Item 2.  Properties

     We believe that all of our present  facilities are adequate for our current
needs and that additional  space is available for future expansion on acceptable
terms.  The following table sets forth certain  information  concerning the real
estate that we own or lease:

<TABLE>
<CAPTION>


                                                                                                              Monthly Rent
                                                                                                              or Mortgage
      Location           Square Feet/Acres             Owned/Leased                      Occupant             Payment
----------------------   ------------------  ----------------------------------  -------------------------    ---------------
<S>                      <C>                 <C>                                 <C>                          <C>
Denver, CO           (1)        182,623      Owned                               Matrix Bancorp and
                                                                                 various of its subsidiaries          N/A
Phoenix, AZ          (2)         62,771      Leased through February 28, 2007    Matrix Financial and ABS     $    62,771
Phoenix, AZ                      17,421      Leased through August 31, 2007      Matrix Financial             $     8,365
Scottsdale, AZ                      300      Leased through January 1, 2005      Matrix Bank                  $       950
Highlands Ranch, CO                  18      Leased through June 30, 2005        Matrix Bancorp               $     2,400
Las Cruces, NM                    1,576      Leased through April 30, 2005       Matrix Bank                  $     1,708
Waco, TX                         11,294      Leased through June 30, 2006        Sterling Trust               $    13,553
Waco, TX                            928      Leased through January 31, 2005     Sterling Trust               $     1,021
Waco, TX                          1,204      Leased through December 31, 2006    Sterling Trust               $     1,385
Memphis, TN                       3,305      Leased through September 7, 2006    First Matrix and Matrix
                                                                                 Bancorp Trading              $     5,731
Houston, TX                      71,437      Owned                               ABS                                  N/A
Mesa, AZ                    6.729 Acres      Owned                               ABS                                  N/A
Mesa, AZ                          7,616      Owned                               ABS                                  N/A
Springerville, AZ                12,904      Owned                               ABS                                  N/A
Lakeland, FL                      8,521      Owned                               ABS                                  N/A
St. Louis, MO                     6,144      Leased through June 30, 2012        ABS                          $    12,500
St. Louis, MO                     5,500      Owned                               ABS                                  N/A
St. Louis, MO                    42,000      Owned                               ABS                                  N/A
Flower Mound, TX                 27,000      Owned                               ABS                                  N/A
Flower Mound, TX           29.162 Acres      Owned                               ABS                                  N/A
------------------
<FN>
          (1)  Of this 182,623  square feet,  approximately  55,754 square feet are leased to the Company and certain of
               its  subsidiaries.  Substantially  all of the remaining space is rented to unaffiliated  third parties at
               market prices.
          (2)  Of this 62,771  square fee,  approximately  29,722  square feet are leased to Matrix  Financial  and ABS.
               Substantially  all of the  remaining  space is  subleased  to the buyer of the  production  platform,  an
               unaffiliated third party. See "Item 1. Business--Discontinued Operations."
</FN>
</TABLE>

Item 3.  Legal Proceedings

     General.  We are from time to time party to various litigation  matters, in
most cases involving ordinary and routine claims incidental to our business.  We
accrue  for  contingent  liabilities  with  respect  to  litigation  matters  in
accordance with the requirements of SFAS No. 5, "Accounting for  Contingencies",
which  generally  requires the Company to accrue a loss for a litigation  matter
involving a  contingent  liability if the loss is probable and the amount of the
loss is reasonably  estimable.  In order to determine whether the two conditions
necessary  for  accrual  are  met,  management  necessarily  makes a  number  of
judgments and  assumptions.  Because the outcome of most  litigation  matters is
inherently  uncertain,  the  Company  will  generally  only  accrue a loss for a
pending  litigation  matter  if, for  example,  the  parties to the matter  have
entered into definitive settlement agreements or a final judgment adverse to the
Company has been entered.

     In many cases, these settlements or final judgments are not material to the
consolidated  financial  position,  results of  operations  or cash flows of the
Company.  Nevertheless,  an adverse  decision in certain  matters,  as described
below,  may  have a  material,  adverse  impact  on our  consolidated  financial
position, results of operations or cash flows.

     Matrix Bancorp.  Matrix Bancorp,  The Vintage Group, Inc., Vintage Delaware
Holdings,  Inc.,  Matrix Bank,  and Guy A. Gibson,  a former  director of Matrix
Bancorp,  Richard V. Schmitz,  currently Co-Chief Executive Officer and Chairman
of the Board of Matrix  Bancorp,  and D. Mark Spencer,  currently the President,
Co-Chief  Executive  Officer and a director of Matrix  Bancorp,  have been named
defendants in an action filed in November 2000 styled Roderick Adderley,  et al.
v. Guy A. Gibson, et al. pending in the District Court of Tarrant County, Texas,
seeking  to impose  joint and  several  liability  on these  defendants  for the

                                       24
<PAGE>
judgment  against  Sterling  Trust  in  Roderick  Adderley,  et al.  v.  Advance
Financial  Services,  Inc., et al. ("Adderley I") See "--Sterling  Trust" below.
The plaintiffs have asserted  various theories of liability,  including  control
person  theories of  liability  under the Texas  Securities  Act and  fraudulent
transfer  theories of  liability.  The  defendants  believe  they have  adequate
defenses and intend to vigorously defend this action. The parties have agreed to
abate the action  pending  the outcome of  Adderley  I. The  ultimate  legal and
financial  liability of the Company,  if any, in this matter cannot be estimated
with certainty at this time.

     Matrix Bancorp,  Matrix Bank, The Vintage Group,  Inc. and Vintage Delaware
Holdings,  Inc. have also been named as defendants in the Munoz matter described
below. See "--Sterling Trust."

     Matrix Bank.  A former  customer of Matrix Bank is a debtor in a Chapter 11
proceeding under the Bankruptcy Code styled In re Apponline.com, Inc. and Island
Mortgage  Network,  Inc.  pending in the United States  Bankruptcy Court for the
Eastern  District of New York. Prior to the bankruptcy  filing,  Matrix Bank had
provided the customer, Island Mortgage Network, Inc., with a purchase/repurchase
facility  under which Matrix Bank purchased  residential  mortgage  loans,  with
Island Mortgage having the right or obligation to repurchase such mortgage loans
within a specified period of time.  Matrix Bank has initiated an adversary claim
in the  Bankruptcy  Court against the State Bank of Long Island  ("State  Bank")
seeking  to recover  losses  sustained  by Matrix  Bank as a result of the fraud
perpetrated  by  Island  Mortgage.  State  Bank,  among  other  things,  was the
depository  bank for Island  Mortgage.  Matrix Bank also  believes that any loss
sustained as a result of its dealings with Island  Mortgage are insured.  Matrix
Bank cannot  accurately  assess at this time  whether and to what extent it will
receive  compensation  from any source for  losses  incurred  as a result of its
relationship with Island Mortgage. In addition,  the Trustee for Island Mortgage
initiated  an  avoidable  preference  action  against  Matrix  Bank  relating to
approximately  $6.1 million that was returned to Matrix Bank in connection  with
mortgage  loans slated to be purchased by Matrix Bank but which never closed and
funded. During the fourth quarter of 2004, Matrix Bank reached an agreement with
the estate of Island for approximately  $3.6 million to settle all of the claims
of the Trustee relating to this matter,  which is included in other  liabilities
at December 31, 2004. The settlement was paid in January 2005. This matter, with
regard to the Trustee of Island Mortgage, is now closed.

     Sterling  Trust.  Sterling  Trust has been named a  defendant  in an action
filed July 1999 styled Roderick Adderley, et al. v. Advanced Financial Services,
Inc.,  et al.  that was tried in Tarrant  County,  Texas  district  court in the
spring of 2000.  The jury  returned  a verdict  adverse to  Sterling  Trust with
respect to two of 12  theories of  liability  posed by the  plaintiffs,  and the
court has  signed a judgment  for  certain  of the  plaintiffs  in the amount of
approximately  $6.4  million,   plus  post-judgment   interest  and  conditional
attorneys'  fees for the  plaintiffs  in connection  with any appeals.  Sterling
Trust  appealed the judgment to the Court of Appeals for the Second  District of
Texas (Fort Worth). On July 31, 2003, the Court of Appeals affirmed and reversed
in part the jury  verdict.  The Court of Appeals  affirmed  the jury's award for
actual damages of approximately $6.2 million,  plus  post-judgment  interest and
conditional   attorneys'  fees  for  the  appeals  (currently  estimated  to  be
approximately $3.6 million), but denied the punitive award of approximately $250
thousand. Sterling Trust appealed to the Supreme Court of Texas, and the Supreme
Court of Texas has agreed to hear the appeal.  Oral  arguments  were held before
the Supreme  Court of Texas on September  29,  2004,  and the case is awaiting a
decision  from the Court.  Notwithstanding  the fact that the  Supreme  Court of
Texas has taken this appeal by Sterling  Trust,  no assurances can be given that
the appeal will be  successful or that the Supreme Court of Texas will render an
opinion favorable to Sterling Trust. Despite the fact that a final judgment from
the trial court and the  intermediate  appellate  court has been entered against
Sterling in this matter,  management has determined that the loss in this matter
is not probable within FAS 5;  accordingly,  no accrual for loss with respect to
this matter has been  recorded in the  consolidated  financial  statements.  The
ultimate  legal and financial  liability of the Company,  if any, in this matter
cannot be estimated with certainty at this time.

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

                                       25
<PAGE>
financial  liability of the Company,  if any, in this matter cannot be estimated
with certainty at this time.

     Sterling Trust,  Matrix Bancorp,  Matrix Bank, The Vintage Group,  Inc. and
Vintage Delaware  Holdings,  Inc. have been named a defendant in an action filed
in December 2001 styled Heraclio A. Munoz, et al. v. Sterling Trust Company, et.
al. that is pending in Superior Court of the State of California.  The complaint
seeks class action status,  requests  unspecified  damages and alleges negligent
misrepresentation,  breach of fiduciary  duty and breach of written  contract on
the part of Sterling  Trust.  In November 2004, the Court certified two classes,
one consisting of California  plaintiffs  alleging  breach of fiduciary duty and
second class  consisting of plaintiffs  nationwide  alleging breach of contract.
The Company  believes it has  meritorious  defenses and is defending  the matter
vigorously.  The ultimate legal and financial  liability of the Company, if any,
in this matter cannot be estimated with certainty at this time.

     Matrix  Financial.  Matrix  Financial  has been named as a defendant  in an
arbitration  action  filed on September  17, 2003 with the American  Arbitration
Association  styled  Veteran  Home  Loans,  Inc. v.  Matrix  Financial  Services
Corporation.  The complaint alleges that Matrix Financial underpaid Veteran Home
Loans for  services  provided  to Matrix  Financial  by  Veteran  Home  Loans in
connection with its assistance in originating  mortgage loans, and seeks general
damages  for breach of  contract.  In  February  2005,  we agreed to settle this
matter. In consideration of a payment of $85 thousand by Matrix  Financial,  the
parties exchanged mutual releases and dismissed the arbitration.  This matter is
now closed.

     Matrix Financial was named in March 2004 as a defendant in a putative class
action lawsuit styled Monica Thigpen v. Matrix  Financial  Services  Corporation
filed in the  United  States  Bankruptcy  Court  for the  Southern  District  of
Alabama.  The plaintiff claims that Matrix Financial filed an improper and false
affidavit  in  connection  with  plaintiff's  Chapter 13  bankruptcy  proceeding
because the signature page of the affidavit was executed separate and apart from
the other pages,  and has asked the Court to award the plaintiff actual damages,
punitive damages,  injunctive relief, attorney's fees and other relief as may be
appropriate. Discovery is on-going. Matrix Financial believes it has meritorious
defenses and intends to defend this action  vigorously.  The ultimate  legal and
financial  liability of the Company,  if any, in this matter cannot be estimated
with certainty at this point.

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, 2004.

                                     PART II

Item 5. Market for Registrant's  Common Equity,  Related Stockholder Matters and
Issuer Purchases of Equity Securities

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

<TABLE>
<CAPTION>

                                                          Market Price
                                                  ----------------------------
        Quarter Ended:                                 High            Low
                                                  ------------    ------------
<S>     <C>  <C>                                  <C>             <C>
             December 31, 2004                    $     13.00     $     11.52
             September 30, 2004                         13.91            9.95
             June 30, 2004                              12.49           10.75
             March 31, 2004                             11.70            8.91

             December 31, 2003                    $      9.32     $      8.01
             September 30, 2003                         10.35            8.79
             June 30, 2003                              10.24            8.60
             March 31, 2003                              9.59            8.00
</TABLE>

     On March 10,  2005,  the closing  price of our common  stock was $12.61 per
share. Also, as of that date, the approximate number of holders of record of our
common  stock was 35. This number  does not include  beneficial  owners who hold
their shares in a depository trust in "street" name.

                                       26
<PAGE>
     In May 2000, we announced the adoption of a Common Stock Repurchase Program
under which we were  authorized  to  repurchase up to $3.0 million of our common
stock.  In June 2002,  the Board of  Directors  of the  Company  authorized  the
repurchase  of up to an additional  $2.5 million of common  stock,  bringing the
total  authorization  to-date  under the  repurchase  program to $5.5 million of
common stock.  Under the program,  we have repurchased a total of 389,560 shares
through  December 31, 2004,  for a total purchase  price of  approximately  $3.2
million.  Prior  to  acquiring  any  additional  stock,  we would  announce  our
intention  to do so. No  executive  officer  or  director  participated  in this
repurchase.  Our ability to repurchase  stock is further  limited due to various
provisions in Matrix Bancorp's debt  instruments,  the most restrictive of which
is our bank stock loan.  Although we have no present plans to do so, we may seek
in the future  authorization  from the Board of Directors  of Matrix  Bancorp to
repurchase  additional  shares  of our  Common  Stock  under  the  Common  Stock
Repurchase  Program.  Any such additional  authorization will be consistent with
the  restrictions and limitations  under our debt covenants,  including those of
the bank stock loan described above.

     We have not paid any  dividends  on our equity  for the last  three  fiscal
years.  Any  future  determination  as to  dividend  policy  will be made at the
discretion  of the Board of Directors of the Company and will depend on a number
of factors,  including  our future  earnings,  capital  requirements,  financial
condition and future prospects and such other factors the Board of Directors may
deem relevant. Our ability to pay dividends is restricted by the same provisions
that  restrict  our  ability  to  repurchase  our  stock,  as  described  in the
immediately preceding paragraph. Additionally, Matrix Bancorp is prohibited from
paying  dividends  on its common stock if the  scheduled  payments on our junior
subordinated  debentures and trust preferred  securities have not been made. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of  Operations--Liquidity  and  Capital  Resources"  and  Notes 13 and 14 to the
consolidated  financial  statements  included  elsewhere in this  document.  The
ability of Sterling  Trust,  First  Matrix and Matrix Bank to pay  dividends  to
Matrix Bancorp may be restricted  due to certain  regulatory  requirements.  See
"Item 1. Business--Regulation and Supervision."

     The following table provides  information as of December 31, 2004 regarding
compensation plans (including individual compensation  arrangements) under which
equity  securities  of the  Company are  authorized  for  issuance.  For further
information, see Note 18 to the consolidated financial statements.
<TABLE>
<CAPTION>
                                               Number of securities                              Number of securities remaining
                                                to be issued upon        Weighted average      available for future issuance under
                                             exercise of outstanding     exercise price of         equity compensation plans
                                              options, warrants and     outstanding options,   (excluding securities reflected in
             Plan Category                           rights             warrants and rights                 column (a))
----------------------------------------------------------------------------------------------------------------------------------
                                                      (a)                     (b)                                (c)
<S>                                          <C>                        <C>                     <C>
Equity  compensation  plans approved by
security holders                         (1)        440,550                $ 10.94                             469,910
                                            =====================================================================================
<FN>
     (1) Column (a) includes the options  granted under the 1996 Stock Option Plan,  which amended and restated the Company's
Stock Option Plan adopted in 1995. Column (a) does not include  outstanding  options under the Company's Amended and Restated
Employee Stock  Purchase Plan (the "ESPP"),  which has a shareholder  approved  reserve of 250,000 shares that is included in
column  (c).  Under the ESPP,  each  eligible  employee  may  purchase a limited  number of shares of common  stock at annual
intervals each year at a purchase  price per share equal to 85% of the fair market value of the Company's  common stock as of
either the beginning or ending date of the annual purchase period.  Due to recent  accounting  pronouncements,  participation
under the ESPP has been suspended for the 2005 calendar year.
</FN>
</TABLE>

 Item 6.  Selected Financial Data

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

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

     Information  presented in this table is from continuing  operations,  which
excludes the financial results of the wholesale  production  platform for all of
the years  presented.  The  platform  was sold in 2003 as  discussed in "Item 1.
Business -  Discontinued  Operations."  The results from  continuing  operations
include, however, the operations of Matrix Asset Management Corporation in which
our majority  interest was sold in 2004 as discussed in "Item 1. Business - Sale
of Majority  Interest in Matrix Asset  Management  Corporation",  and the equity
earnings  generated by our joint  venture  investment in Matrix  Settlement  and
Clearance  Services,  LLC in which our interest was sold in 2004 as discussed in
"Item  1.  Business  - Sale of  Interest  in  Matrix  Settlement  and  Clearance
Services,  LLC". The results from continuing  operations as reflected herein are

                                       27
<PAGE>
not necessarily reflective of the financial results that might have occurred had
the  disposition  of the platform had actually  been  completed on the indicated
date, and are not indicative of any future results.
<TABLE>
<CAPTION>
                                                                                 As of and for the
                                                                              Year Ended December 31,
                                               ----------------------------------------------------------------------------------
                                                  2004             2003              2002             2001              2000
                                               ------------    -------------     -------------    --------------     ------------
                                                                (Dollars in thousands, except per share data)
<S>                                            <C>             <C>               <C>              <C>                <C>
Statement of Operations Data
Net interest income before provision for
 loan and valuation losses                   $     42,627    $       41,708    $      42,710    $        30,183    $      28,552
Provision for loan and valuation losses             3,269             3,641            2,821              2,980            3,840
                                               ------------    -------------     ------------     --------------     ------------
Net interest income after provision for
 loan and valuation losses                         39,358            38,067           39,889             27,203           24,712
                                               ------------    -------------     ------------     --------------     ------------
Noninterest income:
 Loan administration                               15,253            21,668           27,359             28,273           23,850
 Brokerage                                         10,629            10,873            8,105              4,815            8,119
 Trust services                                     7,853             6,781            5,345              4,036            4,923
 Real estate disposition services                   7,786             6,624            4,153              2,572            3,677
 Gain on sale of loans and securities               6,618            14,267            5,480              4,163              982
 Gain on sale of assets                            31,767                 -                -              3,425                -
 Gain on sale of mortgage servicing rights, net         -                 -              675                167            2,634
 School services                                    2,871             2,420            4,616              5,427            4,240
 Other                                              5,650             6,696            6,201              5,509            4,536
                                               ------------    -------------     ------------     --------------     ------------
    Total noninterest income                       88,427            69,329           61,934             58,387           52,961
Noninterest expense                                95,666           110,968          118,848             85,585           67,635
                                               ------------    -------------     ------------     --------------     ------------
Income (loss) from continuing operations
 before income taxes                               32,119           (3,572)         (17,025)                  5           10,038
Income tax expense (benefit)                       10,359           (2,575)          (7,756)               (887)           3,632
                                               ------------    -------------     ------------     --------------     ------------
Income (loss) from continuing operations     $     21,760    $        (997)    $     (9,269)    $           892    $       6,406
                                               ============    =============     ============     ==============     ============
Income (loss) from continuing operations
 per share assuming dilution(1)              $       3.28    $       (0.15)    $      (1.43)    $          0.14    $        0.95
Weighted average common shares assuming
 dilution                                       6,630,006         6,539,195        6,462,272          6,560,454        6,748,857

Balance Sheet Data
Total assets                                 $  1,888,860    $    1,723,924    $   1,701,405    $     1,646,940    $   1,418,773
Securities                                        316,367           152,508           29,073              6,963           66,616
Total loans, net                                1,369,539         1,344,256        1,393,810          1,340,700        1,095,045
Mortgage servicing rights, net                     26,574            39,744           63,200             78,712           71,529
Deposits(2)                                     1,119,159           974,059          933,957            866,235          602,669
Custodial escrow balances                          51,598            85,466          151,790            129,665           77,647
FHLBank borrowings                                506,118           458,204          385,785            303,361          519,433
Other borrowings                                   93,408           114,495          125,903            222,032          124,503
Total shareholders' equity                         92,315            69,684           66,936             71,312           64,023

Operating Ratios and Other Selected Data
Return from continuing operations on
 average total assets(3)                             1.22%           (0.06)%          (0.57)%              0.56%            0.49%
Return from continuing operations on
 average equity(3)                                  28.45            (1.45)          (13.07)               1.34            10.22
Average equity to average total assets(3)            4.30             4.14             4.35                4.18             4.75
Net interest margin(3)(4)                            2.68             2.88             3.06                2.14             2.41
Operating efficiency ratio(5)                       61.05            73.33            76.88               71.95            70.89
Total amount of loans purchased for sale     $  1,738,181     $  1,636,986      $ 1,127,632    $         97,486    $     204,922
Balance of owned servicing portfolio
 (end of period)                                2,258,840        3,183,536        5,333,627           5,656,365        5,517,963
Trust assets under administration
 (end of period)                               18,195,726       13,280,435        7,876,329           6,017,085        3,847,038

Ratios of Earnings to Fixed Charges(6)
Including interest on deposits                     1.99x             0.89x            0.60x              1.00x            1.15x
Excluding interest on deposits                     2.49x             0.82x            0.18x              0.99x            1.23x

Loan Performance Ratios and Data
Allowance for loan and valuation losses      $     11,172    $       9,789    $       9,343    $          9,338    $       8,581
Nonperforming loans(7)                             31,345           31,450           30,818              37,251           28,516
Nonperforming loans/total loans(7)                   2.27%            2.32%            2.20%               2.76%            2.54%
Nonperforming assets/total assets(7)                 1.82             2.32             2.30                2.77             2.20
Net loan charge-offs/average loans(3)                0.14             0.23             0.21                0.17             0.18
Allowance for loan and valuation losses/
  total loans                                        0.81             0.72             0.67                0.69             0.76
Allowance for loan and valuation losses/
  nonperforming loans                               35.64            31.13            30.32               25.07            30.09
----------
</TABLE>
                                       28
<PAGE>
<TABLE>
<CAPTION>
<S>  <C>
(1)  Net income (loss) per common share assuming  dilution is based on the weighted  average  number of common shares  outstanding
     during each period and the dilutive effect,  if any, of stock options and warrants  outstanding.  There are no other dilutive
     securities.
(2)  At December 31, 2004, 2003, 2002, 2001 and 2000, the total balance of brokered  deposits was $247.9 million,  $104.6 million,
     $327.3 million, $303.0 million, and $203.6 million, respectively.
(3)  Calculations are based on average daily balances where available and monthly averages otherwise.
(4)  Net interest margin has been calculated by dividing net interest income from continuing  operations before loan and valuation
     loss provision by average interest-earning assets.
(5)  The operating  efficiency ratio has been calculated by dividing  noninterest  expense from continuing  operations,  excluding
     amortization of mortgage servicing rights, by operating income from continuing  operations.  Operating income from continuing
     operations is equal to net interest income before provision for loan and valuation losses plus noninterest income.
(6)  For purposes of calculating the ratio of earnings to fixed charges,  earnings  consist of income from  continuing  operations
     before taxes plus interest and rent expense. Fixed charges consist of interest and rent expense.
(7)  See  "Management's   Discussion  and  Analysis  of  Financial  Condition  and  Results  of  Operations--Asset  and  Liability
     Management--Nonperforming Assets" for a discussion of the level of nonperforming loans.
</TABLE>

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

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

Overview

     The primary  source of the  Company's  net revenue is net interest  income,
which is the difference between interest income earned on loans and investments,
and interest  expense paid on deposits and borrowed  money.  Net interest income
can  change  significantly  from  period to period  based on  general  levels of
interest rates, customer prepayment patterns, the mix of interest earning assets
and  the  mix  of  interest  bearing  and  non-interest   bearing  deposits  and
borrowings. The Company manages the risk of changes in interest rates on its net
interest  income  through  an  Asset/Liability  Committee  and  through  related
interest  rate  risk  monitoring  and  management  policies  and  practices.  In
addition,  the Company  generates revenue through  fee-based  services.  Many of
these  services  provide  deposits for, or have other  synergies  with, the core
banking operations.

     During 2004, the Company sold our interest in our clearing  operation joint
venture,  as  discussed  in  Item 1.  "Business  - Sale of  Interest  in  Matrix
Settlement and Clearance  Services,  LLC." We sold the platform under negotiated
terms to our former  joint  venture  partner  who  intends  to grow the  overall
services provided by Matrix Settlement and Clearance Services.

     During  2004,  the Company  sold its  majority  interest in our real estate
management  and  disposition  services  subsidiary,  as  discussed  in  Item  1.
"Business - Sale of Majority  Interest in Matrix Asset Management  Corporation."
We sold our majority  interest  because we were concerned that, over an extended
period of time, we would be unable to compete in the industry against large real
estate  title  companies  who could  include  the service as part of their total
bundled service package.

     During 2003,  the Company sold its wholesale  loan  origination  production
platform (as discussed in "Item 1. Business - Discontinued Operations.") We sold
the Platform because we were concerned that, over an extended period of time, we
would find it  difficult  to compete in the  highly  competitive,  lower  margin
mortgage  origination  industry,  and believe that the synergies provided to our
core  operations  from this line of business were no longer  beneficial  from an
operational risk standpoint.  The Company was able to successfully  reinvest the
liquidity generated by the sale of the production platform without a substantial
negative impact on net interest income.

     During  2004,  we  moved  our   servicing   investment  to  a  third  party
subservicer. The decision to move the servicing investment was made to lower the
overall servicing costs.

     In 2004,  the company  maintained a positive net interest gap,  which means
that our assets  are  expected  to  re-price  quicker  than our  liabilities  as
interest rates change over time. See a detailed  discussion of our strategies to
manage our risk in "Item 7. - Asset and Liability Management" which follows. The
continuing low interest rate environment in 2004 caused continued compression of
our net  interest  margin  during  much of the  year.  The five 25  basis  point
increases in short term interest rates by the Federal Reserve  beginning in June
has caused a flattening  of the yield  curve.  During the same period the longer
end of the curve as measured by 30-year fixed rate  mortgages  has fallen.  As a

                                       29
<PAGE>
result, we have again experienced a significant  amount of amortization  expense
on our mortgage  servicing rights.  The mortgage  servicing rights are amortized
based on the  expected  pattern and life of related  servicing  revenues and our
investment is also evaluated  quarterly for  impairment.  Should the long end of
the  interest  rate  curve  maintain  its  current  low  level,  there is a high
probability that our mortgage servicing rights will continue to amortize rapidly
as  borrowers   continue  to  refinance  their  mortgage  loans  elsewhere.   If
longer-term  interest  rates  increase  as we  expect in 2005,  there  should be
reduced refinance activity in mortgage loans and thus reduced mortgage servicing
amortization and possibly a recovery of our recorded  impairment.  Also, as many
of the assets owned by the Company are variable  rate,  increases in longer-term
rates,  will have a positive impact on our net interest margin.  Conversely,  if
interest rates generally  decrease from current  levels,  levels of amortization
and impairments could be significant and net interest margin could be compressed
further.

     Certain of our fee based business, including the acquisition, brokerage and
sale  of SBA  loans  and  loan  pools,  continue  to be a  strong  point  in our
operations,  and in positively impacting our core banking operations.  Growth in
core  deposits  continued  in 2004,  primarily  driven by deposits  generated by
subsidiaries  of the Company for Matrix Bank. We will focus on these  businesses
and our core banking operations in 2005 and beyond.

     The following portions of the Management's Discussion and Analysis focus in
more  detail  on the  results  of  operations  for  2004,  2003  and 2002 and on
information  about the Company's  balance sheet,  credit quality,  liquidity and
funding resources, capital, critical accounting estimates and other matters.

General

     Matrix  Bancorp was formed in June 1993 when the founding  shareholders  of
Matrix Financial and United Financial,  now known as Matrix Bancorp Trading, two
of our subsidiaries, exchanged all of their outstanding capital stock for shares
of our stock in a series of  transactions  that  were  each  accounted  for as a
pooling of interests.  In September  1993, we acquired Dona Ana Savings and Loan
Association,  FSB,  which was  subsequently  renamed  Matrix  Capital Bank.  The
acquisition was accounted for using the purchase method of accounting. We formed
Matrix Asset Management  Corporation,  formerly United Special Services, in June
1995 and Matrix Bancorp  Trading,  formerly  Matrix  Capital  Markets and United
Capital  Markets,  in December  1996. In February  1997, we acquired The Vintage
Group (whose  primary  subsidiary  is Sterling  Trust) in a pooling of interests
and,  accordingly,  no goodwill  was  recorded  and our  consolidated  financial
statements for the prior periods were restated. Additionally, we acquired ABS in
March 1999.  The  acquisition  was  accounted  for using the purchase  method of
accounting.  We entered into our joint venture,  Matrix Settlement and Clearance
Services,  in September of 1999.  On August 1, 2000, we sold the stock of United
Capital  Markets  to one of the  officers  of that  company.  On August 1, 2000,
Matrix Financial, our mortgage banking operation, became an operating subsidiary
of Matrix Bank. On October 31, 2001, First Matrix, our broker-dealer  operation,
became an operating subsidiary of Matrix Bancorp Trading. On September 10, 2004,
we sold our  majority  interest  in Matrix  Asset  Management  Corporation,  but
continued  operations  of its  realty  division  as MTXC  Realty  Corp.,  and on
December  1, 2004,  we sold our  membership  interest in Matrix  Settlement  and
Clearance Services.

     The principal components of our revenues consist of:

     o    net interest income recorded by Matrix Bank,  Matrix Financial and ABS
          School Services;
     o    brokerage and consulting  fees generated by Matrix Bancorp Trading and
          First Matrix;
     o    gains on sales of mortgage  loans  generated by Matrix Bank and Matrix
          Financial;
     o    gains on sales of multifamily and SBA loans and pools at Matrix Bank;
     o    loan administration fees generated by Matrix Financial;
     o    trust service fees generated by Sterling Trust and Matrix Bank;
     o    services fees  generated by MTXC Realty and our equity  earnings under
          equity  method  accounting  of our  minority  interest in Matrix Asset
          Management, LLC; and
     o    school service fees generated by ABS.

     In 2004, included in our revenues were gains on the sale of the Matrix Bank
branches  as  discussed  in Item 1.  "Business  - Sale of  Matrix  Capital  Bank
Branches,  gains on the sale of substantially  all of the assets of Matrix Asset
Management  Corporation  as  discussed  in Item 1.  "Business - Sale of Majority
Interest in Matrix Asset  Management  Corporation,  and gains on the sale of our
45% interest in Matrix  Settlement and Clearance  Services,  LLC as discussed in
Item  1.  "Business  - Sale of  Interest  in  Matrix  Settlement  and  Clearance
Services,  LLC."  These  gains  totaled  $31.8  million.  Similar  gains are not
expected to be as significant source of income prospectively.

                                       30
<PAGE>
     Our results of operations  are  influenced by changes in interest rates and
the effect of these changes on our interest  margins,  mortgage loan prepayments
and the value of mortgage  servicing  portfolios.  Our fee-based  businesses are
effected  to a lesser  extent  by  interest  rates and more by  competition  and
general market conditions.

Discontinued Operations - Sale of Wholesale Production Platform

     On  September 2, 2003,  we announced  the final  closing,  and  substantial
completion of the sale by Matrix  Financial of  substantially  all of its assets
associated  with its  wholesale  mortgage  origination  platform.  See  "Item 1.
Business--Discontinued  Operations" for a more detailed discussion. We agreed to
sell the Platform  because we were concerned  that,  over an extended  period of
time, we would find it difficult to compete in the highly  competitive  mortgage
origination  industry  that  generally  operates on high volume and low margins.
Based on the size of our  wholesale  production  platform,  we were  required to
commit a  significant  percentage  of our capital to a line of business  that is
fairly  cyclical and the earnings were difficult for us to predict.  The sale of
the  platform  has  allowed  us to reduce  our  operational  risks and the costs
associated  with the platform.  We were  successful in reinvesting the liquidity
created from the sale into  predominately  adjustable rate loans,  SBA loans and
high quality mortgage-backed  securities,  thereby reducing the financial impact
of being underinvested due to the sale of the production platform.

     The  operations  of the  production  platform,  which  reflect  income from
discontinued operations, net of tax effect, of approximately $140 thousand, $3.3
million,  and $5.3 million for the years ended December 31, 2004, 2003 and 2002,
respectively,  are  reported  as  discontinued  operations  in the  consolidated
financial  statements,  and will be  presented  as such in future  releases  and
filings,  and as  such  are not  included  in the  discussion  of  results  from
continuing operations below. It should be noted the discontinued  operations are
based upon the Company's  historical  results from  operations of the production
platform, adjusted to reflect the impact of the sale of the production platform.
Because there was an  opportunity  cost of owning the production  platform,  the
historical results are not necessarily indicative of the results that might have
occurred if the  disposition  had actually been completed on the indicated date,
and are not indicative of any future results.

     The operations of Matrix Asset Management Corporation and our investment in
Matrix  Settlement  and  Clearance  Services,  LLC are  reflected in  continuing
operations and will be reflected as such in future releases and filings.

Comparison of Results of Operations for Fiscal Years 2004 and 2003

     Income (loss) from Continuing  Operations.  Income of $21.8 million for the
fiscal year 2004 was recognized,  an improvement of $22.8 million to the loss of
$(1.0)  million for fiscal year 2003.  Income  (loss) per share from  continuing
operations  was $3.34 per basic share and $3.28 per diluted share for the fiscal
year 2004,  as compared  to $(0.15)  per basic and diluted  share for the fiscal
year 2003. Our 2004 income before taxes includes gains recognized on the sale of
the retail  branches  of Matrix Bank in Sun City,  Arizona  and Las Cruces,  New
Mexico of approximately $10.0 million, gain on the sale of our majority interest
in Matrix Asset Management  Corporation of $13.5 million and gain on the sale of
our interest in Matrix Settlement and Clearance  Services,  LLC of approximately
$8.3 million.  Offsetting a portion of these gains was a charge of approximately
$3.0 million to settle a bankruptcy preference claim, which is further discussed
in "Item 3. Legal  Proceedings",  and a charge of approximately  $1.4 million in
connection  with  the  transfer  of our  servicing  platform  to a  third  party
subservicer,  as discussed  more fully in "Item 1.  Business--The  Subsidiaries:
Matrix Financial Services Corporation". Our loss in 2003 was primarily caused by
$32.5 million of amortization of our mortgage servicing asset due to an increase
in the prepayment  speeds on the loans  underlying the mortgage  servicing asset
caused by the historical low interest rate environment.

     Net Interest  Income.  Net interest  income  before  provision for loan and
valuation  losses  increased $920 thousand to $42.6 million for fiscal year 2004
as compared to $41.7  million for fiscal  year 2003.  Our net  interest  margin,
however, decreased 20 basis points to 2.68% for the year ended December 31, 2004
from 2.88% for the year ended  December  31,  2003,  and  interest  rate  spread
decreased to 2.46% for the year ended  December 31, 2004 from 2.57% for the year
ended  December 31, 2003.  The decrease in net interest  margin and the interest
rate spread is due to a combination  of a 40 basis point decrease in the average
rate  earned on  average  interest-earning  assets  to 4.68% for the year  ended
December  31, 2004 as compared to 5.08% for the year ended  December  31,  2003,
while the average balance of interest  earning assets increased to $1.59 billion
for the year ended  December 31, 2004 as compared to $1.45  billion for the year
ended  December 31, 2003,  reducing  the impact of the  reduction in rates.  The
effects of the  decrease  in rates on  interest-earning  assets was also  offset
partially by a decrease in the cost of our  interest-bearing  liabilities  of 29
basis points to 2.22% for the year ended  December 31, 2004 as compared to 2.51%
for the year ended  December 31,  2003,  however,  our average  interest-bearing

                                       31
<PAGE>
liabilities  increased  to $1.43  billion for  December  31, 2004 as compared to
$1.27 billion for December 31, 2003. Both the decrease in the rate earned on our
average  interest-earning  assets,  and the  decrease in the cost of our average
interest-bearing  liabilities  is  driven  by  continued  low  levels  of market
interest  rates.  The yield  earned on our  interest  earning  assets is further
impacted  by our focus on the  acquisition  of  adjustable  rates  loans.  For a
tabular  presentation  of the changes in net  interest  income due to changes in
volume of  interest-earning  assets and changes in interest rates, see "Analysis
of Changes in Net Interest Income Due to Changes in Interest Rates and Volumes."

     Provision  for  Loan  and  Valuation  Losses.  The  provision  for loan and
valuation losses  decreased $370 thousand,  or 10.2%, to $3.3 million for fiscal
year 2004 as compared to $3.6  million for fiscal year 2003.  This  decrease was
attributable to the procedures  followed at Matrix Bank and Matrix  Financial in
the  determination  of  prudently  conservative  loan  valuation  balances.  The
decrease is consistent with the decline in nonperforming assets that occurred at
both  entities.  For a discussion  of the  components  of the allowance for loan
losses, see "Asset and Liability  Management--Analysis of Allowance for Loan and
Valuation  Losses."  For  a  discussion  on  the  allowance  as  it  relates  to
nonperforming   assets,  see  "Asset  and  Liability   Management--Nonperforming
Assets."

     Loan  Administration.  Loan  administration  income represents service fees
earned  from  servicing  loans  for  various  investors,  which  are  based on a
contractual  percentage of the outstanding  principal balance plus late fees and
other  ancillary  charges.  Loan  administration  fees decreased $6.4 million to
$15.3  million for fiscal year 2004 as compared to $21.7 million for fiscal year
2003.  Loan  service  fees are  affected by factors that include the size of our
residential mortgage loan servicing portfolio,  the servicing spread, the timing
of payment  collections and the amount of ancillary fees received.  Our mortgage
loan servicing  portfolio  decreased to an average  balance of $2.66 billion for
fiscal year 2004 as compared to an average  balance of $4.24  billion for fiscal
year 2003.  The impact of the decrease in the average  balance of the  servicing
portfolio  was  partially  offset by an  increase  in the  average  service  fee
(including  all ancillary  income) to 0.55% for the year ended December 31, 2004
as compared to 0.50% for the year ended  December  31,  2003.  Matrix  Financial
anticipates  loan  administration  fees to continue to decrease as its servicing
portfolio  decreases through  prepayments.  The servicing functions performed by
Matrix  Financial  were  transferred to a third party  sub-servicer  December 1,
2004.  We believe that this will allow us to lower our overall  cost  structure.
Loan administration fees are not anticipated to be impacted by this transfer.

     Brokerage Fees.  Brokerage fees represent  income earned from brokerage and
consulting  services  performed   pertaining  to  mortgage  loans  and  mortgage
servicing rights and SBA trading fees. Brokerage fees decreased slightly by $240
thousand,  or 2.2%,  to $10.6  million for fiscal year 2004 as compared to $10.9
million for fiscal year 2003. This relative  consistency was due to increases in
revenues  generated from the purchasing and sales of servicing assets which rose
to $2.0  million  for the year  ended  December  31,  2004 as  compared  to $470
thousand for the year ended  December 31, 2003,  offset by a decline in revenues
generated from the whole loan purchasing and sales  activities,  which decreased
to $3.9 million for fiscal year 2004 as compared to $5.0 million for fiscal year
2003. These variances are due to market  conditions and changes in market demand
year to year.

     Trust  Services.  Trust service fees increased $1.1 million,  or 15.8%,  to
$7.9  million for fiscal  year 2004 as compared to $6.8  million for fiscal year
2003.  The  increase  is  due to an  increase  in  total  trust  accounts  under
administration  of 60,228  accounts at December 31, 2004 from 50,251 accounts at
December  31,  2003,  and total  fiduciary  assets  under  administration  which
increased to $18.2  billion at December 31, 2004 from $13.3  billion at December
31, 2003.  The growth was due to increases  at Matrix  Bank's trust  department,
driven by the business referred to us by Matrix Settlement & Clearance Services,
LLC. As noted in Item 1.  "Business - Sale of Interest in Matrix  Settlement and
Clearance  Services,  LLC", the assets and operations of the trust department at
Matrix  Bank are in process of being sold to the  purchaser  of our  interest in
Matrix Settlement and Clearance  Services,  LLC which is anticipated to close in
mid-2005.  When that sale occurs, our trust services revenues are anticipated to
decrease.

     Real  Estate  Disposition   Services.   Real  estate  disposition  services
represents  fees earned by Matrix Asset  Management  Corporation for real estate
management and disposition  services provided on foreclosed  properties owned by
third party financial services companies and financial institutions, through the
date of the sale of our majority interest in Matrix Asset Management Corporation
as  discussed  in Item 1.  Business - Sale of Majority  Interest in Matrix Asset
Management  Corporation,  and our equity earnings in the new company, as well as
fee revenue  generated by MTXC Realty Corp.,  the realty division  maintained by
the Company.  Real estate disposition service revenue increased $1.2 million, or
17.5%, between the fiscal years 2004 and 2003 to $7.8 million for the year ended
December  31, 2004 as compared to $6.6  million for the year ended  December 31,
2003.  The  increase  was due to volume of  properties  closed  and new  clients

                                       32
<PAGE>
obtained prior to the date of the sale noted above. As noted above,  the sale of
our majority  interest in Matrix  Asset  Management  Corporation  is expected to
cause real estate disposition services revenues to decrease in 2005.

     Gain on Sale of Loans and Securities.  Gain on sale of loans and securities
decreased  $7.7  million,  or 53.6%,  to $6.6  million  for fiscal  year 2004 as
compared to $14.3 million for fiscal year 2003.  The gains include gains on sale
of  repurchased  FHA and VA loans  previously  sold from our mortgage  servicing
rights  portfolio  of $5.0  million  for the year  ended  December  31,  2004 as
compared to $10.2  million for the year ended  December  31, 2003, a decrease of
$5.2 million. Gains on sale of repurchased FHA and VA loans relate to delinquent
loans that are  purchased  out of loan pools of which Matrix  Financial  acts as
servicer and then re-sells into the secondary market. As the overall size of our
servicing portfolio decreases, the gains related to repurchased FHA and VA loans
is  anticipated  to  decrease.  The gains on sale of loans and  securities  also
reflects a decrease of $480 thousand in gains on the sale of originated  SBA and
multifamily  loans at Matrix Bank,  to $1.3 million for the year ended  December
31, 2004 as compared to $1.8 million for the year ended December 31, 2003. Gains
on sale of  investment  securities  decreased  $440 thousand to $420 thousand in
2004 from $860 thousand in 2003.  The gains on sale of loans and  securities can
fluctuate significantly from year to year based on a variety of factors, such as
the current interest rate environment,  the supply and mix of loan or securities
portfolios  available  in the  market,  and as market  conditions  dictate,  the
particular loan portfolios we elect to sell.

     Gain on Sale of Assets. The gain on sale of assets of $31.8 million for the
year ended  December 31, 2004 as compared to $0 for the year ended  December 31,
2003  includes  the gain on the sale of our  majority  interest in Matrix  Asset
Management Corporation of $13.5 million, the gain on the sale of the branches of
Matrix Bank in Las Cruces,  New Mexico of $5.1 million and in Sun City,  Arizona
of $4.9 million, and the $8.3 million gain on the sale of our interest in Matrix
Settlement  and Clearance  Services,  LLC. See further  discussion of all of the
noted transactions in Item 1. Business.

     School  Services.  School  services  income  represents fees earned by ABS,
operating as The GEO Group,  for  outsourced  business and  consulting  services
provided  primarily to charter  schools.  School services income  increased $450
thousand,  or 18.6%,  to $2.9  million  for fiscal year 2004 as compared to $2.4
million for fiscal year 2003.  This increase was primarily due to an increase in
rates paid by our core  business  service  clients.  We  continue  to reduce the
number of business service clients as a result of the strategic  decision in mid
2002 to  downsize  the level of  capital  committed  to ABS,  and to reduce  our
operating exposure in this line of business.

     Other  Income.   Other  income,   which  includes  equity  in  earnings  of
unconsolidated subsidiaries,  income earned on bank owned life insurance, rental
income,  mortgage servicing net hedging gains and losses and other miscellaneous
income items,  decreased $1.0 million, or 15.6%, to $5.7 million for fiscal year
2004 as  compared  to $6.7  million  for fiscal  year  2003.  The  decrease  was
primarily  due to lower  levels  of ATM fees  which  decreased  to $0 from  $740
thousand for the year ended December 31, 2003, and  acceleration of amortization
charges  recorded  through our equity in earnings  of our  unconsolidated  trust
preferred  securities trusts due to the early call of debt of approximately $650
thousand for the year ended December 31, 2004. These decreases were offset by an
increase in income  generated  and earned up to the date of sale from our equity
investment in Matrix  Settlement and Clearance,  LLC, to $1.5 million for fiscal
2004 as compared to $1.1 million for fiscal 2003, and $440 thousand  equity pick
up since the date of sale for our  minority  equity  interest  in  Matrix  Asset
Management,  LLC.  See  further  discussion  of  these  transactions  in Item 1.
Business.  Remaining  fluctuations  are  based  on the  nature  of the  accounts
reflected in other income.

     Noninterest Expense. Noninterest expense decreased $15.3 million, or 13.8%,
to $95.7  million for fiscal year 2004 as compared to $111.0  million for fiscal
year  2003.  This  decrease  was  primarily  due a  decrease  in  the  level  of
amortization on our mortgage  servicing rights asset to $16.1 million for fiscal
year 2004 as compared to $32.5 million for fiscal year 2003. The following table
details the major components of noninterest expense for the periods indicated:

                                       33
<PAGE>
<TABLE>
<CAPTION>
                                                         Year Ended
                                                         December 31,
                                                -------------------------------
                                                     2004             2003
                                                ---------------  --------------
                                                     (Dollars in thousands)
<S>                                             <C>              <C>
  Compensation and employee benefits            $    32,891      $    34,984
  Amortization of mortgage servicing rights          16,100           32,497
  Occupancy and equipment                             6,166            6,172
  Postage and communication                           2,001            2,435
  Professional fees                                   3,242            3,357
  Data processing                                     3,005            2,860
  Subaccounting fees                                  7,738            5,845
  Recovery of mortgage servicing rights                (444)          (2,950)
  Other general and administrative                   24,967           25,768
                                                ---------------  --------------
     Total                                      $    95,666      $   110,968
                                                ===============  ==============
</TABLE>

     Compensation  and employee  benefits  decreased  $2.1 million,  or 6.0%, to
$32.9  million for fiscal year 2004 as compared to $35.0 million for fiscal year
2003. This decrease was primarily the result of decreased salaries and wages due
to reductions in the overall number of employees, including reductions at Matrix
Bank, Matrix Financial, ABS and Matrix Asset Management Corporation. The Company
had an overall decrease of 207 employees, or 40.7%, to 302 employees at December
31, 2004 as compared to 509 employees at December 31, 2003.

     Amortization  of mortgage  servicing  rights  decreased  $16.4 million,  or
50.5%,  to $16.1  million for fiscal year 2004 as compared to $32.5  million for
fiscal year 2003.  Amortization of mortgage servicing rights fluctuates based on
the  size  of  our  mortgage  servicing   portfolio  and  the  prepayment  rates
experienced with respect to the underlying mortgage loan portfolio.  In response
to the continued historic low interest rates prevalent in the market, prepayment
speeds on our  servicing  portfolio  remained high at an average of 27.5% during
fiscal  year 2004 as compared to 35.4%  during  fiscal year 2003.  Additionally,
there was a decrease in the average balance of our mortgage  servicing rights to
$31.8  million for fiscal year 2004 as compared to $48.7 million for fiscal year
2003.

     Recovery of mortgage servicing rights reflects a recovery of our previously
recorded  impairment  allowance  for the year ended  December  31,  2004 of $440
thousand as compared to a recovery for the year ended  December 31, 2003 of $2.9
million.  The Company is required to record its investment in mortgage servicing
rights at the lower of cost or fair value. The fair value of mortgage  servicing
rights is determined based on the discounted  future servicing income stratified
based on one or more predominant risk  characteristics  of the underlying loans.
The  Company  stratifies  its  mortgage  servicing  rights by  product  type and
investor, among other things, to reflect the predominant risks. To determine the
fair value of its investment, the Company uses a valuation model that calculates
the  present  value of  discounted  future  cash  flows.  Due to  changes in the
interest rate environment  during the year,  among other factors,  an impairment
recovery was recorded.  In addition,  also based on the valuation,  a portion of
our  previously  recorded  impairment  charge  was  charged  off as a  permanent
impairment  against the value of the  mortgage  servicing  rights,  reducing the
carrying basis to estimated fair value. It is not possible to estimate if future
impairments or recoveries  will occur,  and further  changes in market  interest
rates,  or  increases  in  anticipated   future  prepayment  speeds,  may  cause
additional impairment charges in future periods.

     The  remainder  of  noninterest  expense,   which  includes  occupancy  and
equipment expense, postage and communication, professional fees, data processing
costs,  subaccounting fees and other expenses increased $680 thousand, or 1.47%,
to $47.1  million for fiscal  year 2004 as compared to $46.4  million for fiscal
year 2003. The increase is primarily related to increases in subaccounting  fees
at Matrix Bank due to increases in the levels of institutional  deposits held on
which subaccounting services are incurred and the level of fees, which generally
move with changes in the targeted Fed Funds rate. This increase was offset by an
overall decrease in other general and administrative  expenses.  The decrease in
other  general and  administrative  expense is primarily  due to 2003  including
write-downs  of  real  estate  at  ABS  and  litigation  settlements  at  Matrix
Financial,  which are at lower levels that those in 2004, offset by increases in
2004  in  litigation  accruals  at  Matrix  Bank  and  repurchase  reserves  and
write-offs of receivables at Matrix Financial due to loans  repurchased  through
representation and warranty provisions related to our discontinued mortgage loan
origination business.

     Income Taxes.  Income taxes reflect a provision of $10.4 million for fiscal
year 2004 as compared to a benefit of $(2.6)  million for fiscal year 2003.  Our
effective tax rate is 32.3% for fiscal year 2004 as compared to an effective tax

                                       34
<PAGE>
benefit of 72.1% for fiscal year 2003.  The  effective tax rates are affected by
the level of tax-exempt income at ABS and Matrix Bank in proportion to the level
of net  income  or  (loss)  and by  utilization  of  state  net  operating  loss
carry-forwards.  The net tax exempt  interest  income was $3.3  million and $3.7
million for the years ended December 31, 2004 and 2003, respectively.

Comparison of Results of Operations for Fiscal Years 2003 and 2002

     Loss from  Continuing  Operations.  A loss of $(1.0) million for the fiscal
year 2003 was  recognized,  an improvement of $8.3 million to the loss of $(9.3)
million for fiscal year 2002.  On a basic and diluted per share basis,  loss was
$(0.15)  for the fiscal  year 2003 as  compared to $(1.43) for fiscal year 2002.
Our loss in 2003 was  primarily  caused by the  incurrence  of $32.5  million of
amortization of our mortgage  servicing asset, which increased $8.3 million from
2002 levels.  This increase was due to an increase in the  prepayment  speeds on
the loans  underlying the mortgage  servicing asset caused by the historical low
interest rate environment.  The impact of the increased  amortization was offset
by a recovery  of $2.9  million  of  impairment  charges  recorded  against  our
mortgage servicing rights asset,  whereas in 2002 there was a $14.2 million, net
pre-tax, impairment charge against the value of the mortgage servicing rights.

     Net Interest  Income.  Net interest  income  before  provision for loan and
valuation  losses decreased $(1.0) million to $41.7 million for fiscal year 2003
as compared  to $42.7  million for fiscal  year 2002.  Our net  interest  margin
decreased  15 basis  points to 2.88% for the year ended  December  31, 2003 from
3.06% for the year ended December 31, 2002,  and interest rate spread  decreased
to 2.57% for the year  ended  December  31,  2003 from  2.72% for the year ended
December 31, 2002.  The  decrease in net interest  margin and the interest  rate
spread is due to a combination  of a 94 basis point decrease in the average rate
earned on average  interest-earning  assets to 5.08% for the year ended December
31, 2003 as compared to 6.02% for the year ended  December 31, 2002. The effects
of the decrease in rates on  interest-earning  assets was offset  partially by a
decrease in the cost of our  interest-bearing  liabilities of 79 basis points to
2.51% for the year ended  December  31,  2003 as  compared to 3.30% for the year
ended  December  31,  2002.  Both the decrease in the rate earned on our average
interest-earning   assets,   and  the  decrease  in  the  cost  of  our  average
interest-bearing  liabilities  is  driven  by  continued  low  levels  of market
interest rates  prevalent  throughout  2003. The impact of the low interest rate
environment  is not as direct for the average  interest-bearing  liabilities  as
certain of the term borrowings are at fixed rates. 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 $800 thousand,  or 29.1%, to $3.6 million for fiscal
year 2003 as compared to $2.8  million for fiscal year 2002.  This  increase was
attributable  to increased  levels of reserves as a result of an increase in our
homogeneous  residential  loan  portfolio  acquired  to replace  the  originated
wholesale loans, which liquidity was available due to the sale of the production
platform  as  discussed  in "Item  1.  Business--Discontinued  Operations".  The
Company's historic experience is that our homogeneous residential loan portfolio
has slightly  greater losses than mortgage loans that are sold within 45 days of
origination.  For a  discussion  of the  components  of the  allowance  for loan
losses, see "Asset and Liability  Management--Analysis of Allowance for Loan and
Valuation  Losses."  For  a  discussion  on  the  allowance  as  it  relates  to
nonperforming   assets,  see  "Asset  and  Liability   Management--Nonperforming
Assets."

     Loan  Administration.  Loan  administration  income represents service fees
earned  from  servicing  loans  for  various  investors,  which  are  based on a
contractual  percentage of the outstanding  principal balance plus late fees and
other  ancillary  charges.  Loan  administration  fees decreased $5.7 million to
$21.7  million for fiscal year 2003 as compared to $27.4 million for fiscal year
2002. Our mortgage loan servicing  portfolio  decreased to an average balance of
$4.2  billion for fiscal  year 2003 as  compared  to an average  balance of $5.7
billion for fiscal year 2002. The impact of the decrease in the average  balance
of the servicing  portfolio  was partially  offset by an increase in the average
service  fee  (including  all  ancillary  income)  to 0.50%  for the year  ended
December 31, 2003 as compared to 0.45% for the year ended December 31, 2002.

     Brokerage Fees.  Brokerage fees represent  income earned from brokerage and
consulting  services  performed   pertaining  to  mortgage  loans  and  mortgage
servicing rights and SBA trading fees. Brokerage fees increased $2.8 million, or
34.2%,  to $10.9  million for fiscal  year 2003 as compared to $8.1  million for
fiscal year 2002.  This increase was primarily the result of strong  performance
and the  revenues  generated  from the  acquisition,  pooling and selling of SBA
loans  and  securities,  which  increased  to $3.1  million  for the year  ended
December  31, 2003 as compared to $1.7  million for the year ended  December 31,
2002.

                                       35
<PAGE>
     Trust  Services.  Trust service fees increased $1.4 million,  or 26.9%,  to
$6.8  million for fiscal  year 2003 as compared to $5.4  million for fiscal year
2002.  The  increase  is  due to an  increase  in  total  trust  accounts  under
administration  of 50,251  accounts at December 31, 2003 from 45,097 accounts at
December  31,  2002,  and total  fiduciary  assets  under  administration  which
increased  to $13.3  billion at December  31, 2003 from $7.9 billion at December
31, 2002.  The growth was due to increases  at Matrix  Bank's trust  department,
driven by the business referred to us by Matrix Settlement & Clearance Services.

     Real  Estate  Disposition   Services.   Real  estate  disposition  services
represents fees earned by Matrix Asset Management for real estate management and
disposition  services  provided on  foreclosed  properties  owned by third party
financial services companies and financial institutions. Real estate disposition
service revenue increased $2.5 million, or 59.5%,  between the fiscal years 2003
and 2002 to $6.6  million  for the year ended  December  31, 2003 as compared to
$4.1 million for the year ended  December 31, 2002.  The increase was due to the
increase in the number of  properties  closed during the year,  which  increased
54.2%,  to 3,521 from 2,283 in 2002.  Additionally,  the  increase is due to new
clients obtained, and increased volumes from existing clients.  Properties under
management  were 3,183 at December 31, 2003 as compared to 2,071 at December 31,
2002.

     Gain on Sale of Loans and Securities.  Gain on sale of loans and securities
increased  $8.8  million,  or 160.3%,  to $14.3  million for fiscal year 2003 as
compared to $5.5 million for fiscal year 2002.  The increase  includes  gains on
sale of repurchased FHA and VA loans previously sold from our mortgage servicing
rights  portfolio  of $10.2  million  for the year ended  December  31,  2003 as
compared to $4.9 million for the year ended December 31, 2002.  Gains on sale of
repurchased  FHA and VA loans relate to delinquent  loans that are purchased out
of loan pools of which Matrix  Financial acts as servicer and then re-sells into
the secondary market. The gains on sale of loans and securities also includes an
increase of $1.7 million in gains on the sale of originated SBA and  multifamily
loans at Matrix Bank,  to $1.8 million for the year ended  December 31, 2003, as
compared to $100  thousand for the year ended  December 31, 2002.  Gains on sale
can  fluctuate  significantly  from year to year based on a variety of  factors,
such as the current  interest  rate  environment,  the supply and mix of loan or
securities portfolios available in the market, and as market conditions dictate,
the particular loan portfolios we elect to sell.

     Gain  on Sale  of  Mortgage  Servicing  Rights.  Gain  on sale of  mortgage
servicing  rights  decreased  to $0 for fiscal year 2003 from $700  thousand for
fiscal year 2002.  Due to the low  interest  rate  environment  prevalent in the
second half of 2002 and all of 2003,  the market  conditions  were not favorable
for our servicing  portfolio.  Gains from the sale of mortgage  servicing rights
can fluctuate  significantly  from year to year based on the market value of our
servicing  portfolio,  the particular  servicing portfolios we elect to sell and
the availability of similar portfolios in the market.

     School  Services.  School  services  income  represents fees earned by ABS,
operating as The GEO Group,  for  outsourced  business and  consulting  services
provided  primarily to charter  schools.  School services income  decreased $2.2
million,  or 47.6%,  to $2.4  million  for fiscal  year 2003 as compared to $4.6
million for fiscal year 2002.  This  decrease was primarily due to a decrease in
the number of, and rates paid by our core business service clients,  as a result
of the strategic decision in mid 2002 to downsize the level of capital committed
to ABS, and to reduce our operating exposure in this line of business.

     Other Income. Other income, which includes loan origination income,  equity
in earnings of unconsolidated subsidiaries, service and ATM fees, rental income,
structured finance trading activities,  and other miscellaneous items, increased
$500 thousand, or 8.0%, to $6.7 million for fiscal year 2003 as compared to $6.2
million for fiscal year 2002.  The increase was  primarily due to an increase of
$900  thousand  in  income  generated  from  our  equity  investment  in  Matrix
Settlement  and  Clearance  Services,  LLC,  to $1.1  million for fiscal 2003 as
compared to $200 thousand for fiscal 2002.

     Noninterest  Expense.  Noninterest expense decreased $7.9 million, or 6.6%,
to $111.0  million for fiscal year 2003 as compared to $118.9 million for fiscal
year  2002.  This  decrease  was  primarily  due  to a  $14.2  million  non-cash
impairment charge on mortgage servicing rights incurred in 2002 as compared to a
$3.0 million  recovery of such impairment in fiscal 2003. This decrease was also
due to a $1.0 million  charge to write-off the goodwill  balance at ABS incurred
in 2002,  whereas a similar charge was not incurred in fiscal 2003. The decrease
was offset by an increase in the level of amortization on our mortgage servicing
rights asset.  The following  table details the major  components of noninterest
expense for the periods indicated:

                                       36
<PAGE>
<TABLE>
<CAPTION>
                                                                Year Ended
                                                                December 31,
                                                         ----------------------
                                                            2003        2002
                                                         ----------  ----------
                                                         (Dollars in thousands)
<S>                                                      <C>         <C>
  Compensation and employee benefits                      $  34,984   $ 36,350
  Amortization of mortgage servicing rights                  32,497     24,176
  Occupancy and equipment                                     6,172      5,600
  Postage and communication                                   2,435      2,676
  Professional fees                                           3,357      2,770
  Data processing                                             2,860      2,796
  Subaccounting fees                                          5,845      3,085
  (Recovery of) impairment on mortgage servicing rights      (2,950)    14,219
  Other general and administrative                           25,768     27,176
                                                           --------   --------
     Total                                                 $110,968   $118,848
                                                           ========   ========
</TABLE>

     Compensation and employee  benefits  decreased $(1.4) million,  or 3.8%, to
$35.0  million for fiscal year 2003 as compared to $36.4 million for fiscal year
2002.  This decrease was  primarily  the result of decreased  salaries and wages
associated with reductions in the overall number of employees, primarily at ABS,
and by decreases in medical benefits expense associated with the structural rate
changes  implemented  for the 2003  benefit  year.  The  Company  had an overall
decrease of 47  employees,  or 8.5%,  to 509  employees  at December 31, 2003 as
compared to 556 employees at December 31, 2002.

     Amortization of mortgage servicing rights increased $8.3 million, or 34.4%,
to $32.5  million for fiscal  year 2003 as compared to $24.2  million for fiscal
year 2002.  Amortization of mortgage  servicing  rights  fluctuates based on the
size of our mortgage  servicing  portfolio and the prepayment rates  experienced
with  respect to the  underlying  mortgage  loan  portfolio.  In response to the
continued historic low interest rates prevalent in the market, prepayment speeds
on our servicing  portfolio  continued to increase to an average of 35.4% during
fiscal year 2003 as compared to 23.7% during  fiscal year 2002,  which  increase
offset  the  effects  of a  decrease  in the  average  balance  of our  mortgage
servicing  rights to $48.7 million for the 2003 fiscal year as compared to $81.0
million for the 2002 fiscal year.

     (Recovery of) impairment on mortgage servicing rights,  which is a non-cash
item,  reflects a recovery for the year ended  December 31, 2003 of $2.9 million
as compared to an impairment charge of $14.2 million for the year ended December
31, 2002. The Company is required to record its investment in mortgage servicing
rights at the lower of cost or fair value.  To  determine  the fair value of its
investment, the Company uses a valuation model that calculates the present value
of future cash flows.  Due to increases in interest  rates in 2003, a portion of
the previously recorded  impairment was recovered  increasing the carrying basis
to fair value.

     The  remainder  of  noninterest  expense,   which  includes  occupancy  and
equipment expense, postage and communication, professional fees, data processing
costs, subaccounting fees and other expenses increased $2.3 million, or 5.3%, to
$46.4  million for fiscal year 2003 as compared to $44.1 million for fiscal year
2002.  The increase is primarily  related to increased  levels of  subaccounting
fees paid by Matrix Bank, increased  consulting fees,  consisting of accounting,
auditing, information services, legal and other, incurred at Matrix Bank, Matrix
Financial and Matrix Tower  Holdings in fiscal year 2003 above those from fiscal
year 2002,  litigation  settlement costs in fiscal year 2003 at Matrix Financial
that were not present in fiscal year 2002,  write-down  of real estate  owned at
ABS in 2003,  and  losses  realized  on loans  repurchased  at Matrix  Financial
related to the production platform in 2003 that were not present in 2002.

     Income  Taxes.  Income  taxes  reflect a benefit of $2.6 million for fiscal
year 2003 as  compared to a benefit of $7.8  million  for fiscal year 2002.  Our
effective tax benefit was 72.1% for fiscal year 2003 as compared to an effective
tax benefit of 45.6% for fiscal year 2002.  The effective tax rates are affected
by the level of  tax-exempt  income at ABS and Matrix Bank in  proportion to the
level of net loss. The net tax exempt  interest income was $3.7 million and $2.9
million for the years ended December 31, 2003 and 2002, respectively.

Average Balance Sheet

     The  following  table  sets  forth  for  the  periods  and as of the  dates
indicated, information regarding our average balances of assets and liabilities,
as well as the dollar amounts of interest  income from  interest-earning  assets

                                       37
<PAGE>
and interest expense on interest-bearing liabilities and the resultant yields or
costs.  Ratio,  yield and rate  information  is based on average daily  balances
where available;  otherwise, average monthly balances have been used. Nonaccrual
loans are  included in the  calculation  of average  balances  for loans for the
periods indicated.
<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                           ---------------------------------------------------------------------------------------
                                                     2004                          2003                         2002
                                         ---------------------------    ----------------------------   ---------------------------
                                           Average            Average   Average              Average   Average            Average
                                           Balance  Interest  Rate      Balance   Interest   Rate      Balance   Interest  Rate
                                         ---------- --------  -------   --------  --------   -------   --------- -------- --------
                                                                       (Dollars in thousands)
<S>                                      <C>        <C>       <C>       <C>       <C>        <C>       <C>       <C>      <C>
Assets
Interest-earning assets:
  Loans receivable                      $1,373,246  $64,724    4.71%   $1,376,723  $71,202     5.17%   $1,333,390 $82,121    6.16%
  Securities                               182,674    8,639    4.73        28,437    1,465     5.15        11,003     594    5.40
  Interest-earning deposits                  3,694       35    0.95        14,227      135     0.95        24,285     337    1.39
  FHLBank stock                             30,817    1,028    3.34        30,611      905     2.96        26,393     936    3.55
                                         ---------   ------   ------    ----------  ------    ------    ---------  ------  --------
    Total interest-earning assets        1,590,431   74,426    4.68%    1,449,998   73,707     5.08%    1,395,071  83,988    6.02%
                                         =========   ======   ======    =========   ======    ======    =========  ======  =======
Noninterest-earning assets:
  Cash                                      51,197                         46,451                          42,393
  Allowance for loan and
    valuation losses                       (10,595)                        (9,008)                         (9,445)
  Premises and equipment                    22,341                         25,542                          22,454
  Other assets                             125,946                        153,114                         178,450
                                         ---------                      ---------                       ---------
    Total noninterest-earning assets       188,889                        216,099                         233,852
                                         ---------                      ---------                       ---------
    Total assets                        $1,779,320                     $1,666,097                      $1,628,923
                                         =========                      =========                       =========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
  Passbook accounts                     $    3,014       38    1.26%   $    5,706       74     1.30%   $    5,998     117    1.95%
  Money market and NOW accounts            619,835    4,764    0.77       444,468    3,928     0.88       302,479   4,254    1.41
  Certificates of deposit                  188,097    5,862    3.12       336,623    9,336     2.77       469,226  17,125    3.65
  FHLBank borrowings                       502,740   12,391    2.46       366,627    9,379     2.56       328,057   9,478    2.89
  Borrowed money and guaranteed
    preferred beneficial Interests         115,905    8,744    7.54       120,471    9,282     7.70       143,843  10,304    7.16
                                         ---------   ------   -----     ---------   ------    -----     ---------  ------  ------
    Total interest-bearing liabilities   1,429,591   31,799    2.22%    1,273,895   31,999     2.51%    1,249,603  41,278    3.30%

Noninterest-bearing liabilities:
  Demand deposits (including custodial
    escrow balances)                       253,605                        317,693                         268,957
  Other liabilities                         19,633                          5,510                          39,459
                                         ---------                      ---------                       ---------
    Total noninteresting-bearing
      liabilities                          273,238                        323,203                         308,416
  Shareholders' equity                      76,491                         68,999                          70,904
                                         ---------                      ---------                       ---------
    Total liabilities and shareholders'
      equity                            $1,779,320                     $1,666,097                      $1,628,923
                                         =========                      =========                       =========
Net interest income before provision
  for loan and valuation losses                     $42,627                        $41,708                        $42,710
                                                     ======                         ======                         ======
Interest rate spread                                           2.46%                           2.57%                         2.72%
                                                              =====                           =====                        ======
Net interest margin                                            2.68%                           2.88%                         3.06%
                                                              =====                           =====                        ======
Ratio of average interest-earning
  assets to average interest-bearing
  liabilities                                                111.25%                         113.82%                       111.64%
                                                             =======                         ======                        ======
</TABLE>
Analysis of Changes in Net Interest  Income Due to Changes in Interest Rates and
Volumes

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

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

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

                                       38
<PAGE>
<TABLE>
<CAPTION>
                                          Year Ended December 31, 2004 vs. 2003     Year Ended December 31, 2003 vs. 2002
                                          Increase (Decrease) Due to Change in      Increase (Decrease) Due to Change in
                                         -----------------------------------------  ---------------------------------------
                                          Volume          Rate          Total        Volume         Rate          Total
                                         ------------  ------------  -------------  ---------  -------------- -------------
                                                                      (Dollars in thousands)
<S>                                      <C>           <C>           <C>            <C>        <C>             <C>
Interest-earning assets:
  Loans receivable                       $     (179)   $   (6,299)   $    (6,478)   $  2,604    $   (13,523)   $   (10,919)
  Securities                                  7,303          (129)         7,174         900            (29)           871
  Interest-earning deposits                    (100)            -           (100)       (114)           (88)          (202)
  FHLBank stock                                   6           117            123         138           (169)           (31)
                                         ----------    -----------   -----------    ---------   ------------   ------------
     Total interest-earning assets            7,030        (6,311)           719       3,528        (13,809)       (10,281)
                                         ----------    -----------   -----------    ---------   ------------   ------------
Interest-bearing liabilities:
  Passbook accounts                             (34)           (2)           (36)         (6)           (37)           (43)
  Money market and NOW accounts               1,377          (541)           836       1,599         (1,925)          (326)
  Certificates of deposit                    (4,532)        1,058         (3,474)     (4,203)        (3,586)        (7,789)
  FHLBank borrowings                          3,389          (377)         3,012       1,049         (1,148)           (99)
  Borrowed money and guaranteed
    preferred beneficial interest              (347)         (191)          (538)     (1,759)           737         (1,022)
                                         -----------   -----------   ------------   ---------   ------------   ------------
    Total interest-bearing liabilities         (147)          (53)          (200)     (3,320)        (5,959)        (9,279)
                                         -----------   -----------   ------------   ---------   ------------   ------------
Change in net interest income before
  provision for loan and
  valuation losses                       $    7,177    $   (6,258)   $       919    $  6,848    $    (7,850)   $    (1,002)
                                         ==========    ===========   ============   =========   ============   ============
</TABLE>
Asset and Liability Management

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

     o    increasing  focus on lines of  business  that are less  interest  rate
          sensitive,  such as  brokerage  activities,  consulting  services  and
          self-directed trust services;
     o    purchasing adjustable rate mortgages;
     o    increasing  emphasis on the origination of  construction,  multifamily
          and commercial real estate lending, including SBA loans, which tend to
          have  higher   interest  rates  with  shorter  loan   maturities  than
          residential mortgage loans and generally are at adjustable rates;
     o    acquisition and sales of guaranteed  portions of SBA loans,  which are
          generally at adjustable rates;
     o    extending  the  maturity  of  our   interest-bearing   liabilities  by
          borrowing longer-term advances from the FHLBank;
     o    pursuing  institutional  alliances or  depository  relationships  that
          provide  fee-based  income  or  generate  liabilities  that  are  less
          expensive or less  interest  rate  sensitive  than retail  deposits or
          borrowings  from  third  party  institutions  to  fund  our  investing
          activities;
     o    focusing on  noninterest-bearing  custodial escrow balances related to
          our mortgage servicing rights; and
     o    using Matrix Bank as the  settlement  bank for settlement and clearing
          services  offered by Sterling Trust and Matrix  Settlement & Clearance
          Services LLC to generate deposits.

     The  strategies  outlined have been adhered to over the past several years.
As a result of the strategies,  Matrix Bank is slightly positively gapped, which
means that its assets will  re-price  quicker than its  liabilities  as interest
rates fluctuate.  As a result,  if interest rates increase,  the rising interest
rates should have a positive  impact on the net  interest  income.  However,  if
interest  rates remain static or decrease  further,  or if  short-term  interest
rates increase  without a comparable  increase in long-term  interest  rates, we
should  experience some compression in our net interest income as certain of our
interest-bearing  and  noninterest-bearing  liabilities  will not re-price lower
commensurate  with  declines in asset  yields.  Due to the historic low interest
rate environment,  our investment in mortgage  servicing rights was unprofitable
in 2004 and 2003. In the current  interest rate  environment,  the investment in
mortgage  servicing  rights will cause the  amortization  of the  investment  to
remain at higher levels than  initially  estimated.  Due to the 2003 sale of the
production   platform,   as   discussed   in  "Item  1.   Business--Discontinued
Operations",  we  do  not  anticipate  increasing  our  investment  in  mortgage
servicing  rights,  except  related to bulk loan  purchases at Matrix Bank.  The
servicing  function  performed by Matrix  Financial was  transferred  to a third
party  sub-servicer in the fourth quarter of 2004. We believe this will allow us

                                       39
<PAGE>
to lower our overall cost structure  necessitated by the continuing  decrease in
the mortgage servicing investment.  We will continue to consider several options
related to servicing, including strategic sales of the servicing asset.

     During 2004, as discussed in "Item 1. Business--Sale of Matrix Capital Bank
Branches",  we sold our three retail branch locations in Las Cruces,  New Mexico
and Sun City, Arizona.  Included in the sales were approximately  $182.5 million
of retail deposits,  and  approximately  $22.8 million of loans. The decision to
sell the locations  allows us to focus our efforts on  generating  institutional
depository alliances, which we believe is a less expensive funding strategy.

     Lending Activities. Our major interest-earning asset is our loan portfolio.
A significant part of our asset and liability management involves monitoring the
composition of our loan portfolio,  including the corresponding maturities.  The
following table sets forth the composition of our loan portfolio by loan type as
of the  dates  indicated.  The  amounts  in the  table  below  are  shown net of
discounts and other deductions.
<TABLE>
<CAPTION>
                                                                        As of December 31,
                 ------------------------------------------------------------------------------------------------------------------
                         2004                     2003                   2002                  2001                    2000
                 ----------------------   ---------------------  ---------------------  ---------------------   -------------------
                   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     $  999,202     72.96%   $  903,186      67.19%  $1,001,885     71.88%  $1,055,284     78.71%   $  903,955    81.00%
Multifamily,
 commercial
 real estate       325,885     23.80       379,931      28.26      313,237     22.47      192,225     14.34       123,491     11.07
 and
 commercial
School financing    30,402      2.22        46,765       3.48       49,560      3.56       61,969      4.62        51,909      4.65
Construction        24,644      1.80        21,201       1.58       34,160      2.45       35,158      2.62        36,768      3.29
Consumer               578      0.04         2,962       0.22        4,311      0.31        5,403      0.40         8,479      0.76
                 ---------    ------     ----------    ------    ---------    ------    ---------    ------     ---------   -------
   Total loans   1,380,711    100.82     1,354,045     100.73    1,403,153    100.67    1,350,038    100.70     1,124,602   100.77
Less allowance
 for loan and
 valuation
 losses             11,172      0.82         9,789       0.73        9,343      0.67        9,338      0.70         8,581     0.77
                 ---------    ------     ---------     ------    ---------    ------    ---------    ------     ---------   -------
Loans
 receivable,
 net            $1,369,539    100.00%   $1,344,256     100.00%  $1,393,810    100.00%  $1,340,700    100.00%   $1,116,021   100.00%
                 =========    ======     =========     ======    =========    ======    =========    ======     =========   ======
</TABLE>
     The  following  table  presents the  aggregate  maturities of loans in each
major  category of our loan  portfolio as of December 31,  2004,  excluding  the
allowance  for loan losses.  Actual  maturities  may differ from the  maturities
shown below as a result of renewals and prepayments or the timing of loan sales.
<TABLE>
<CAPTION>
                                                                               As of December 31, 2004
                                                               --------------------------------------------------------
                                                                 Less than      One to       Over Five
                                                                 One Year     Five Years       Years         Total
                                                               ------------- ------------  -------------   ------------
                                                                               (Dollars in thousands)
<S>                                                            <C>           <C>           <C>             <C>
Residential                                                    $      225    $      3,583  $     995,393   $    999,201
Multifamily, commercial real estate and commercial                 12,170          24,698        289,018        325,886
School financing                                                    4,939             540         24,923         30,402
Construction                                                       17,322           7,322              -         24,644
Consumer                                                              488              90              -            578
                                                               ----------    ------------  -------------   ------------
    Total loans                                                $   35,144    $     36,233  $   1,309,334   $  1,380,711
                                                               ==========    ============  =============   =============
</TABLE>
     Loans held for sale,  excluding the  allowance  for loan losses,  which are
primarily  contractually  due in less than one to five years,  are split between
fixed and adjustable rates as follows:
<TABLE>
<CAPTION>
                                                                               As of December 31, 2004
                                                               --------------------------------------------------------
                                                                 Less than      One to       Over Five
                                                                 One Year     Five Years       Years         Total
                                                               ------------- ------------  -------------   ------------
                                                                               (Dollars in thousands)
<S>                                                            <C>           <C>           <C>             <C>
Fixed                                                          $    5,122    $   2,329     $   66,181      $   73,632
Adjustable                                                            801        2,907        917,680         921,388
                                                               ----------    ---------     ----------      ----------
    Total loans                                                $    5,923    $   5,236     $  983,861      $  995,020
                                                               ==========    =========     ==========       =========
</TABLE>
                                       40
<PAGE>
     Loans held for investment,  excluding the allowance for loan losses,  which
are  contractually  due in one or  more  years,  are  split  between  fixed  and
adjustable rates as follows:
<TABLE>
<CAPTION>
                                                                              As of December 31, 2004
                                                               -----------------------------------------------------
                                                                 Less than      One to      Over Five
                                                                 One Year     Five Years      Years        Total
                                                               ------------  ------------  ------------ ------------
                                                                              (Dollars in thousands)
<S>                                                            <C>           <C>           <C>          <C>
Fixed                                                          $      7,732  $     8,509   $   117,857  $    134,098
Adjustable                                                           21,614       22,487       207,492       251,593
                                                               ------------  -----------   -----------  ------------
    Total loans                                                $     29,346  $    30,996   $   325,349  $    385,691
                                                               ============  ===========   ===========  ============
</TABLE>
     Nonperforming Assets. As part of asset and liability management, we monitor
nonperforming assets on a monthly basis.  Nonperforming assets consist primarily
of nonaccrual  loans and foreclosed real estate.  Loans are placed on nonaccrual
when full payment of principal or interest is in doubt or when they are past due
90 days as to either  principal  or  interest.  Foreclosed  real  estate  arises
primarily through  foreclosure on mortgage loans owned. The following table sets
forth our nonperforming assets as of the dates indicated:
<TABLE>
<CAPTION>
                                                                              As of December 31,
                                                   -----------------------------------------------------------------------
                                                       2004           2003           2002           2001           2000
                                                   -----------    -----------    -----------    -----------    -----------
                                                                            (Dollars in thousands)
<S>                                                <C>            <C>            <C>            <C>            <C>
Nonaccrual residential mortgage loans              $   12,157     $   19,599     $   15,123     $   19,039     $   22,592
Nonaccrual commercial real estate, commercial
  loans and school financing                           19,148         11,851         15,649         18,172          5,792
Nonaccrual consumer loans                                  40              -             46             40            132
                                                   -----------    -----------    -----------    -----------    -----------
     Total nonperforming loans                         31,345         31,450         30,818         37,251         28,516
Foreclosed real estate                                  2,955          8,538          8,343          8,355          2,646
                                                   -----------    -----------    -----------    -----------    -----------
     Total nonperforming assets                    $   34,300     $   39,988     $   39,161     $   45,606     $   31,162
                                                   ===========    ===========    ===========    ===========    ===========
Total nonperforming loans to total loans                 2.27%          2.32%          2.20%          2.76%          2.54%
Total nonperforming assets to total assets               1.82%          2.32%          2.30%          2.77%          2.20%
Ratio of allowance for loan and valuation losses
  to total nonperforming loans                          35.64%         31.13%         30.32%         25.07%         30.09%
Interest on nonperforming loans not included in
  interest income                                  $      652     $    1,084     $      916     $    1,773     $     1,016
</TABLE>

     We accrue for  interest on  government-sponsored  loans such as FHA insured
and VA  guaranteed  loans which are past due 90 or more days, as the majority of
the interest on these loans is insured by the federal government.  The aggregate
unpaid principal balance of  government-sponsored  accruing loans that were past
due 90 or more days was $18.1  million,  $12.2  million  and  $34.8  million  at
December 31, 2004, 2003 and 2002, respectively.

     Nonaccrual  residential  mortgage loans as a percentage of total loans were
0.9% at December 31, 2004, 1.4% at December 31, 2003, 1.1% at December 31, 2002,
1.4% at  December  31,  2001 and  2.1% at  December  31,  2000.  The  nonaccrual
residential  mortgage  loans have  decreased at December 31, 2004 as compared to
December  31,  2003.  The  decrease  is  due  to   repayments,   reinstatements,
foreclosures  and sales of delinquent  uninsured  loans. Due to the low interest
rate  environment,  Matrix Bank has experienced  significantly  higher levels of
repayments and reinstatements of nonaccrual loans than in prior years.

     The  increase  in  nonaccrual  commercial  loans and  school  financing  at
December 31, 2004 as compared to December 31, 2003 is  attributable  to increase
at both ABS school financing loans and at Matrix Bank due primarily to increases
in nonaccrual commercial loans, as discussed below.

     With  regard to our school  financing,  a majority  of our  origination  of
tax-exempt  financing for charter schools is for the purchase of real estate and
equipment.  The  balance of these  loans in  nonaccrual  status  increased  $2.6
million as compared to December  31, 2003 to $5.6  million at December 31, 2004.
Based on current  information,  we believe that reserves are  sufficient for any
potential losses. During the first quarter of 2004, one school client, with whom
we had loans in the amount of $10.5 million, experienced financial difficulties.
Of the $10.5 million balance, $2.6 million represented a participation sold to a
third party with  recourse.  During the second quarter of 2004, the $7.9 million
of the loans retained were placed on non-accrual  status. The loans were secured
by two parcels of real estate. During the third quarter of 2004, we entered into

                                       41
<PAGE>
a revised forbearance agreement,  which included the forgiveness of $6.1 million
of loans for a deed in lieu on one of the two parcels.  Concurrently, the client
entered into a market rate lease  agreement  on the parcel.  We believe that the
market value of the real estate  supports the balance of the loan forgiven.  The
remaining loan balance of approximately $2.0 million remains on non-accrual. The
client is in compliance with the payment terms of the forbearance  agreement and
as performance is demonstrated,  the loan will be placed on accrual status.  The
loan is secured and we believe that there are sufficient reserves and collateral
in the case of noncompliance.

     During  2004,  Matrix Bank placed three  commercial  real estate loans that
total $6.6 million at December 31, 2004 on non-accrual status.  Based on current
information,  we believe that there are  sufficient  reserves for any  potential
loss.

     Analysis of Allowance for Loan and Valuation  Losses.  The following  table
sets forth information regarding changes in our allowance for loan and valuation
losses for the periods  indicated.  The table  includes the  allowance  for both
loans held for investment and loans held for sale.
<TABLE>
<CAPTION>
                                                                 As of and for the Year Ended December 31,
                                              ----------------------------------------------------------------------------------
                                                  2004             2003              2002             2001             2000
                                              ---------------  --------------    -------------    -------------     ------------
                                                                           (Dollars in thousands)
<S>                                           <C>              <C>               <C>              <C>               <C>
Allowance for Loan and valuation losses,      $                $                 $                $                 $
beginning of year                                     9,789           9,343            9,338            8,581              6,354
Charge-offs:
     Real estate - mortgage                           1,099           1,998            1,239              872                434
     Real estate - construction                           -              74                -               31                320
     Commercial loans and school financing              870           1,319            1,482              746                819
     Consumer                                            80             139              276              659                476
                                              --------------   -------------     ------------     ------------      -------------
          Total charge-offs                           2,049           3,530            2,997            2,308              2,049
Recoveries:
     Real estate - mortgage                             109             101               97                4                  1
     Commercial loans and school financing               40             110               17                -                  -
     Consumer                                            14             124               67               81                 40
                                              --------------   -------------     ------------     ------------      -------------
          Total recoveries                              163             335              181               85                 41
                                              --------------   -------------     ------------     ------------      -------------
Net charge-offs                                       1,886           3,195            2,816            2,223              2,008
Provision for loan and valuation losses
charged to operations                                 3,269           3,641            2,821            2,980              4,235
                                              --------------   -------------     ------------     ------------       ------------
Balance at end of year                        $      11,172    $      9,789      $     9,343      $     9,338        $     8,581
                                              ==============   =============     ============     ============       ============
Ratio of net charge-offs to average loans              0.14%           0.23%            0.21%            0.17%              0.18%
                                              ==============   =============     ============     ============       ============
Average loans outstanding during the year     $   1,373,246    $  1,376,723      $ 1,333,390      $ 1,338,613        $ 1,086,041
                                              ==============   =============     ============     ============       ============
</TABLE>
     To provide for the risk of loss inherent in extending  credit,  the Company
maintains an allowance for loan and valuation losses. The allowance for loan and
valuation  losses is analyzed by management as discussed  below and is increased
by the provision for loan and valuation losses,  which is charged to operations,
as necessary.  The allowance for loan and  valuation  losses is  calculated,  in
part,  based on historical loss experience.  In addition,  management takes into
consideration other factors, such as:

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

     These loss  factors on  unclassified  assets  range from 0% for  guaranteed
portions of SBA loans to 20.0% for high loan to value  uninsured loans that were
underwritten to FHA guidelines.  The loss factors are applied to the outstanding
principal  balance  of  loans  in  their  respective  categories.  Loans  in the
commercial  and school  finance  portfolios  are assigned  loss factors based on
items similar to those listed,  plus  additional  individual  loan review on all
significant  loans,  including SBA loans, which result in loans being classified
as watch, substandard or doubtful.

     The Company  considers a loan impaired when,  based on current  information
and  events,  it is  probable  that it will be unable to collect all amounts due

                                       42
<PAGE>

according to the contractual terms of the loan.  Generally,  potential  impaired
loans  owned  by  the  Company  include  only  commercial   loans,  real  estate
construction loans, commercial real estate mortgage loans, multifamily loans and
school  financing.  Impairment  allowances  are  considered  by the  Company  in
determining the overall adequacy of the allowance for loan losses.

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

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

     Substandard and doubtful loans of homogeneous  loan portfolios are assigned
loss  factors of 5.00% to  50.00%,  if not  measured  for  impairment.  The loss
factors  are  applied to the  outstanding  principal  balances of loans in their
respective categories.

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

     The  following  table shows  information  regarding  the  components of our
allowance for loan and valuation losses as of the dates indicated:
<TABLE>
<CAPTION>
                                                                As of December 31,
                  ----------------------------------------------------------------------------------------------------------------
                          2004                   2003                  2002                    2001                   2000
                  ---------------------  --------------------    --------------------  -------------------   ---------------------
                             Percentage             Percentage            Percentage             Percentage            Percentage
                             of Loans               of Loans              of Loans               of Loans              of Loans
                             in each                in each               in each                in each               in each
                             Category to            Category to           Category to            Category to           Category to
                             Total                  Total                 Total                  Total                 Total
                   Amount    Loans        Amount    Loans        Amount   Loans         Amount   Loans        Amount   Loans
                  ---------- ----------  ---------- ----------  --------- ----------   -------- ----------   -------- ------------
                                                              (Dollars in thousands)
<S>               <C>        <C>         <C>        <C>         <C>       <C>          <C>      <C>          <C>      <C>
Residential       $  4,547     72.63%    $  4,018     66.70%    $   3,199     71.40%   $  3,918    78.30%    $  4,133     80.39%
Multifamily,
  commercial
  real estate
  and commercial     4,487     23.47        3,653     28.06         2,768     22.32       2,400    14.15        1,684     11.28
School financing     1,792      2.09        1,766      3.45         2,810      3.53       2,527     4.56        2,329      4.31
Construction           331      1.77          326      1.57           542      2.44         445     2.59          302      3.27
Consumer                15      0.04           26      0.22            24      0.31          48     0.40          133      0.75
                  --------   -------     --------   -------     ---------   -------    --------   ------     --------    ------
                  $ 11,172    100.00%    $  9,789    100.00%    $   9,343    100.00%   $  9,338   100.00%    $  8,581    100.00%
                  ========   =======     ========   =======     =========    ======    ========   ======     ========    =======
</TABLE>
     The ratio of the allowance for loan and valuation losses to total loans was
0.81% at December  31, 2004,  0.73% at December 31, 2003,  0.67% at December 31,
2002,  0.70% at December 31. 2001, and 0.77% at December 31, 2000. The allowance
for  loan  and  valuation  losses  is  reduced  by  loans  charged  off,  net of
recoveries. The balance of the allowance for loan and valuation losses allocated
to residential  has increased,  despite a decrease in the balance of these loans
in nonaccrual  status,  due to the increase in the overall  principal  amount of
residential  loans  outstanding  at December 31,  2004.  The balance of loan and
valuation losses allocated to multifamily,  commercial real estate,  commercial,
school financing and construction  loans has increased due to increases in these
type loans in nonaccrual status,  despite an overall decrease in the outstanding
loan principal balances in these categories. As of December 31, 2004, we believe
that the  allowance,  when taken as a whole,  is  adequate  to absorb  estimated
probable current losses inherent in the loan portfolio.

     Risk Sensitive Assets and Liabilities. As discussed in "Asset and Liability
Management--General"  a  significant  portion  of our  operations  and  ultimate
success is  partially  dependent  upon our ability to manage our  interest  rate
risk.  Interest  rate risk can be defined as the  exposure  of our net  interest
income to adverse  movements in interest rates.  Although we manage other risks,
such as credit, operational and liquidity risk in the normal course of business,
we  consider  interest  rate risk to be a  significant  market  risk which could
potentially  have the largest  material  effect on our  financial  condition and
results of operations. The majority of our market risk related to interest rates
exists within the operations of Matrix Bank. However,  Matrix Financial also has

                                       43
<PAGE>

interest rate risk related to its mortgage  servicing rights. The susceptibility
to  movements  in  interest  rates  affects  the cash flows  generated  from the
mortgage  servicing  rights,  which are recorded in other income versus interest
income.  In a decreasing  interest rate  environment,  the underlying  servicing
portfolio tends to prepay faster,  which reduces future servicing  income; in an
increasing  interest  rate  environment,  prepayments  tend to  decrease,  which
increases expected future servicing income.

     We currently  classify our SBA pooled  securities  as trading.  Because the
securities  are all  Prime  based,  and have  historically  traded  in very high
trading  ranges even in a changing  interest rate  environment,  the  securities
should  maintain  limited  market  risk.  The majority of our  residential  loan
portfolio  is held for sale,  which  requires  us to  perform  quarterly  market
valuations  of the  portfolio in order to properly  record the  portfolio at the
lower of  aggregate  cost or  market.  Therefore,  we  continually  monitor  the
interest rates of our loan portfolio as compared to prevalent  interest rates in
the market.

     Interest rate risk management at Matrix Bank is the  responsibility  of the
Asset and Liability Committee, which reports to the board of directors of Matrix
Bank. The Asset and Liability  Committee  establishes  policies that monitor and
coordinate  our  sources,  uses and  pricing of funds.  The Asset and  Liability
Committee is also involved in  formulating  our budget and strategic  plan as it
relates  to  investment  objectives.  We have  engaged a third  party to provide
consulting  services to assist us with our asset/liability  management.  We meet
with this  consulting  firm quarterly to monitor the interest rate risk position
and to analyze and discuss strategies related to asset/liability  management. We
anticipate  that we will continue to engage this  consulting firm on a quarterly
basis to perform  quarter end models of interest  rate risk and  asset/liability
positions  and  will  use  our  internal  modeling  to  support  asset/liability
decisions.

     We continue to attempt to reduce the  volatility in net interest  income by
managing the  relationship  of interest rate  sensitive  assets to interest rate
sensitive liabilities. To accomplish this, we focus on acquiring adjustable rate
residential  mortgages and have increased our efforts  regarding the origination
of residential  construction  loans,  multifamily loans,  commercial real estate
loans and SBA loans,  which  re-price  or mature  more  quickly  than fixed rate
residential  real  estate  loans.  We also  purchase  with the intent to sell as
pooled  securities  the  guaranteed  portion  of SBA  loans.  Again,  the  loans
generally adjust with prime and present very little interest rate risk. The risk
associated  with the guaranteed SBA loans acquired  resides with the significant
premium paid for the loans. The other significant asset that in the past we have
invested in is residential  mortgage  servicing rights. The value and cash flows
from residential  mortgage  servicing rights respond  counter-cyclically  to the
value of fixed rate  mortgages.  When interest  rates  increase and the value of
fixed rate mortgages decrease, in turn decreasing net interest income, the value
of the  mortgage  servicing  rights  increase.  In a  decreasing  interest  rate
environment, the inverse occurs. It is important to note, however, that an equal
increase or decrease in interest rates will not affect the value of our mortgage
servicing  rights  portfolio  equally.  A decrease  in interest  rates  causes a
greater  reduction in the value of the  portfolio as compared to the increase in
value in the portfolio  from an equal increase in interest  rates.  The scenario
discussed of decreasing  interest  rates is what occurred in 2003 and 2002.  The
interest  rate  environment  in 2004  remained at  historically  low levels.  In
response to the low interest rates, we experienced  continued significant runoff
in our  servicing  portfolio.  Due to the  volatility  of the value of  mortgage
servicing, we do not anticipate significantly increasing our investment in 2005.
To the  contrary,  we expect our overall  investment  in 2005 to again  decrease
through  prepayment  and normal  amortization.  The incidence of prepayment of a
mortgage  loan  increases  during  periods of  declining  interest  rates as the
homeowner  seeks to refinance the loan to a lower interest rate. If the level of
prepayment  on segments of our  mortgage  servicing  portfolio  achieves a level
higher than we projected for an extended  period of time,  then an impairment in
the associated  basis in the mortgage  servicing  rights may occur.  To mitigate
this risk of impairment due to declining  interest rates, we initiated a hedging
program on a portion of our  investment.  In 2004,  based on our analysis of the
servicing  investment,  we removed our hedge of mortgage  servicing  rights.  In
2005,  we  may  sell  portions  of  our  mortgage  servicing  portfolio  as  the
opportunity  presents itself,  and continue to reduce our overall  investment in
this asset.

     Another  significant  strategy  that we focus on in managing  interest rate
risk is identifying  lines of business that generate  noninterest rate sensitive
liabilities.  Examples of this strategy are the investment in mortgage servicing
rights,  which generate no cost escrow deposits;  Sterling  Trust's  operations,
which administer deposits with relatively low costs; and our previous investment
in Matrix  Settlement and Clearance  Services LLC that uses, or its clients use,
Matrix Bank as the clearing bank and custodian, which creates low-cost deposits.
After the sale of our interest in Matrix Settlement and Clearance  Services LLC,
they are continuing to use Matrix Bank as the clearing bank and  custodial,  and
thus we are able to maintain the level of the deposits.  See "Item 1. Business -
Sale of Interest in Matrix Settlement and Clearance Services, LLC."

     With regards to our interest-sensitive liabilities in order to maintain our
net asset  sensitive  interest  rate gap and  extend  the  average  lives of our

                                       44
<PAGE>
interest-bearing  liabilities,  Matrix Bank has acquired short option agreements
and  longer-term  fixed rate advances from the FHLBank (1 to 10 years)  totaling
$216.0  million at December 31, 2004,  which have  interest  rates  ranging from
2.69% to 5.63%.  Many of these  liabilities  were  acquired  several  years ago;
however,  Matrix Bank acquired $50.0 million of such liabilities  during 2004 (1
to 10 years) at rates from 2.87% to 3.92%.  It is anticipated  that our interest
margin will benefit in the long-term as interest rates increase.

     Short-term Borrowings. A primary function of asset and liability management
is to ensure adequate  liquidity.  In addition to cash and cash equivalents,  we
rely heavily on short-term borrowing capabilities for liquidity and as a funding
vehicle.  The primary  sources  for  short-term  borrowings  are the FHLBank for
Matrix Bank,  third party credit facility for ABS, and the revolving  portion of
the bank stock loan for Matrix Bancorp. See "Liquidity and Capital Resources."

     The following table sets forth a summary of our short-term borrowings
during 2004, 2003 and 2002 and as of the end of each such period:
<TABLE>
<CAPTION>
                                                                  Average                         Weighted
                                                    Amount        Amount         Maximum          Average
                                                  Outstanding   Outstanding     Outstanding       Interest         Weighted
                                                     at          During the       at any         Rate During    Average Interest
                                                   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, 2004:
      FHLBank borrowings(2)                       $  506,118    $   502,740     $  601,147           2.46  %          2.95 %
      School financing                                15,572         24,835         30,350           4.14             5.70
At or for the year ended December 31, 2003:
      FHLBank borrowings(3)                          458,204        366,627        592,211           2.56             2.17
      Revolving lines of credit                            -          5,883         18,362           4.88             -
      School financing                                30,439         31,586         32,367           4.03             3.96
At or for the year ended December 31, 2002:
      FHLBank borrowings(4)                          385,785        328,057        446,923           2.89             2.64
      Revolving lines of credit                       10,000         15,820         30,850           3.45             2.79
      School financing                                32,328         41,293         50,252           4.77             4.37
----------
<FN>
(1)  Calculations are based on daily averages where available and monthly averages otherwise.
(2)  A total of $176.0 million of the FHLBank borrowings outstanding at December 31, 2004 were borrowed under short option advance
     agreements with the FHLBank. The interest rates on the short option advance borrowings ranged from 2.69% to 5.63% at December
     31, 2004 and their  possible  call dates varied from January 2005 to November  2006. A total of $40.0  million of the FHLBank
     borrowings  outstanding at December 31, 2004 were borrowed under fixed rate advance agreements with the FHLBank. The interest
     rates on the advances  ranged from 2.87% to 3.92% at December 31, 2004, and their maturity dates ranged from November 2005 to
     May 2008. Additionally, $1.1 million of the FHLBank borrowings outstanding at December 31, 2004 are fixed-term/rate advances,
     which were borrowed  from the FHLBank to offset  specific  loans  originated  by Matrix Bank.  The principal  amount of these
     fixed-term/rate  advances adjust monthly based on an amortization schedule. The interest rate on the fixed-term/rate advances
     was 5.84%, and their maturity date is June 2014.
(3)  A total of $266.0 million of the FHLBank borrowings outstanding at December 31, 2003 were borrowed under short option advance
     agreements with the FHLBank. The interest rates on the short option advance borrowings ranged from 1.27% to 5.63% at December
     31, 2003 and their possible call dates varied from January 2004 to November 2006.  Additionally,  $1.2 million of the FHLBank
     borrowings  outstanding  at December 31, 2003 are  fixed-term/rate  advances,  which were borrowed from the FHLBank to offset
     specific loans originated by Matrix Bank. The principal amount of these  fixed-term/rate  advances adjust monthly based on an
     amortization schedule. The interest rate on the fixed-term/rate advances was 5.84%, and their maturity date is June 2014.
(4)  A total of $266.0 million of the FHLBank borrowings outstanding at December 31, 2002 were borrowed under short option advance
     agreement with the FHLBank.  The interest rates on the short option advance borrowings ranged from 1.27% to 5.63% at December
     31, 2002 and their possible call dates varied from December 2002 to November 2006. Additionally,  $1.3 million of the FHLBank
     borrowings  outstanding  at December 31, 2002 are  fixed-term/rate  advances,  which were borrowed from the FHLBank to offset
     specific loans originated by Matrix Bank. The principal amount of these  fixed-term/rate  advances adjust monthly based on an
     amortization schedule. The interest rate on the fixed-term/rate advances was 5.84%, and their maturity date is June 2014.
</FN>
</TABLE>

Liquidity and Capital Resources

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

                                       45
<PAGE>
     o    the issuance of junior subordinated  debentures through Matrix Bancorp
          Capital Trust I in 1999,  Matrix Bancorp  Capital Trust II, III and IV
          in 2001 and Matrix Bancorp  Capital Trust V in 2002 and Matrix Bancorp
          Capital Trust IV in 2004;
     o    the issuance of subordinated debt offering in February 2004;
     o    secured senior debt provided by unaffiliated financial institutions;
     o    the issuance of 11.5% senior  notes in September  1997,  (paid in full
          September 2004);
     o    a bank stock loan; and
     o    our initial public offering.

     As of December 31, 2004,  Matrix Bancorp had $76.1 million in  indebtedness
outstanding.   The  borrowed  funds  have  been  used  historically  as  capital
injections to Matrix Bank, Matrix Financial, Matrix Bancorp Trading and ABS.

     In March 2004,  Matrix Bancorp amended its bank stock loan  agreement.  The
amended bank stock loan agreement has two components,  an $8.2 million term loan
and a revolving  line of credit of $12.0  million.  As of December 31, 2004, the
balance of the term loan was $4.3 million and the balance of the revolving  line
of credit  was $0.  The  amended  bank stock  loan  requires  Matrix  Bancorp to
maintain total shareholders' equity of $60.0 million. Matrix Bank is required to
maintain  classified assets of less than 3% of total assets,  and must also earn
in excess of $7.5 million over the previous  four quarters as of the end of each
fiscal quarter from June 30, 2003 forward.  The covenants must be met quarterly.
As of December 31, 2004, we were in compliance with all covenants. The term loan
has a maturity  date of  December  31,  2006.  The  revolving  line of credit is
annually  renewed and currently has a maturity date of March 31, 2005. We are in
the process of renewing the revolving line of credit.  Note, however,  there can
be no assurances that the bank stock loan will be renewed or any terms modified,
or any new revolving line of credit facilities entered into.

     The Company has  sponsored  six trusts,  Matrix  Bancorp  Capital  Trusts I
through  VI, of which 100% of the  common  equity is owned by the  Company.  The
trusts were formed for the purposes of issuing corporation-obligated mandatorily
redeemable  capital   securities  (the  "capital   securities")  to  third-party
investors and  investing  the proceeds from the sale of such capital  securities
solely in junior  subordinated  debt  securities of the Company.  The debentures
held by each  trust are the sole  assets  of that  trust.  Distributions  on the
capital  securities  issued  by each  trust  are  payable  either  quarterly  or
semiannually  at a rate per annum equal to the interest rate being earned by the
trust on the debentures held by that trust.  The capital  securities are subject
to mandatory redemption,  in whole or in part, upon repayment of the debentures.
The Company has entered into agreements  which,  taken  collectively,  fully and
unconditionally  guarantee the capital securities subject to the term of each of
the guarantees.  See details and further  discussion of these trusts included in
Note 14 to the consolidated financial statements.

     In February  2004, the Company  issued $10.0 million of  subordinated  debt
with a ten-year  maturity.  The  interest  rate adjusts  quarterly  based on the
90-day LIBOR at a margin of 2.75%.  Interest  payments are to be made quarterly.
Generally,  the debt covenants are no less  restrictive  than the Capital Trusts
discussed below. The net proceeds were used to satisfy the full repayment of the
11.5% senior notes  (discussed  in the  following  paragraph)  which  matured in
September 2004.

     On September  29, 1997,  we completed a registered  debt  offering of $20.0
million  in  senior  notes  due in  September  2004,  raising  net  proceeds  of
approximately  $19.1  million.  The notes matured on September 30, 2004 and were
paid in full at that time.

     In August 2004,  Matrix  Bancorp  Capital Trust VI ("Trust VI"), a Delaware
business trust formed by Matrix Bancorp,  completed the sale of $10.0 million of
6.425%  preferred  securities.  Trust VI also issued  common  securities  to the
Company,  and used the net proceeds from the offering to purchase  $10.3 million
in principal amount of 6.425% junior  subordinated  debentures of Matrix Bancorp
due October 18, 2034. The interest rate is fixed through  October 2009, at which
time it will  reset to a variable  rate of  three-month  LIBOR  plus  2.5%.  The
preferred securities accrue and pay distributions quarterly at an annual rate of
6.425% of the stated liquidation  amount of $1 thousand per preferred  security.
The Company has fully and  unconditionally  guaranteed all of the obligations of
Trust VI under the  preferred  securities.  The  guarantee  covers the quarterly
distributions  and  payments  on  liquidation  or  redemption  of the  preferred
securities,  but only to the  extent of funds  held by Trust VI.  The  preferred
securities  are   mandatorily   redeemable  upon  the  maturity  of  the  junior
subordinated debentures or upon earlier redemption as provided in the indenture.
The Company has the right to redeem the junior subordinated debentures, in whole
or in part, on or after October 18, 2009, at a redemption price specified in the
indenture plus any accrued but unpaid interest to the redemption date.  Proceeds
raised were used to partially  redeem 10% trust preferred  securities of Capital
Trust I, discussed below.

                                       46


<PAGE>
     On September 29, 2004, the Company announced the partial  redemption of the
10.0%  cumulative  trust preferred  securities  issued by Matrix Bancorp Capital
Trust I in July of 1999.  The  Company  redeemed  an  aggregate  amount of $15.0
million of the trust preferred and common securities in the amount of $25.00 for
each trust preferred security, plus accumulated and unpaid distributions through
the redemption date, which was October 29, 2004.

     The trend of net cash used by our operating activities experienced over the
reported  periods  results  primarily from the growth at Matrix Bank and regular
operating activities. The trend of net cash used by operations is dependent upon
the  Company's  decision  to retain  Matrix  Bank's  earnings at Matrix Bank and
leverage the earnings by  increasing  its interest  earning  assets  through the
purchase of primarily  residential mortgage loans. In the future, we believe the
trend of net cash used will decrease as the Company's intent is to resume Matrix
Bank's  historical  dividend  policy  and thus to  retain  less than 100% of the
earnings of Matrix Bank at Matrix Bank. However,  the retention of less earnings
will not support the same level of growth as occurred in 2004.  Also,  we expect
anticipated  decreases  in use of cash from the cost  reductions  that should be
realized from,  among other items, the transfer of the servicing asset at Matrix
Financial to a sub-servicer, as well as continued return of capital committed to
ABS through  dividends to Matrix Bancorp as the loans receivable  continue to be
liquidated under a strategy adopted in 2003.

     The Company is reliant on dividend and tax payments  from its  subsidiaries
in order to fund  operations,  meet  debt  and tax  obligations  and grow new or
developing  lines of business.  A long-term  inability  of a subsidiary  to make
dividend   payments  could   significantly   impact  the  Company's   liquidity.
Historically,  the  majority of the dividend  payments  have been made by Matrix
Bank. Due to the success experienced by certain of the fee based subsidiaries of
Matrix Bancorp and the gains  generated on the sale of our majority  interest in
Matrix Asset  Management  Corporation and our interest in Matrix  Settlement and
Clearance  Services LLC as discussed in "Item 1. Business",  dividends were also
paid  by  these  subsidiaries  to the  Company.  As a  result  of the  liquidity
generated,  Matrix  Bank did not pay a  dividend  to the  Company  in 2004.  The
current  dividend  policy  approved  by Matrix  Bank is 75% of the  consolidated
cumulative  earnings of Matrix Bank.  The current  dividend  policy  approved by
Matrix  Bancorp  Trading  and  First  Matrix  is 90% of the  earnings  of  those
subsidiaries. Absent these dividend payments, the Company intends to utilize the
line of credit on its bank stock loan, as needed,  to meet its own and the other
subsidiaries financial obligations.  Additionally, it is anticipated that during
2005, as was experienced in 2004, a portion of the capital that was committed to
ABS will be returned  through  dividends to Matrix Bancorp from ABS as the loans
receivable at ABS are  liquidated  under a strategy  adopted in 2003. The timing
and amounts of this  liquidation  cannot be  determined  with  certainty at this
time, but are anticipated to provide additional  liquidity to the Company during
2005.

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

     o    trust deposits;
     o    FHLBank borrowings;
     o    brokered deposits;
     o    custodial escrow balances;
     o    other institutional wholesale and retail deposits;
     o    sales of loan portfolios and investment securities; and
     o    proceeds from principal and interest  payments on loans and investment
          securities.

     Contractual   loan  payments  and  net  deposit  inflows  are  a  generally
predictable  source  of  funds,  while  loan  prepayments  and  loan  sales  are
significantly   influenced  by  general  market   interest  rates  and  economic
conditions.  Borrowings  on a  short-term  basis  are used as a cash  management
vehicle to  compensate  for seasonal or other  reductions  in normal  sources of
funds.  Matrix Bank utilizes advances from the FHLBank as its primary source for
borrowings.  At December 31, 2004, Matrix Bank had overnight and term borrowings
from the FHLBank of $506.1 million.  The  availability of FHLBank  borrowings is
based on the level of collateral  pledged.  Generally,  the availability will be
limited  based  on  eligible  collateral  pledged  or 50% of total  assets.  The
custodial  escrow  balances held by Matrix Bank fluctuate based upon the mix and
size of the  related  mortgage  servicing  rights  portfolios  and the timing of
payments  for taxes and  insurance,  as well as the level of  prepayments  which
occurs. For a tabular presentation of the our short-term borrowings,  see "Asset
and Liability Management--Short-Term Borrowings."

     Matrix Bank offers a variety of deposit accounts having a range of interest
rates and terms.  Matrix Bank's retail  deposits  principally  consist of demand
deposits and  certificates  of deposit.  The flow of deposits is  influenced  by
general  economic   conditions,   changes  in  prevailing   interest  rates  and
competition.  Matrix Bank's retail deposits were previously  obtained  primarily
from the branches in Sun City,  Arizona and Las Cruces,  New Mexico. As noted in

                                       47
<PAGE>
"Item 1.  Business--Sale  of Matrix Bank  Branches"  those branches were sold in
2004,  including   approximately  $178.5  million  of  retail  deposits,   which
represented approximately 12.5% of our average interest-bearing liabilities. The
sale of the  branches  is not  expected  to  have a  significant  impact  on the
liquidity at Matrix Bank.  Other funding  sources  discussed will be utilized to
replace the deposits. On a continuing basis, traditional retail deposits will be
generated from the area surrounding the Denver,  Colorado location,  but are not
anticipated to be a significant portion of our liquidity.

     Brokered deposits are accepted and have been utilized to support growth and
maintenance of liquidity 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  from  commercial  and
wholesale  sources  as a primary  source of funds to  support  its  lending  and
investing activities.

     The following table sets forth the average balances for each major category
of Matrix Bank's deposit accounts and the  weighted-average  interest rates paid
for interest-bearing deposits for the periods indicated:
<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                             -------------------------------------------------------------------------------------------
                                         2004                           2003                           2002
                             -----------------------------  -----------------------------  -----------------------------
                                              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            $      3,014        1.26 %     $      5,706        1.30 %     $      5,998         1.95 %
NOW accounts                      166,608        0.16            159,140        0.21            119,585         0.48
Money market accounts             619,835        0.73            444,468        0.81            302,479         1.22
Time deposits                      77,188        3.35            114,175        1.92            130,544         4.55
Brokered deposits                 110,909        2.95            222,448        2.28            338,682         3.30
                             ------------   -----------     ------------     ---------     ------------     ----------
     Total deposits          $    977,554        1.09 %     $    945,937        1.41 %     $    897,288         2.40 %
                             ============   ===========     ============     =========     ============     ==========
</TABLE>

     The following table sets forth the amount of Matrix Bank's certificates of
deposit that are greater than $100 thousand by time remaining until maturity as
of December 31, 2004:

<TABLE>
<CAPTION>
                                                            Weighted Average
                                                  Amount       Rate Paid
                                            --------------- ------------------
                                                  (Dollars in thousands)
<S>                                         <C>             <C>
 Three months or less                       $          -              -    %
 Over three months through six months                  -              -
 Over six months through twelve months                 -              -
 Over twelve months                                  855              4.27
                                            --------------  -----------------
          Total                             $        855              4.27 %
                                            ==============  =================
</TABLE>

     We actively  monitor  Matrix  Bank's  compliance  with  regulatory  capital
requirements.  Historically,  Matrix Bank has increased its core capital through
the  retention of a portion of its  earnings.  Matrix  Bank's  future  growth is
dependent  upon  retention  of a  portion  of its  earnings  and will be  funded
primarily through  institutional  wholesale deposit growth,  brokered  deposits,
borrowings from the FHLBank and custodial deposits directed by affiliates.

     ABS  School  Services'  principal  source of funding  for school  financing
consists of its internal capital, sales of loans to third party institutions and
partnership trusts with unaffiliated financial  institutions.  Amounts available
to be sold and amounts to be financed are at the  purchaser's  and lender's sole
discretion.  One of our  facilities  maintained  at a  third  party  institution
matured in September 2004. Cash proceeds  generated from the sale or refinancing
of the underlying  loans used as collateral for the financing were used to repay
the maturing  facility.  The second  facility which currently has an outstanding
balance of  approximately  $14.8 million matures in September of 2005. We are in
the process of renewing the facility.  However,  there can be no assurances that
such facility will be renewed. We do not anticipate significantly increasing our
current loan portfolio.

     Under a purchase and sale agreement,  ABS has sold school  financings to an
unaffiliated financial institution,  with full recourse to ABS. ABS services the
school financings on a scheduled/scheduled  remittance and in the case of a loss
or default, upon the liquidation of the underlying  collateral,  ABS is required
to reimburse the unaffiliated  financial  institution for any shortfall.  Due to

                                       48
<PAGE>
the  control  the  unaffiliated   financial  institution  has  over  the  school
financing,  the transaction was accounted for as a sale. The recourse provisions
were considered by us at the time of the sale. No gain or loss was booked at the
sale date as the loans were sold at their carrying  value.  The total balance of
the school financings sold with recourse is $7.4 million at December 31, 2004.

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

     As discussed in "Item 3. Legal Proceedings," we are from time to time party
to various litigation matters, in most cases,  involving ordinary routine claims
incidental to our business. We accrue for contingent liabilities with respect to
litigation  matters  in  accordance  with  the  requirements  of SFAS  5,  which
generally  requires  the  Company  to  accrue  a loss  for a  litigation  matter
involving a  contingent  liability if the loss is probable and the amount of the
loss is reasonably  estimable.  With respect to all pending litigation  matters,
our ultimate  legal and financial  responsibility,  if any,  cannot be estimated
with  certainty.  As such,  the impact on our  liquidity  and capital  cannot be
estimated  with  certainty,  and,  an adverse  decision in certain  matters,  as
described in "Item 3. Legal Proceedings," may have a material, adverse impact on
our consolidated liquidity or capital.

     With regard to the Adderley  case at Sterling  Trust  discussed in "Item 3.
Legal  Proceedings,"  it was noted  that the  Court of  Appeals  for the  Second
District of Texas (Fort  Worth)  affirmed a portion of the jury's  award for the
plaintiffs and against  Sterling Trust for actual damages of $6.2 million,  plus
post-judgment  interest and conditional  attorneys fees for the appeals. We also
noted that we appealed this decision to the Supreme Court of Texas.  The Supreme
Court of Texas agreed to hear the appeal of Sterling Trust, and on September 29,
2004, oral argument was held before the Supreme Court of Texas.  Notwithstanding
the fact  that the  Supreme  Court of Texas has heard  this  appeal by  Sterling
Trust, no assurances can be given that the appeal will be successful or that the
Supreme Court of Texas will render an opinion favorable to Sterling Trust. If we
are  unsuccessful  in this appeal,  and if we elect to contribute the capital to
Sterling Trust to pay the judgment,  there would be a significant  impact on the
liquidity of the Company.

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

Inflation and Changing Prices

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

Critical Accounting Policies

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

                                       49
<PAGE>
     Allowance for Loan and Valuation  Losses.  The Company  currently views the
determination  of the  allowance  for loan and  valuation  losses as a  critical
accounting policy that requires significant judgments, assumptions and estimates
used in preparation of its consolidated financial statements.  The allowance for
loan losses represents  management's estimate of probable credit losses inherent
in  the  loan  portfolios,  which  represent  the  largest  asset  type  on  the
consolidated  balance  sheet.  Estimating  the amount of the  allowance for loan
losses  requires  significant  judgment and the use of estimates  related to the
amount and timing of expected  future cash flows on  impaired  loans,  estimated
losses on pools of homogeneous  loans based on historical loss  experience,  and
consideration  of current  economic trends and  conditions,  all of which may be
susceptible  to  significant  change.  Loan  losses are  charged off against the
allowance,  while recoveries of amounts  previously  charged off are credited to
the  allowance.  A provision for loan losses is charged to  operations  based on
management's periodic evaluation of the factors previously mentioned, as well as
other pertinent factors.

     The  allowance  for loan  losses  consists  of three  components,  pools of
homogenous  loans with similar risk  characteristics,  individually  significant
loans,  often  classified,  that are  measured  for  impairment  and a component
representing  estimated  probable  inherent but  undetected  losses,  which also
contemplates the imprecision in the credit risk models utilized to calculate the
allowance.

     Pools of homogenous  loans with similar risk  characteristics  are assessed
for probable  losses.  Matrix Bank performs a quarterly loss migration  analysis
and loss factors are updated regularly based on actual experience.  The analysis
also examines  historical loss experience and the related  internal  gradings of
loans charged off. The loss migration analysis considers inherent but undetected
losses  within the  portfolio.  These losses may arise due to  uncertainties  in
economic  conditions,  delays in obtaining  information,  including  unfavorable
information  about  a  borrower's   financial   condition,   the  difficulty  in
identifying triggering events that correlate perfectly to subsequent loss rates,
and risk  factors that have not yet  manifested  themselves  in loss  allocation
factors.  This component of the allowance also considers inherent imprecision in
the loan  loss  migration  models.  The  Company  has  expanded  the  geographic
footprint in which it operates,  and changed its  portfolio mix in recent years.
As a  result,  historical  loss  experience  data used to  establish  allocation
estimates may not precisely  correspond  to the current  portfolio.  Uncertainty
surrounding the strength and timing of economic cycles also affects estimates of
loss.  The  historical  loss  factors used may not be  representative  of actual
unrealized losses inherent in the portfolio.

     The portion of the allowance  established for loans measured for impairment
reflects  expected  credit  losses  resulting  from analyses  developed  through
specific  credit   allocations  for  individual   loans.   The  specific  credit
allocations  are based on regular  analyses of all  significant  loans where the
internal  credit  rating is at or below a  predetermined  classification.  These
analyses  involve a high  degree of judgment  in  estimating  the amount of loss
associated  with specific loans,  including  estimating the amount and timing of
future cash flows and collateral values.

     The last  component  of the  allowance  for loan losses is a portion  which
represents  the  estimated  probable  inherent but  undetected  losses,  and the
imprecision in the credit risk models utilized to calculate the allowance.  This
component of the reserve is not associated  with any particular loan type and is
reflective  of the  uncertainty  surrounding  general  economic  conditions  and
ongoing uncertainty with respect to a small number of individually large loans.

     There are many factors  affecting the  allowance for loan losses;  some are
quantitative  while others require  qualitative  judgment.  Although  management
believes its process for determining the allowance  adequately  considers all of
the  potential  factors  that could  potentially  result in credit  losses,  the
process  includes  subjective  elements and may be  susceptible  to  significant
change.  To  the  extent  actual  outcomes  differ  from  management  estimates,
additional  provision for credit  losses could be required that could  adversely
affect earnings or financial position in future periods.

     Valuation of Mortgage Servicing Rights and Loans Held for Sale. The Company
also  considers  its  lower  of cost or  market  valuations  which  apply to the
valuation of mortgage  servicing rights and loans held for sale to be a critical
accounting policy that requires use of judgments, assumptions and estimates. Our
mortgage  servicing  portfolio  does not trade in an  active  open  market  with
readily observable market prices. Although sales of mortgage servicing rights do
occur,  the exact terms and  conditions may not be readily  available.  As such,
mortgage servicing rights are established and valued in accordance with SFAS 140
using discounted cash flow modeling  techniques which require management to make
estimates  regarding future net servicing cash flows,  taking into consideration
actual and expected  mortgage loan prepayment rates,  discount rates,  servicing
costs,  and other  economic  factors.  The expected and actual rates of mortgage
loan prepayments are the most significant  factors driving the value of mortgage
servicing rights asset.  Increases in mortgage loan prepayments reduce estimated
future net  servicing  cash flows  because  the life of the  underlying  loan is

                                       50
<PAGE>
reduced.  In  determining  the fair  value  of the  mortgage  servicing  rights,
mortgage  interest  rates,  which are used to determine  prepayment  rates,  and
discount  rates are held  constant  over the  estimated  life of the  portfolio.
Expected mortgage loan prepayment rates are derived from a third-party model and
may be  adjusted  to  reflect  the  specific  characteristics  of the  Company's
portfolio.  Mortgage  servicing  rights are  carried at the lower of the initial
capitalized amount, net of accumulated  amortization,  or fair value. Management
compares its fair value  estimates and  assumptions  to  observable  market data
where  available and to recent market activity and believes that the fair values
and  related   assumptions   are  comparable  to  those  used  by  other  market
participants.  The Company has recorded  impairment  reserves and  recoveries of
such  reserves  based  on the  market  conditions  and the  valuation  analysis.
Although  management believes its process for determining the impairment reserve
required   adequately   considers  all  of  the  potential  factors  that  could
potentially  result in declines in value of the mortgage  servicing rights,  the
process  includes  subjective  elements and may be  susceptible  to  significant
change.  To  the  extent  actual  outcomes  differ  from  management  estimates,
additional  provision  for  impairment  could be required  that could  adversely
affect earnings or financial position in future periods.

     The  Company  classifies  a majority  of its loan  assets as held for sale.
Loans held for sale are required to be carried at the lower of cost or market in
accordance with SFAS 65,  "Accounting for Certain Mortgage Banking  Activities."
Many of the loans owned by the Company  either do not trade in an active  market
or trade in  inefficient  markets.  As such,  the market value of loans  without
available  market  prices is  estimated  by loan type using  interest  rates for
reasonably comparable assets found in the secondary  marketplace.  Other factors
including delinquency,  existence of government  guarantees,  and other economic
factors  are  considered  in  estimating  the fair value of loans held for sale.
Management  compares its fair value  estimates  and  assumptions  to  observable
market data where  available and to recent market activity and believes the fair
values and related  assumptions  are  comparable  to those used by other  market
participants.  A rising  interest  rate  environment  could  possibly  result in
declines in the market value of the loans held for sale,  which could  adversely
affect earnings or financial  position in future periods.  The Company mitigates
risk  associated with declines in the estimated fair value of its loans held for
sale by predominately  holding loans with variable  interest rates that are less
market sensitive to interest rate fluctuations.  In addition, in 2005 management
is considering the use of derivative instruments to hedge the change in value or
cash flows from loans due to changes in interest rates.

     Litigation.  The Company  also  considers  the  judgments  and  assumptions
concerning  litigation  as a critical  accounting  policy.  The Company has been
notified that we are a defendant in a number of legal proceedings. Most of these
cases involve ordinary and routine claims incidental to our business.  We accrue
for contingent liabilities with respect to litigation matters in accordance with
the  requirements  of SFAS 5, which  generally  requires the Company to accrue a
loss for a litigation  matter  involving a  contingent  liability if the loss is
probable  and  the  amount  of the  loss  is  reasonably  estimable.  See a full
description of such proceedings at "Item 3. Legal  Proceedings." With respect to
all pending  litigation  matters,  our ultimate  legal  responsibility,  if any,
cannot be  estimated  with  certainty.  Based on the  ultimate  outcome  of such
proceedings,  it is possible  that future  results of  operations  and financial
position  for any  particular  quarterly or annual  period  could be  materially
affected by changes in our assumptions related to such proceedings.

     Any material effect on the  consolidated  financial  statements  related to
these critical accounting areas is also discussed in this financial review.

Recent Accounting Pronouncements

     Note 2 to the consolidated  financial  statements  discusses new accounting
policies  adopted  by the  Company  during  2004  and  the  expected  impact  of
accounting  policies  recently  issued or  proposed  but not yet  required to be
adopted.  To the extent the  adoption  of new  accounting  standards  materially
affects financial condition,  results of operations,  or liquidity,  the impacts
are discussed in the applicable  section(s) of this  discussion and the notes to
the consolidated financial statements.

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

     The  following  table  presents,  as of December  31, 2004,  the  Company's
significant fixed and determinable  contractual obligations by payment date. The
payment amounts  represent those amounts  contractually due to the recipient and
do not include any unamortized premiums or discounts, hedge basis adjustments or
other similar carrying value  adjustments.  Further  discussion of the nature of
each obligation is included in the referenced Note to the consolidated financial
statements.

                                       51
<PAGE>
<TABLE>
<CAPTION>
                                                                  As of December 31, 2004
                                      ---------------------------------------------------------------------------
                                          Note       1 Year      1 to 3     3 to 5       Over 5
                                        Reference    or Less     Years       Years        Years        Total
                                      -----------   ---------   --------    --------    ----------   ------------
                                                                 (Dollars in thousands)
<S>                                   <C>           <C>         <C>        <C>          <C>           <C>
Contractual Obligations
Deposits (passbook, NOW and money
   market)                                 12       $      -    $     -     $      -    $866,974     $  866,974
Certificate accounts                       12        206,418      43,861       1,906           -        252,185
FHLBank borrowings                         15        465,000      30,000      10,000       1,118        506,118
Borrowed money                             13         17,000       4,573           -      10,000         31,573
Junior subordinated debentures owed
   to unconsolidated subsidiary trusts     14              -           -           -      61,835         61,835
Operating leases                           19          1,100       1,225         304         375          3,004

     A schedule of significant commitments at December 31, 2004 follows:

Commitments                                                           (Dollars in thousands)
Commitments to extend credit:
  Loans secured by mortgages                                                $ 32,499
  Construction loans                                                          37,522
  Commercial lines of credit                                                     337
  Commercial loans                                                             2,468
  Consumer loans                                                                 323
Standby letters of credit                                                      3,078
Commitments to purchase single family mortgage loans                          60,120
Commitments to purchase USDA and SBA loans                                    37,905
Commitments to sell USDA and SBA loans and securities                         16,042
</TABLE>

     Further  discussion  of these  commitments  is  included  in Note 19 of the
consolidated  financial statements.  In addition,  the Company has contingencies
due to various  litigation  matters  which are also  discussed in Note 19 of the
consolidated financial statements.

     The Company may also have liabilities under certain contractual  agreements
contingent  upon  the  occurrence  of  certain  events.   A  discussion  of  the
significant  contractual  arrangements  under  which  the  Company  may be  held
contingently liable, including guarantee arrangements, is included in Note 19 of
the consolidated financial statements.

     The  Company's  off-balance  sheet  arrangements,  which include the use of
school  financing  sale  agreements,  are  discussed  further  in Note 13 of the
consolidated financial statements.

Forward Looking Statements

     Certain statements  contained in this annual report that are not historical
facts,  including,  but not limited to, statements that can be identified by the
use  of   forward-looking   terminology   such  as  "may,"   "will,"   "expect,"
"anticipate,"  "predict,"  "believe,"  "plan,"  "estimate"  or "continue" or the
negative  thereof or other  variations  thereon or comparable  terminology,  are
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation Reform Act of 1995, and involve a number of risks and  uncertainties.
The actual  results  of the  future  events  described  in such  forward-looking
statements  in this annual report could differ  materially  from those stated in
such  forward-looking  statements.  Among the factors  that could  cause  actual
results to differ  materially  are: third party claims or actions in relation to
the ongoing or future  bankruptcies  of the Company's  customers;  interest rate
fluctuations; level of delinquencies; defaults and prepayments; general economic
conditions;  competition; government regulation; possible future litigation; the
actions or  inactions of third  parties,  and actions or inactions of those that
are parties to the existing or future bankruptcies of the Company's customers or
litigation  related thereto;  unanticipated  developments in connection with the
bankruptcy actions or litigation  described above,  including judicial variation
from existing legal  precedent and the decision by one or more parties to appeal
decisions  rendered;  the risks and  uncertainties  discussed  elsewhere in this
annual report and in the Company's  current  report on Form 8-K,  filed with the
Securities and Exchange  Commission on March 14, 2005; and the uncertainties set
forth from time to time in the  Company's  periodic  reports,  filings and other
public statements.

                                       52
<PAGE>
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

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

Item 8.  Financial Statements and Supplementary Data

     See Index to Financial Statements on page F-1.

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

     None.

Item 9A.  Controls and Procedures

     Management of the Company is responsible for  establishing  and maintaining
effective  disclosure controls and procedures,  as defined under Rules 13a-15(e)
and 15d-15(b) of the  Securities  Exchange Act of 1934. As of December 31, 2004,
an evaluation was performed under the supervision and with the  participation of
the Company's  management,  including the Co-Chief  Executive Officers and Chief
Financial  Officer,  of the  effectiveness  of the design and  operation  of the
Company's  disclosure  controls and procedures.  Based on that  evaluation,  the
Company's  management  concluded  that the  Company's  disclosure  controls  and
procedures as of December 31, 2004 were  effective in ensuring that  information
required  to be  disclosed  in this  Annual  Report on Form  10-K was  recorded,
processed, summarized, and reported within the time period required by the SEC's
rules  and  forms.  There  have been no  significant  changes  in the  Company's
internal  controls over  financial  reporting  that occurred  during the quarter
ended  December  31,  2004 that have  significantly  affected,  or are likely to
materially affect, the Company's internal controls over financial reporting.

Item 9B.  Other Information

     None.

                                    PART III
Items 10 through 14.

     The information for these items is incorporated  from the definitive  proxy
statement to be filed with the Commission within 120 days of December 31, 2004.

                                     PART IV

Item 15.  Exhibits and Financial Statement Schedules

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

          See Index to Financial Statements on page F-1.

     (b) Exhibits

          See Exhibit Index, beginning on page II-1.

     (c) Financial Statement Schedules

          None.

                                       53

<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 14th day of
March, 2005.

                              MATRIX BANCORP, INC.


Dated:  March 14, 2005        /s/ D. Mark Spencer
                              D. Mark Spencer
                              President and Co-Chief Executive Officer
                              (Principal Executive Officer)

Dated:  March 14 , 2005       /s/ Richard V. Schmitz
                              Richard V. Schmitz
                              Co-Chief Executive Officer

Dated:  March 14, 2005        /s/ David W. Kloos
                              David W. Kloos
                              Senior Vice President and Chief Financial Officer
                              (Principal Accounting and Financial Officer)


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

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

/s/ D. Mark Spencer                         President, Co-Chief Executive               March 14, 2005
D. Mark Spencer                             Officer and a Director
                                            (Principal Executive Officer)

/s/ Richard V. Schmitz                      Co-Chief Executive Officer and              March 14, 2005
Richard V. Schmitz                          Chairman of the Board


/s/ David A. Frank                          Director                                    March 14, 2005
David A. Frank


/s/ Robert T. Slezak                        Director                                    March 14, 2005
Robert T. Slezak


/s/ Lester Ravitz                           Director                                    March 14, 2005
Lester Ravitz


/s/ Dr. James Bullock                       Director                                    March 14, 2005
Dr. James Bullock
</TABLE>

                                       54
<PAGE>
<TABLE>
<CAPTION>

                                INDEX TO EXHIBITS
<S>          <C>                <C>
  3.1        //////             Articles of Amendment to the Articles of Incorporation (3.1)
  3.2        +                  Bylaws, as amended, of the Registrant (3.2)
  4.1        +                  Specimen Certificate for Common Stock of the Registrant (4.1)
  4.2        + o                Amended and Restated 1996 Stock Option Plan (4.2)
  4.3        ***o               Amendment No. 1 to the 1996 Amended and Restated Employee Stock Option Plan of the
                                      Registrant (4.1)
  4.4        ***o               Amendment No. 2 to the 1996 Amended and Restated Employee Stock Option Plan of the
                                      Registrant (4.2)
  4.5        <<<<<<<<<< o       Form of Non-Qualified Stock Option Agreement (99.1)
  4.6        <<<<<<<<<< o       Form of Director Non-Qualified Stock Option Agreement (99.2)
  4.7        // o               Employee Stock Purchase Plan, as amended (4.4)
  4.8        ^                  Form of Indenture by and among the Registrant and State Street Bank and Trust Company, as
                                      trustee, relating to the 10% Junior Subordinated Debentures due 2029 (4.7)
  4.9        ^                  Form of Junior Subordinated Debentures (4.8)
  4.10       ^                  Certificate of Trust of Matrix Bancorp Capital Trust I (4.9)
  4.11       ^                  Form of Amended and Restated Trust Agreement of Matrix Bancorp Capital Trust I (4.10)
  4.12       ^                  Form of Preferred Security Certificate for Matrix Bancorp Capital Trust I (4.11)
  4.13       ^                  Form of Preferred Securities Guarantee Agreement of the Company relating to the Preferred
                                      Securities (4.12)
  4.14       ^                  Form of Agreement as to the Expenses and Liabilities (4.13)
  4.15       ^^                 Amended and Restated Trust Agreement, dated May 11, 2001, between Matrix Bancorp,
                                      Inc. and Matrix Bancorp, Inc., as Trustee (4.2)
  4.16       *                  Indenture between the Registrant and Wilmington Trust Company, as debenture trustee,
                                      dated as of March 28, 2001, relating to the 10.18% junior subordinated
                                      deferrable interest debentures due June 8, 2031 (10.5)
  4.17       *                  Amended and Restated Declaration of Trust of Matrix Bancorp Capital Trust II, dated
                                      as of March 28, 2001 (10.6)
  4.18       *                  Common Securities Guarantee Agreement of the Registrant, dated as of March 28, 2001
                                      (10.7)
  4.19       *                  Capital Securities Guarantee Agreement of the Registrant, dated as of March 28, 2001
                                      (10.8)
  4.20       **                 Indenture between the Registrant and The Bank of New York, as debenture trustee,
                                      dated as of July 16, 2001, relating to the 10.25% junior subordinated
                                      deferrable interest debentures due July 25, 2031 (10.3)
  4.21       **                 Amended and Restated Declaration of Trust of Matrix Bancorp Capital Trust III, dated
                                      as of July 16, 2001 (10.4)
  4.22       **                 Common Securities Subscription Agreement of the Registrant, dated as of July 16,
                                      2001 (10.5)
  4.23       **                 Capital Securities Agreement of the Registrant, dated as of June 28, 2001 (10.6)
  4.24       /////              Indenture between the Registrant and Wilmington Trust Company, as trustee, dated as
                                      of November 28, 2001, relating to Floating Rate Junior Subordinated Debt
                                      Securities due 2031 (4.26)
  4.25       /////              Amended and Restated Declaration of Trust of Matrix Bancorp Capital Trust IV, dated
                                      as of November 28, 2001 (4.27)
  4.26       /////              Guarantee Agreement of the Registrant, dated as of November 28, 2001 (4.28)
  4.27       *****              Junior Indenture  between the Registrant and The Bank of New York, as trustee,  dated
                                      as of July 25,  2002,  relating  to  Floating  Rate  Junior  Subordinated  Debt
                                      Securities, due July 25, 2032 (4.1)
  4.28       *****              Amended and Restated Trust  Agreement of Matrix Bancorp  Capital Trust V, dated as of
                                      July 25, 2002 (4.2)
  4.29       *****              Guarantee Agreement of Matrix Bancorp Capital Trust V, dated as of July 25, 2002
                                      (4.3)
  4.30       ##                 Junior Indenture between the Registrant and Deutsche Bank Trust Company Americas,
                                      dated as of August 30, 2004, relating to Junior Subordinated Debt Securities, due
                                      October 18, 2034 (10.3)
</TABLE>
                                      II-1
<PAGE>
<TABLE>
<S>          <C>               <C>
  4.31       ##                 Amended and Restated Trust Agreement of Matrix Bancorp Capital Trust VI, dated as of
                                      August 30, 2004 (10.1)
  4.32       ##                 Guarantee Agreement of Matrix Bancorp Capital Trust VI, dated as of August 30, 2004 (10.2)
  4.33       <<<<               Rights Agreement dated as of November 4, 2002, between Matrix Bancorp, Inc. and
                                      Computershare Trust Company, which includes the form of Articles of Amendment
                                      to State Terms of Series A Junior Participating Preferred Stock, $0.01 par
                                      value, the form of Right Certificate and the Summary of Rights (4.1)
  4.34       <<<<               Form of Articles of Amendment to State Terms of Series A Junior Participating
                                      Preferred Stock (4.1)
  4.35       ///////            Indenture, dated February 13, 2004, between Registrant and Wells Fargo Bank, as
                                      Trustee, relating to Floating Rate Subordinated Debt Security due 2014 (4.32)
  10.1       +                  Assignment and Assumption Agreement, dated as of June 28, 1996, by and among Mariano
                                      C. DeCola, William M. Howdon, R. James Nicholson and Matrix Funding Corp.
                                      (10.30)
  10.2       ?                  Amendment to Assignment and Assumption Agreement, dated as of August 13, 2002, by
                                      and among Mariano C. DeCola, William M. Howdon, R. James Nicholson and Matrix
                                      Funding Corp.
  10.3       +                  Development Management Agreement, dated as of June 28, 1996, by and among Matrix
                                      Funding Corp. and Nicholson Enterprises, Inc. (10.31)
  10.4       ///                Coyote Creek Planned Unit Development Agreement, dated as of July 1, 1998, by and
                                      among Fort Lupton, L.L.C. and Matrix Funding Corp. (10.12)
  10.5       +                  Fort Lupton Golf Course Residential and Planned Unit Development Agreement, dated as
                                      of November 28, 1995 (10.36)
  10.6       ////               Credit Agreement, dated as of December 27, 2000, by and between Registrant, as
                                      borrower, and U.S. Bank National Association, as agent, and certain lenders,
                                      as lenders (10.15)
  10.7       *                  First Amendment to Credit Agreement, dated as of March 5, 2001, by and between
                                      Registrant, as borrower, and U.S. Bank National Association, as agent, and
                                      certain lenders, as lenders (10.3)
  10.8       **                 Second Amendment to Credit Agreement, dated as of July 27, 2001, by and between
                                      Registrant, as borrower, and U.S. Bank National Association, as agent, and
                                      certain lenders, as lenders (10.2)
  10.9       /////              Third Amendment to Credit Agreement, dated as of December 26, 2001, by and between
                                      Registrant, as borrower, and U.S. Bank National Association, as agent, and
                                      certain lenders, as lenders (10.19)
  10.10      ****               Fourth Amendment to Credit Agreement, dated as of March 31, 2002, by and between
                                      Registrant, as borrower, and U.S. Bank National Association, as agent, and
                                      certain lenders, as lenders (10.2)
  10.11      ******             Fifth Amendment to Credit Agreement, dated as of March 29, 2003, by and between
                                      Registrant, as borrower, and U.S. Bank National Association, as agent, and
                                      certain lenders, as lenders (10.1)
  10.12      #                  Sixth Amendment to Credit Agreement, dated as of March 31, 2004, by and between
                                      Registrant, as borrower, and U.S. Bank National Association, as agent, and
                                      certain lenders, as lenders (10.1)
  10.13      ////               Lease dated as of September 1, 1999, by and between Matrix Financial Services
                                      Corporation and Suncor Development Company (10.22)
  10.14      ////o              Matrix Bancorp, Inc. Executive Incentive Plan (10.27)
  10.15      /////o             Matrix Bancorp, Inc. (f/k/a Matrix Capital Corporation) 401(k) Profit Sharing Plan
                                      (10.29)
  10.16      /////o             Amendment No. 1, effective as of January 1, 1994, to the Registrant's 401(k) Profit
                                      Sharing Plan (10.30)
  10.17      /////o             Amendment No. 2, effective as of May 20, 1996, to the Registrant's 401(k) Profit
                                      Sharing Plan (10.31)
  10.18      /////o             Amendment No. 3, effective as of April 1, 1997, to the Registrant's 401(k) Profit
                                      Sharing Plan (10.32)
  10.19      /////o             Amendment No. 4, effective as of December 30, 2001, to the Registrant's 401(k)
                                      Profit Sharing Plan (10.33)
</TABLE>

                                      II-2
<PAGE>
<TABLE>
<S>          <C>               <C>
  10.20      <<< o             Consulting Agreement, dated as of June 5, 2002, by and between Guy A. Gibson and
                                      Matrix Bancorp, Inc. (10.1)
  10.21      <<<<<             Purchase and Assumption Agreement, dated as of February 28, 2003, by Matrix
                                      Financial Services Corporation, as seller, and AmPro Mortgage Corporation, as
                                      purchaser (10.1)
  10.22      ******            First Amendment to Purchase and Assumption Agreement, dated as of April 18, 2003, by
                                      and between Matrix Financial Services Corporation, as seller, Matrix Capital
                                      Bank, as parent, and AmPro Mortgage Corporation, as purchaser (10.2)
  10.23      *******           Second Amendment to Purchase and Assumption Agreement, dated as of July 22, 2003, by
                                      and between Matrix Financial Services Corporation, as seller, Matrix Capital
                                      Bank, as parent, and AmPro Mortgage Corporation, as purchaser (10.1)
  10.24      <<<<<<            Third Amendment to Purchase and Assumption Agreement, dated as of August 31, 2003,
                                      by and between Matrix Financial Services Corporation, as seller, Matrix
                                      Capital Bank, as parent, and AmPro Mortgage Corporation, as purchaser (10.4)
  10.25      ///////o          Change of Control Agreement, dated as of October 28, 2003 by and between Matrix
                                      Bancorp, Inc. and David W. Kloos (10.39)
  10.26      ///////o          Change of Control Agreement, dated as of October 28, 2003 by and between Matrix
                                      Bancorp, Inc. and T. Allen McConnell (10.40)
  10.27      <<<<<<<<<< o      First Amendment to Change of Control Agreement, dated as of February 15, 2005 and
                                      effective February 11, 2005 by and between Matrix Bancorp, Inc. and T. Allen
                                      McConnell (10.1)
  10.28      ///////           Branch Purchase and Deposit Assumption Agreement, dated as of January 30, 2004 by
                                      and between Matrix Capital Bank and FirstBank (10.41)
  10.29      ##                Branch Purchase and Deposit Assumption Agreement, dated as of July 7, 2004 by and
                                      between Matrix Capital Bank and AccessBank (10.4)
  10.30      <<<<<<<<          Contribution and Sale Agreement, dated as of August 31, 2004 by and among First
                                      American Real Estate Solutions LLC, Matrix Bancorp, Inc., and Matrix Asset
                                      Management Corporation (10.1)
  10.31      ##                Operating Agreement of Matrix Asset Management LLC dated as of September 10, 2004
                                      (10.5)
  10.32      <<<<<<<<<         Contribution Agreement dated as of December 1, 2004 by and among Bluff Point
                                      Associates Corp., McInerney/Gabriele Family Limited Partnership, R. Clifton
                                      D'Amato, John H. Moody, MSCS Ventures, Inc., Matrix Bancorp, Inc., Matrix
                                      Capital Bank, Optech Systems, Inc., Let Lee and MG Colorado Holdings, Inc.
                                      (10.1)
  12         FH                Statement Re: Computations of Ratios
  21         FH                Subsidiaries of the Registrant
  23.1       FH                Consent of KPMG LLP
  31.1       FH                Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350, as adopted
                                      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2       FH                Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section 1350, as adopted
                                      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.3       FH                Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as adopted
                                      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1       FH                Certification by D. Mark Spencer pursuant to 18 U.S.C. Section 1350, as adopted
                                      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2       FH                Certification by Richard V. Schmitz pursuant to 18 U.S.C. Section 1350, as adopted
                                      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.3       FH                Certification by David W. Kloos pursuant to 18 U.S.C. Section 1350, as adopted
                                      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

-----------------------------

          FH        Filed herewith

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

</TABLE>
                                                               II-3
<PAGE>
<TABLE>
<S>      <C>        <C>
         /          Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's  annual report on
                    Form 10-K for the fiscal year ended December 31, 1996, filed by the Registrant with the Commission.

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

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

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

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

         //////     Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's  annual report on
                    Form 10-K for the fiscal year ended December 31, 2002, 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, 2003, filed by the Registrant with the Commission.

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

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

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

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

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

         <<<<<<     Incorporated by reference from the exhibit number shown in parenthesis  from the  Registrant's  report on Form
                    8-K filed by the Registrant with the Commission on August 31, 2003.

         <<<<<<<    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 September 15, 2003.

         <<<<<<<<   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 September 15, 2004.

         <<<<<<<<<  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 December 6, 2004.

         <<<<<<<<<< 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 February 16, 2005.

         ?          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.
</TABLE>
                                                               II-4
<PAGE>
<TABLE>
<S>       <C>       <C>
          *         Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's  quarterly report
                    on Form 10-Q for the quarter ended March 31, 2001, filed by the Registrant with the Commission.

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

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

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

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

          ******    Incorporated by reference from the exhibit number shown in parenthesis from the Registrant's  quarterly report
                    on Form 10-Q for the quarter ended March 31, 2003, 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, 2003, 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, 2004, 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, 2004, filed by the Registrant with the Commission.

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

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

          o         Management contract or compensatory plan or arrangement.

</TABLE>
                                                               II-5
<PAGE>
                          INDEX TO FINANCIAL STATEMENTS

   Consolidated Financial Statements of Matrix Bancorp, Inc. and Subsidiaries


Report of Independent Registered Public Accounting Firm.....................F-2

Consolidated Balance Sheets--December 31, 2004 and 2003.....................F-3

Consolidated Statements of Operations--for the years ended
December 31, 2004, 2003 and 2002............................................F-4

Consolidated Statements of Shareholders' Equity and Comprehensive Income
(Loss) for the years ended December 31, 2004, 2003 and 2002.................F-6

Consolidated Statements of Cash Flows--for the years ended
December 31, 2004, 2003 and 2002............................................F-7

Notes to Consolidated Financial Statements..................................F-9


                                      F-1


<PAGE>
             Report of Independent Registered Public Accounting Firm



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

We have audited accompanying consolidated balance sheets of Matrix Bancorp, Inc.
and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related
consolidated  statements of operations,  shareholders'  equity and comprehensive
income  (loss),  and cash flows for each of the years in the  three-year  period
ended  December  31,  2004.  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 the  standards of the Public
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Matrix Bancorp, Inc.
and  subsidiaries  as of December  31,  2004 and 2003,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended December 31, 2004, in conformity with U.S. generally  accepted  accounting
principles.

As discussed in note 2 to the  consolidated  financial  statements,  the Company
changed its method of  accounting  for  variable  interest  entities in 2003 and
changed its method of  accounting  for goodwill and other  intangible  assets in
2002.



                                          KPMG LLP


Denver, Colorado
March 14, 2005


                                      F-2
<PAGE>
<TABLE>
<CAPTION>
                                               Matrix Bancorp, Inc. and Subsidiaries
                                                    Consolidated Balance Sheets

                                         (Dollars in thousands, except share information)

                                                                                  December 31,
                                                                              2004               2003
                                                                        ------------------------------------
<S>                                                                     <C>                 <C>
Assets
Cash and cash equivalents                                               $       40,471     $      32,538
Interest-earning deposits and federal funds sold                                 2,398             1,972
Investment securities                                                          316,367           152,508
Loans held for sale, net                                                       989,822           999,454
Loans held for investment, net                                                 379,717           344,802
Mortgage servicing rights, net                                                  26,574            39,744
Other receivables                                                               35,139            43,884
FHLBank stock, at cost                                                          33,481            30,682
Premises and equipment, net                                                     19,037            24,981
Bank owned life insurance                                                       21,569            20,613
Other assets, net                                                               21,330            24,208
Foreclosed real estate, net                                                      2,955             8,538
                                                                        ------------------------------------
Total assets                                                            $    1,888,860     $   1,723,924
                                                                        ====================================

Liabilities and shareholders' equity
Liabilities:
   Deposits                                                             $    1,119,159     $     974,059
   Custodial escrow balances                                                    51,598            85,466
   FHLBank borrowings                                                          506,118           458,204
   Borrowed money                                                               31,573            47,970
   Junior subordinated debentures owed to unconsolidated subsidiary
     trusts                                                                     61,835            66,525
   Other liabilities                                                            23,955            18,508
   Income taxes payable and deferred income tax liability                        2,307             3,508
                                                                        -----------------------------------
Total liabilities                                                            1,796,545         1,654,240
                                                                        -----------------------------------
Commitments and contingencies (Note 19)

Shareholders' equity:
   Preferred stock, par value $0.0001; authorized
     5,000,000 shares; no shares outstanding                                         -                 -
   Common stock, par value $0.0001; authorized 50,000,000 shares;
     issued and outstanding 6,620,850 and 6,518,981 shares at
     December 31, 2004 and 2003, respectively                                        1                 1
   Additional paid-in capital                                                   21,432            20,615
   Retained earnings                                                            70,756            48,859
   Accumulated other comprehensive income                                          126               209
                                                                        -----------------------------------

Total shareholders' equity                                                      92,315            69,684
                                                                        -----------------------------------
Total liabilities and shareholders' equity                              $    1,888,860     $   1,723,924
                                                                        ===================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
<TABLE>
<CAPTION>
                                               Matrix Bancorp, Inc. and Subsidiaries
                                               Consolidated Statements of Operations

                                         (Dollars in thousands, except share information)

                                                                                  Years Ended December 31,
                                                                              2004           2003           2002
                                                                        ----------------------------------------------
<S>                                                                      <C>            <C>           <C>
Interest and dividend income:
   Loans and securities                                                  $     73,363   $     72,667  $     82,715
   Interest-earning deposits                                                    1,063          1,040         1,273
                                                                        ----------------------------------------------
Total interest and dividend income                                             74,426         73,707        83,988

Interest expense:
   Savings and time deposits                                                    5,900          9,410        17,242
   Demand and money market deposits                                             4,765          3,928         4,254
   FHLBank borrowings                                                          12,391          9,379         9,478
   Borrowed money and junior subordinated debentures                            8,743          9,282        10,304
                                                                        ----------------------------------------------
Total interest expense                                                         31,799         31,999        41,278
                                                                        ----------------------------------------------
Net interest income before provision for loan and valuation losses             42,627         41,708        42,710
Provision for loan and valuation losses                                         3,269          3,641         2,821
                                                                        ----------------------------------------------
Net interest income after provision for loan and valuation losses              39,358         38,067        39,889

Noninterest income:
   Loan administration                                                         15,253         21,668        27,359
   Brokerage                                                                   10,629         10,873         8,105
   Trust services                                                               7,853          6,781         5,345
   Real estate disposition services                                             7,786          6,624         4,153
   Gain on sale of loans and securities                                         6,618         14,267         5,480
   Gain on sale of assets                                                      31,767              -             -
   Gain on sale of mortgage servicing rights, net                                   -              -           675
   School services                                                              2,871          2,420         4,616
   Other                                                                        5,650          6,696         6,201
                                                                        ----------------------------------------------
Total noninterest income                                                       88,427         69,329        61,934

Noninterest expense:
   Compensation and employee benefits                                          32,891         34,984        36,350
   Amortization of mortgage servicing rights                                   16,100         32,497        24,176
   Occupancy and equipment                                                      6,166          6,172         5,600
   Postage and communication                                                    2,001          2,435         2,676
   Professional fees                                                            3,242          3,357         2,770
   Data processing                                                              3,005          2,860         2,796
   Subaccounting fees                                                           7,738          5,845         3,085
   (Recovery of) impairment on mortgage servicing rights                         (444)        (2,950)       14,219
   Other general and administrative                                            24,967         25,768        27,176
                                                                        ----------------------------------------------
Total noninterest expense                                                      95,666        110,968       118,848

Income (loss) from continuing operations before income taxes                   32,119         (3,572)      (17,025)
Income tax expense (benefit)                                                   10,359         (2,575)       (7,756)
                                                                        ----------------------------------------------
Income (loss) from continuing operations                                       21,760           (997)       (9,269)
                                                                        ----------------------------------------------
Discontinued operations:
Income from discontinued operations, net of income tax provision of
   $89, $2,149 and $3,439, respectively                                           137          3,322         5,317
                                                                        ----------------------------------------------
Net income (loss)                                                        $     21,897   $      2,325  $     (3,952)
                                                                        ==============================================
</TABLE>
                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                                               Matrix Bancorp, Inc. and Subsidiaries
                                               Consolidated Statements of Operations

                                         (Dollars in thousands, except share information)

                                                                                  Years Ended December 31,
                                                                              2004           2003           2002
                                                                        ----------------------------------------------
<S>                                                                     <C>            <C>                 <C>
Income (loss) from continuing operations per share - basic              $       3.34   $      (0.15)       $    (1.43)
                                                                        ----------------------------------------------
Income (loss) from continuing operations per share - assuming dilution  $       3.28   $      (0.15)       $    (1.43)
                                                                        ----------------------------------------------

Income from discontinued operations per share - basic                   $       0.02   $       0.51        $     0.82
                                                                        ----------------------------------------------
Income from discontinued operations per share - assuming dilution       $       0.02   $       0.51        $     0.82
                                                                        ----------------------------------------------

Net income (loss) per share - basic                                     $       3.36   $       0.36        $    (0.61)
                                                                        ==============================================
Net income (loss) per share - assuming dilution                         $       3.30   $       0.36        $    (0.61)
                                                                        ==============================================

Weighted average shares - basic                                              6,520,239      6,494,803        6,462,272
                                                                        ==============================================
Weighted average shares - assuming dilution                                  6,630,006      6,539,195        6,462,272
                                                                        ==============================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-5

<PAGE>
<TABLE>
<CAPTION>
                                               Matrix Bancorp, Inc. and Subsidiaries
                    Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss)

                                                      (Dollars in thousands)

                                                                                              Accumulated
                                          Common Stock      Additional                          Other                 Comprehensive
                                         -----------------    Paid-In   Treasury  Retained   Comprehensive                Income
                                         Shares     Amount    Capital    Shares   Earnings      Income        Total       (loss)
                                         ------------------------------------------------------------------------------------------
<S>                                      <C>        <C>      <C>         <C>      <C>        <C>             <C>        <C>
Balance at December 31, 2001             6,518,604  $    1   $20,800     $    -   $ 50,486   $       25      $71,312
 Shares repurchased                        (66,060)      -         -       (726)         -            -         (726)
 Shares retired (389,560 shares)                 -       -      (726)       726          -            -            -
 Issuance of stock related to employee
   stock purchase plan and options          36,999       -       301          -          -            -          301
 Comprehensive (loss):
   Net loss                                      -       -         -          -     (3,952)           -       (3,952)    $ (3,952)
   Net unrealized holding gains,
     net of income tax                           -       -         -          -          -            1            1            1
                                                                                                                         ----------
 Comprehensive income                                                                                                    $ (3,951)
                                         --------------------------------------------------------------------------------==========
Balance at December 31, 2002             6,489,543  $    1   $20,375     $    -   $ 46,534   $       26      $66,936
                                         --------------------------------------------------------------------------------

Issuance of stock related to employee
  stock purchase plan and options           29,438       -       240          -          -            -          240
Comprehensive income:
  Net income                                     -       -         -          -      2,325            -        2,325     $  2,325
  Net unrealized holding gains,
    net of income tax(2)                         -       -         -          -          -          183          183          183
                                                                                                                         ----------
Comprehensive income                                                                                                     $  2,508
                                         --------------------------------------------------------------------------------=========
Balance at December 31, 2003             6,518,981  $    1   $20,615     $    -   $ 48,859   $      209      $69,684
                                         --------------------------------------------------------------------------------

Issuance of stock related to employee
  stock purchase plan and options          101,869       -       817          -          -            -          817
Comprehensive income:
  Net income                                     -       -         -          -     21,897            -       21,897     $ 21,897
  Net unrealized holding losses,
    net of income tax(1)(2)                      -       -         -          -          -          (83)         (83)         (83)
                                                                                                                         ----------
Comprehensive income                                                                                                     $ 21,814
                                         --------------------------------------------------------------------------------=========
Balance at December 31, 2004             6,620,850  $    1   $21,432     $    -   $ 70,756   $      126      $92,315
                                         --------------------------------------------------------------------------------

(1) Disclosure of reclassification amount
    Unrealized holding loss arising during the year ended December 31, 2004                                              $    (83)
    Less: reclassification adjustment of gains included in net income                                                           -
                                                                                                                         ----------
    Net unrealized holding loss on securities, net of income tax (2)                                                     $    (83)
                                                                                                                         ==========
(2) Net of income tax expense of $123 and income tax benefit of $(56) for 2003 and 2004, respectively
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-6

<PAGE>
<TABLE>
<CAPTION>
                                               Matrix Bancorp, Inc. and Subsidiaries
                                               Consolidated Statements of Cash Flows

                                                      (Dollars in thousands)

                                                                             Years Ended December 31,
                                                                         2004            2003         2002
                                                                   ---------------------------------------------
<S>                                                                <C>               <C>             <C>
Operating activities
Income (loss) from continuing operations                            $    21,760      $      (997)    $ (9,269)
Adjustments to reconcile income (loss) from continuing
 operations to net cash used in operating activities:
   Depreciation and amortization                                          4,409            3,652        3,978
   Provision for loan and valuation losses                                3,269            3,641        2,821
   Amortization of mortgage servicing rights                             16,100           32,497       24,176
   (Recovery) impairment on mortgage servicing rights                      (444)          (2,950)      14,219
   Gain on sale of loans and securities                                  (6,618)         (14,267)      (5,480)
   Gain on sale of other assets                                         (31,767)               -            -
   Gain on sale of mortgage servicing rights, net                             -                -         (675)
   Loss on sale of building and equipment                                    25                -           17
   Loss (gain) on sale of foreclosed real estate                             51             (925)        (284)
   Tax benefits on stock options exercised                                 (234)               -            -
   Changes in assets and liabilities:
   Proceeds from the sale of trading securities                         179,174                -            -
   Loans originated for sale, net of loans sold                          12,324          (16,216)    (109,014)
   Loans purchased for sale                                          (1,738,181)      (1,636,986)  (1,127,632)
   Principal payments on, and proceeds from sale of loans held          632,879          743,713      684,364
     for sale
   Originated mortgage servicing rights, net                               (615)          (5,717)     (34,511)
   Decrease in other receivables and other assets                        18,344           18,508       10,608
   Decrease in payable for purchase of mortgage servicing rights           (199)            (581)      (3,956)
   Increase (decrease) in other liabilities, income taxes
     payable and deferred income tax liability                            4,445           (5,191)      26,964
                                                                   ---------------------------------------------
Net cash used in operating activities from continuing operations       (885,278)        (881,819)    (523,674)
   Net cash provided by discontinued operations                             137          353,903      139,964
                                                                   ---------------------------------------------
Net cash used in operating activities                                  (885,141)        (527,916)    (383,710)
                                                                   ---------------------------------------------
Investing activities
Loans originated and purchased for investment                          (129,714)        (236,055)    (253,672)
Principal repayments on loans held for investment                       154,869          130,302      137,972
Loans sold in the sale of Matrix Bank branches                           22,837                -            -
Purchase of available for sale securities                              (103,615)         (29,397)     (10,994)
Proceeds from sale of available for sale securities                     779,350          653,744      422,685
Proceeds from maturity and prepayment of available for sale              30,825            1,348        1,728
  securities
Purchase of held to maturity securities                                 (42,594)         (40,440)           -
Proceeds from the maturity and prepayment of held to maturity            11,145                -            -
  securities
Purchase of FHLBank stock, net                                           (2,799)            (303)     (12,198)
Purchase of bank owned life insurance                                         -          (20,000)           -
Purchases of premises and equipment                                        (576)          (4,121)     (17,614)
Proceeds from the sale of Matrix Bank branches premises and               4,788                -            -
  equipment
Proceeds from the sale of other assets                                   20,302                -            -
</TABLE>

                                      F-7
<PAGE>
<TABLE>
<CAPTION>
                                             Matrix Bancorp, Inc. and Subsidiaries
                                         Consolidated Statements of Cash Flows (continued)

                                                      (Dollars in thousands)

                                                                             Years Ended December 31,
                                                                         2004            2003         2002
                                                                   ---------------------------------------------
<S>                                                                 <C>              <C>            <C>
Acquisition of mortgage servicing rights                            $      (871)     $      (374)   $       -
Proceeds from the sale of building and equipment                              -                -           45
Proceeds from sale of foreclosed real estate                             11,011           12,306        8,306
Proceeds from sale of mortgage servicing rights                               -                -        9,682
                                                                   ---------------------------------------------
Net cash provided by investing activities                               754,958          467,010      285,940
                                                                   ---------------------------------------------
Financing activities
Net increase in deposits                                            $   319,034      $    40,102       67,722
Net deposits sold with sale of Matrix Bank branches                    (173,934)               -            -
Net (decrease) increase in custodial escrow balances                    (33,868)         (66,324)      22,125
Increase (decrease) in revolving lines and FHLBank borrowings, net       33,047           60,530      (18,663)
Payments of notes payable                                               (11,530)          (1,515)      (1,981)
Proceeds from notes payable and financing arrangements                    9,760                -        2,000
Payment of financing arrangements                                             -              (29)         (61)
Proceeds from issuance of capital securities of subsidiary trusts        10,000                -        5,000
Redemption of capital securities of subsidiary trusts                   (14,550)               -            -
Treasury shares repurchased                                                   -                -         (726)
Proceeds from issuance of common stock related to employee stock
  purchase plan and options                                                 583              240          301
                                                                    --------------------------------------------
Net cash provided by financing activities                               138,542           33,004       75,717
                                                                    --------------------------------------------
Increase (decrease) in cash and cash equivalents                          8,359          (27,902)     (22,053)
Cash and cash equivalents at beginning of the year                       34,510           62,412       84,465
                                                                    --------------------------------------------
Cash and cash equivalents at end of the year                         $   42,869      $    34,510    $  62,412
                                                                    ============================================
Supplemental disclosure of non-cash activity
Loans securitized and transferred to foreclosed real estate
  and other assets                                                   $   14,094      $    12,572    $   8,010
                                                                    ============================================
Loans securitized and transferred to securities available for sale   $  761,384      $   708,507    $ 435,528
                                                                    ============================================
Loans securitized and transferred to trading securities              $  251,336      $         -    $       -
                                                                    ============================================
Securities available for sale transferred to trading securities      $   54,163      $         -    $       -
                                                                    ============================================
Loans held for sale transferred to loans held for investment         $   88,778      $         -    $       -
                                                                    ============================================

Supplemental disclosure of cash flow information
Cash paid for interest                                               $   31,487      $    32,592    $  45,050
                                                                    ===========================================
Cash paid (received) for income taxes                                $   11,649      $     2,879    $  (4,074)
                                                                    ============================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-8
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

1.   Organization

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

Matrix  Bank, a federally  chartered  savings and loan  association,  serves the
local and national community through its Denver, Colorado location, primarily by
acquiring residential loans,  originating commercial real estate, Small Business
Administration and multi-family loans, providing trust services, and to a lesser
extent  personal  and business  depository  services.  During 2002,  Matrix Bank
completed the relocation of its domicile from Las Cruces,  New Mexico to Denver.
During  2004,  Matrix Bank entered into  definitive  agreements  to sell its two
retail  branches  in Las Cruces and its  retail  branch in Sun City,  Arizona to
Access Anytime BanCorp, Inc.'s subsidiary, FirstBank, as discussed more fully in
Note 5 below. The sale of the branches is not expected to  significantly  impact
the operations or liquidity of Matrix Bank or the Company.

The Company's  mortgage banking business is primarily  conducted  through Matrix
Financial,  and was  established  with the  primary  objective  of  originating,
acquiring and servicing  residential  mortgage  loans. On September 2, 2003, the
Company announced the final closing,  and substantial  completion of the sale by
Matrix  Financial  of  substantially  all  of its  assets  associated  with  its
wholesale  mortgage  origination  platform,  as  discussed  more fully in Note 6
below.  The servicing  platform was retained.  These  servicing  functions  were
transferred  to a third party  sub-servicer  effective  December  1, 2004.  This
sub-servicing arrangement is not expected to impact loan administration revenues
of the Company,  but is  anticipated to help lower the overall cost structure at
Matrix Financial.

Matrix Bancorp Trading, formerly known as Matrix Capital Markets, Inc., 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.

The Company's real estate disposition  services business was conducted by Matrix
Asset  Management  Corporation,   which  provided  real  estate  management  and
disposition  services  on  foreclosed  properties  owned  by  financial  service
companies   and   financial   institutions.   During  2004,   the  Company  sold
substantially all of the assets related to Matrix Asset Management,  retaining a
25% interest in the new company  created by the  purchaser,  as  discussed  more
fully in Note 3 below. The sale closed effective  September 1, 2004. We retained
MTXC Realty,  a former division of Matrix Asset  Management  Corporation,  which
operates a real estate  brokerage  office  operating  exclusively  in the Denver
metro area.

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

                                      F-9
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

First Matrix is registered with the National  Association of Securities  Dealers
as a fully disclosed  broker-dealer.  First Matrix is  headquartered  in Denver,
Colorado and has a branch office in Memphis,  Tennessee. First Matrix focuses as
agent for Matrix Bank on the acquisition,  brokering, securitization and sale of
Small Business Administration ("SBA") loans and SBA securities.

ABS, operating under the trade name The GEO Group,  provides outsourced business
services and financing primarily to charter schools.

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

2.   Significant Accounting Policies

Basis of Presentation

Accounting  Research  Bulletin  No.  51  ("ARB  51"),   Consolidated   Financial
Statements,  requires a company's  consolidated  financial statements to include
subsidiaries  in which the company has a controlling  financial  interest.  This
requirement  has been applied to  subsidiaries in which a company has a majority
voting  interest.  Investments  in  companies  in  which  the  Company  controls
operating and  financing  decisions  (principally  defined as owning a voting or
economic interest greater than 50%) are consolidated,  and intercompany accounts
and transactions have been eliminated in consolidation. The Company's investment
in Matrix Settlement & Clearance Services, LLC ("MSCS") in which the Company had
significant  influence  over  operating  and  financing  decisions  (principally
defined as owning a voting or economic  interest of 20% to 50%) through November
30, 2004 was accounted for by the equity method of accounting.  This  investment
was included in other assets and the Company's  proportionate share of income or
loss included in other  noninterest  income.  On November 30, 2004,  the Company
sold its 45%  membership  interest in MSCS,  as  discussed  more fully in Note 4
below. The Company has received  approximately 5% of outstanding common stock of
the new company formed by the  purchasers of MSCS.  The Company's  investment in
the new company, in which the Company has no control or influence over operating
and  financing  decisions  (principally  defined as owning a voting or  economic
interest of less than 20%), is accounted  for by the cost method of  accounting.
Any dividends  distributed on this investment are included in other  noninterest
income.

The voting interest  approach defined in ARB 51 is not applicable in identifying
controlling  financial  interests in entities that are not controllable  through
voting  interests  or in which the  equity  investors  do not bear the  residual
economic  risks.  In  such  instances,   Financial  Accounting  Standards  Board
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities",
and the revised FIN 46R, indicate when a company should include in its financial
statements the assets, liabilities and activities of another entity. In general,
a variable interest entity ("VIE") is a corporation,  partnership, trust, or any
other  legal  structure  used for  business  purposes  that either does not have
equity  investors with voting rights or has equity investors that do not provide
sufficient financial resources for the entity to support its activities.  FIN 46
provides  guidance  on how to  identify  a VIE and  determine  when the  assets,
liabilities, noncontrolling interests, and results of operations of a VIE are to
be included in an entity's consolidated  financial statements.  Generally, a VIE
exists when either the total  equity  investment  at risk is not  sufficient  to
permit the entity to finance its activities by itself,  or the equity  investors
lack one of three characteristics associated with owning a controlling financial
interest.  Those characteristics  include the direct or indirect ability to make
decisions about an entity's  activities through voting rights or similar rights,
the obligation to absorb the expected  losses of an entity if they occur, or the
right to receive the expected  residual returns of the entity if they occur. The

                                      F-10
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

Company  has 6 VIE's  in the form of its  wholly-owned  subsidiary  trusts  that
issued  capital  securities to  third-party  investors and to certain direct and
indirect  interests in investment  partnerships,  commonly  referred to as Trust
Preferred  securities.  Such VIE's  have been  deconsolidated  in the  financial
statements  beginning  in  2003  with  the  implementation  of FIN  46.  Further
discussion regarding these  securitization  trusts is included below and in Note
14.

Critical Accounting Policies and Estimates

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

The Company  views the  allowance  for loan and  valuation  losses as a critical
accounting policy that requires significant judgments, assumptions and estimates
used in preparation of its consolidated financial statements. See further detail
in this Note for a detailed description of the Company's process and methodology
related to the allowance for loan and valuation losses.

The Company also considers the valuations of mortgage servicing rights and loans
held for  sale,  which  require  the  asset to be  recorded  at lower of cost or
market, to be critical accounting  policies that require judgments,  assumptions
and estimates used in preparation of its consolidated financial statements.  See
further  detail in this Note for a  detailed  discussion  concerning  the use of
estimates in the valuation of mortgage servicing rights and loans held for sale.

The Company also considers the judgments and assumptions  concerning  litigation
as a critical  accounting  policy.  The Company has been  notified that we are a
defendant in a number of legal  proceedings,  as discussed in detail in Note 19.
Most of these cases  involve  ordinary  and  routine  claims  incidental  to our
business.  We accrue for  contingent  liabilities  with  respect  to  litigation
matters in accordance with the requirements of Statement of Financial Accounting
Standards  ("SFAS")  No. 5,  "Accounting  for  Contingencies,"  which  generally
requires  the  Company  to accrue a loss for a  litigation  matter  involving  a
contingent  liability  if the loss is  probable  and the  amount  of the loss is
reasonably estimable. In order to determine whether the two conditions necessary
for accrual are met,  management  makes a number of judgments  and  assumptions.
Because the outcome of most  litigation  matters is  inherently  uncertain,  the
Company will generally only a accrue a loss for a pending  litigation matter if,
for example,  the parties to the matter have entered into definitive  settlement
agreements or a final  judgment  adverse to the Company has been  entered.  With
respect to all pending litigation matters, our ultimate legal responsibility, if
any, cannot be estimated with certainty.  Based on the ultimate  outcome of such
proceedings, it is possible that future results of operations for any particular
quarter  or  annual  period  could be  materially  affected  by  changes  in our
assumptions related to such proceedings.

                                      F-11
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

The  preparation of the  consolidated  financial  statements in conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires management to make estimates and assumptions that affect the amounts of
assets and liabilities at the date of the consolidated financial statements, and
disclosures of contingent  assets and  liabilities  and the reported  amounts of
revenue and expenses  during the reporting  period.  Actual results could differ
from these estimates.  See discussion above regarding estimates used in critical
accounting policy areas.

Certain  reclassifications  have been made to prior years consolidated financial
statements and related notes to conform to the current year presentation.

Derivative Instruments and Hedging Activities

The Company,  through its subsidiary Matrix Financial,  had historically entered
into derivative transactions  principally to protect against the risk of adverse
price or  interest  rate  movements  on the value of mortgage  servicing  rights
asset.  As  discussed  further  below,  during the second  quarter of 2004,  the
Company  made the  decision  to remove  the hedge and did not  reconstitute  the
hedging  position  throughout the remainder of the year ended December 31, 2004.
The Company is also required to recognize  certain  contracts and commitments as
derivatives when the characteristics of those contracts and commitments meet the
definition of a derivative.

Under the guidelines of SFAS No. 133, "Accounting for Derivative Instruments and
Certain Hedging Activities", as amended, ("SFAS 133") all derivative instruments
are required to be carried at fair value on the balance sheet. SFAS 133 provides
special hedge accounting  provisions,  which permit the change in the fair value
of the hedged item related to the risk being hedged to be recognized in earnings
in the same period and in the same income  statement  line as the change in fair
value of the derivative.

At December  31, 2004 and 2003,  the  Company has no  derivative  that meets the
hedge accounting  provisions  provided under SFAS 133, and at December 31, 2004,
has no economic or other  hedges  outstanding.  However,  the Company  does have
contracts and  commitments  that meet the  definition of a derivative.  SFAS 133
requires the Company to record certain  commitments  principally  related to the
purchase  of  assets  to be held for  sale as  derivatives  on the  consolidated
balance sheets.  See Note 19 for further  details on off-balance  sheet risk and
concentration of commitments.

Historically,  the Company had a program that utilized derivative instruments to
hedge a portion of its investment in mortgage  servicing  rights.  The Company's
hedge  was an  economic  hedge to  offset  changes  in fair  value  of  mortgage
servicing  rights  caused by changes  in  interest  rates with  changes in hedge
instruments that consist of futures contracts and options on futures. During the
second  quarter of 2004, the Company made the decision to remove the hedge based
on the  underlying  characteristics  of the servicing  portfolio,  amongst other
considerations,  including  our asset and  liability  mix.  For the year's ended
December  31,  2004 and 2003,  the  change in the fair  value of the  derivative
instruments is recorded with a corresponding charge or credit to income.

Investment Securities

Securities  available  for  sale  include  mortgage-backed  securities  and  SBA
securities.  Securities  available for sale are carried at estimated  fair value
with the change in unrealized  gains and losses reported in other  comprehensive

                                      F-12
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

income,  net of tax, which is included as a separate  component in shareholders'
equity.  Realized  gains  and  losses on the sale of,  and  other-than-temporary
impairment  charges on,  available for sale  securities are recorded in gains on
sale of loans and securities using the specific-identification method.

Securities held to maturity include mortgage-backed  securities.  Securities are
classified  as held to maturity  when  management  has the  positive  intent and
ability to hold the  securities  to  maturity.  Securities  held to maturity are
carried at amortized cost.

Purchase  premiums and  discounts are  recognized  in interest  income using the
interest method over the terms of the securities.  Declines in the fair value of
held to maturity and  available  for sale  securities  below their cost that are
deemed to be other-than-temporary  are reflected in earnings as realized losses.
In estimating  other-than-temporary  impairment losses, management considers the
length of time and the  extent to which the fair  value has been less than cost,
the financial condition and near term prospects of the issuer and the intent and
ability of the  Company to retain its  investment  in the issuer for a period of
time sufficient to allow for any anticipated  recovery in fair value.  Gains and
losses  on the  sale of  securities  are  recorded  on the  trade  date  and are
determined using the specific identification method.

Trading securities include SBA securities.  Securities are classified as trading
securities when they are created or bought and held  principally for the purpose
of selling them in the near term.  Trading  securities  are carried at estimated
fair value  with the change in  unrealized  gains and losses  reported  in other
income.

The  Company  purchases  the  guaranteed  portion of SBA loans from  third-party
lenders and then securitizes  these loans into SBA guaranteed  pooled securities
through  the use of a  fiscal  and  transfer  agent  approved  by the  SBA.  The
certificates are then sold directly to institutional investors,  achieving legal
isolation.  The process of securitizing SBA loans into pools of SBA certificates
is prescribed by the SBA and must be followed to obtain the SBA guarantee.  This
securitization  meets the  requirements  for sale treatment  under SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of  Liabilities,"  ("SFAS  140").  An SBA  approved  fiscal and  transfer  agent
associated  with  the  SBA  securitizations  issues  certificates  once  all the
necessary  documents  to  support  the  transaction  have been  provided  by the
Company.  The SBA  guarantees the credit risk with respect to the loans sold. In
accordance with SFAS 140, sales of these  securitized loans are removed from the
balance  sheet  and a net gain or loss is  recognized  in  income at the time of
initial sale, and each subsequent sale when the combined net sales proceeds and,
if applicable,  retained  interests  differ from the loans'  allocated  carrying
amount. Net gains or losses are recorded in noninterest income.

Loans Held for Sale

Loans  purchased  or  originated  without  the  intent to hold to  maturity  are
classified  as held for sale.  Loans  held for sale are  carried at the lower of
aggregate  cost,  net of  discounts or premiums  and a valuation  allowance,  or
estimated  fair market value.  Estimated  fair market value is determined  using
forward  commitments  to sell loans or  mortgage-backed  securities to permanent
investors,  or current  market rates for loans of similar  quality and type. Net
unrealized losses, if any, are recognized in a valuation allowance by charges to
operations. SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated
with  Originating  or  Acquiring  Loans and  Initial  Direct  Costs of  Leases,"
requires  discounts  or premiums  on loans held for sale be  deferred  until the
related loan is sold. The Company appropriately accretes discounts and amortizes
premiums  related to repayment of loan principal,  which is included in interest
income. The loans are primarily secured by 1-to-4 family residential real estate
located throughout the United States or guaranteed by the SBA.

                                      F-13
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

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

Loans Held for Investment

Loans that the Company  has the intent and  ability to hold for the  foreseeable
future or until maturity or payoff are classified as held for investment.  Loans
held for investment generally are reported at unpaid principal balances adjusted
for charge offs, net of unearned discounts and premiums, deferred loan fees, and
allowance  for loan  losses.  The  loans  include  residential  mortgage  loans,
commercial loans, multi-family, and SBA loans, and are primarily secured by real
estate.  Interest  income is  accrued  on the  unpaid  principal  balance.  Loan
origination  fees, net of certain  direct  origination  costs,  are deferred and
amortized  into  interest  income as an adjustment to the yield over the term of
the loan.

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

Allowance for Loan and Valuation Losses

The allowance for loan and valuation losses is management's estimate of probable
credit  losses  inherent  in  the  loan   portfolios.   Management   takes  into
consideration  factors  such as the amount and timing of  expected  future  cash
flows on impaired loans, estimated losses on pools of homogeneous loans based on
historical loss  experience,  and  consideration  of current economic trends and
conditions.

The allowance for loan losses consists of three components, pools of homogeneous
loans with similar risk characteristics,  individually  significant loans, often
classified,  that are  measured  for  impairment  and a  component  representing
estimated probable inherent but undetected  losses,  which also contemplates the
imprecision in the credit risk models utilized to calculate the allowance.

Pools of homogeneous  loans with similar risk  characteristics  are assessed for
probable losses based on loss migration  analysis where loss factors are updated
regularly based on actual experience. The analysis also examines historical loss
experience  and the related  internal  gradings of loans  charged  off. The loss
migration  analysis also  considers  inherent but  undetected  losses within the
portfolio.

                                      F-14
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

The portion of the  allowance  established  for loans  measured  for  impairment
reflects  expected losses  resulting from analyses  developed  through  specific
credit allocations for individual loans.

The  last  component  of the  allowance  for  loan  losses  is a  portion  which
represents  the  estimated  probable  inherent but  undetected  losses,  and the
imprecision in the credit risk models utilized to calculate the allowance.  This
component of the allowance is not associated  with any particular  loan type and
is reflective of the uncertainty  surrounding  general  economic  conditions and
ongoing  uncertainty with respect to a small number of individually  large loans
or uninsured single family mortgage loans.

Loan losses are charged against the allowance when the probability of collection
is considered remote. In the opinion of management, the allowance is adequate to
absorb the inherent losses in the current loan portfolio.

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

Mortgage Servicing Rights

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

The estimated fair value of MSRs is determined  based on the  discounted  future
servicing   income   stratified   based   on  one  or  more   predominant   risk
characteristics  of the  underlying  loans.  The Company  stratifies its MSRs by
product  type,  interest  rate and  investor  to reflect  the  predominant  risk
characteristics. To determine the estimated fair value of MSRs, the Company uses
a valuation  model that  calculates the present value of discounted  future cash
flows. In using this valuation model, the Company incorporates  assumptions that
market  participants would use in estimating future net servicing income,  which
includes  estimates of the cost of  servicing  per loan,  including  incremental
interest  cost of  servicer  advances,  foreclosure  expenses  and  losses,  the
discount  rate,  float value,  an  inflation  rate,  ancillary  income per loan,
prepayment  speeds and default  rates.  For purposes of performing an impairment
analysis on MSRs, the Company  estimates fair value using the following  primary
assumptions:   prepayment   speeds  ranging  from  90  PSA  (Public   Securities
Association  prepayment speed  measurement) to 1,512 PSA; discount rates ranging
from 9.00% to 17.00%; and default rates ranging from 0% to 100%.

MSRs are  evaluated  for  impairment  in  accordance  with SFAS 140. The factors
discussed above are used to determine impairment. If temporary impairment exists
within a risk  stratification  tranche,  a valuation  allowance  is  established

                                      F-15
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

through a charge  to income  equal to the  amount  by which the  carrying  value
exceeds  the fair  value.  If it is later  determined  all or a  portion  of the
temporary  impairment no longer exists for a particular  tranche,  the valuation
allowance is reduced through acredit to noninterest expense.

MSRs are also reviewed for other-than-temporary impairment. Other-than-temporary
impairment exists when the recoverability of a recorded  valuation  allowance is
determined  to be remote  taking into  consideration  historical  and  projected
interest  rates and loan  pay-off  activity.  When this  situation  occurs,  the
unrecoverable  portion  of  the  valuation  allowance  is  applied  as a  direct
write-down to the carrying value of the MSRs.  Unlike a valuation  allowance,  a
direct  write-down  permanently  reduces the carrying  value of the MSRs and the
valuation allowance, preventing subsequent recoveries.

As of  December  31, 2004 and 2003,  a valuation  allowance  of  $3,406,000  and
$6,450,000, respectively, was required, and the fair value of the aggregate MSRs
was approximately $26,574,000 and $39,744,000, respectively.

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

Premises and Equipment

Premises  and  equipment  are  carried  at cost less  accumulated  depreciation.
Depreciation is computed using the straight-line method over the estimated lives
of the assets,  which  generally  range from 2 to 7 years for  software,  office
furniture and equipment and 40 years for buildings.  Leasehold  improvements are
amortized over the shorter of the useful economic life or the lease term.

Foreclosed Real Estate

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

Bank Owned Life Insurance

Bank owned life insurance  represents the cash surrender value of life insurance
policies  purchased  to insure the lives of certain  officers  and  directors of
Matrix Bank.  Earnings are credited to the balance and recorded as part of other
income in the consolidated statements of operations.

Impairment or Disposal of Long-Lived Assets

The  Company  reviews  long-lived  assets  to be held and  used  for  impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison  of the carrying  amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.

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 uses the asset and liability  method in accounting for income taxes.
Under this method,  deferred tax assets and liabilities are determined  based on

                                      F-16
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

differences between financial reporting and tax basis of assets and liabilities,
and are  measured  using the  enacted  tax rates and laws that will be in effect
when the differences are expected to reverse.

Loan Administration Income

Loan administration  income represents service fees and other income earned from
servicing  loans for various  investors.  Loan  administration  income  includes
service  fees  that are based on a  contractual  percentage  of the  outstanding
principal  balance plus late fees and other ancillary  charges.  Service fees on
loans  and all  other  income  are  recognized  when the  related  payments  are
received.  The servicing functions previously performed by Matrix Financial were
transferred to a third party  sub-servicer  in the fourth quarter of 2004.  Loan
administration fees are not expected to be impacted by this transfer.

Brokerage Income

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

Trust Services Income

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

Real Estate Disposition Services Income

Real estate  disposition  services income represents fees earned related to real
estate  management and disposition  services provided to others, as well as real
estate  brokerage  fees. Real estate  disposition  services income is recognized
when  services  are  performed.  See  Note 3 for a  discussion  of the  sale  of
substantially all of our assets related to our real estate disposition  services
subsidiary.

School Services Income

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

Subaccounting fees

Subaccounting  fees represent  fees paid to a third party to service  depository
accounts on our behalf.  Such fees are paid to third parties that provide Matrix
Bank custodial and wholesale deposits.

Stock-Based Compensation

At December  31, 2003,  the Company has one  stock-based  employee  compensation
plan,  which  is  described  more  fully  in Note 18.  We  apply  the  intrinsic

                                      F-17
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

value-based  method of  accounting  prescribed by  Accounting  Principles  Board
("APB") Opinion No. 25,  "Accounting  for Stock Issued to Employees,"  ("Opinion
No.  25").  Under this method,  compensation  expense is recorded on the date of
grant only if the current  market  price of the  underlying  stock  exceeded the
exercise price.  SFAS 123,  "Accounting for  Stock-Based  Compensation,"  ("SFAS
123"),   established  accounting  and  disclosure   requirements  using  a  fair
value-based method of accounting for stock-based employee  compensation plan. As
allowed by SFAS 123 and SFAS 148  "Accounting  for Stock  Based  Compensation  -
Transition  and  Disclosure,  an Amendment to FASB  Statement  No. 123," we have
elected to  continue to apply the  intrinsic  value-based  method of  accounting
described  above,  and have  adopted the  disclosure  requirements  of SFAS 123.
Accordingly,  we do not recognize compensation expense for our stock-based plan,
as we do not issue options at exercise prices below the market value at the date
of the grant.  In December  2004,  the FASB  revised  SFAS 123 with SFAS 123(R),
"Share-Based   Payment,"   ("SFAS   123(R)")  which   eliminates  the  intrinsic
value-based method and requires all entities to recognize  compensation  expense
in an  amount  equal  to the  fair  value of share  based  payments  granted  to
employees.  The Company is required to adopt SFAS 123(R) for the interim  period
beginning July 1, 2005. The Company  currently expects to adopt SFAS 123(R) with
the interim period beginning July 1, 2005 under the modified prospective method.
As a result,  the Company will have compensation  expense for any awards granted
after  the date of  adoption,  and will  include  compensation  expense  for the
unvested  portions of previously  granted awards that remain  outstanding at the
date of adoption.

Had compensation cost for our stock-based plans been determined  consistent with
SFAS No. 123, our net income  (loss) and income (loss) per share would have been
changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                                                    Year ended December 31,
                                                            2004             2003              2002
                                                     ------------------------------------------------------
                                                           (Dollars in thousands, except share data)
<S>                                                  <C>               <C>               <C>
Net income (loss):
   Net income (loss) as reported                     $      21,897     $        2,325    $     (3,952)
   Deduct: Total stock-based employee compensation
   expense determined under fair value based method
   for awards, net of related tax effects                     (236)              (262)           (358)
                                                     ------------------------------------------------------
   Pro forma                                         $      21,661     $        2,063    $     (4,310)
                                                     ======================================================
Income (loss) per share:
   Basic, as reported                                $        3.36     $          0.36   $      (0.61)
                                                     ======================================================
   Basic, pro forma                                  $        3.32     $          0.32   $      (0.67)
                                                     ======================================================
   Diluted, as reported                              $        3.30     $          0.36   $      (0.61)
                                                     ======================================================
   Diluted, pro forma                                $        3.27     $          0.32   $      (0.67)
                                                     ======================================================
</TABLE>

Cash and Cash Equivalents

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

Income (Loss) Per Common Share

Basic income (loss) per common share from  continuing  operations is computed by
dividing income (loss) from continuing operations by the weighted average number
of common shares outstanding for the period. Basic and diluted income per common

                                      F-18
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

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

Restructuring Charges

Associated with the transfer by Matrix  Financial of the servicing  function for
our MSRs to a third  party  sub-servicer  in the  fourth  quarter  of 2004,  the
Company  recorded  pre-tax  charges of  approximately  $1.4  million  related to
write-offs  for  furniture,   fixtures,  leasehold  improvements  and  retention
packages.  These charges are included in noninterest  expense for the year ended
December 31, 2004.

Associated with the purchase of Matrix  Financial Center by Matrix Bank in 2002,
Matrix  Bancorp  and certain  subsidiaries  with  various  leased  office  space
throughout  the  Denver  metropolitan  area  moved  their  offices  into  Matrix
Financial  Center.  Associated  with this move,  the Company  recorded a pre-tax
charge of $700,000 in other  general and  administrative  expenses  for the year
ended  December  31,  2002.  The  charge  represents  the  excess of costs to be
incurred on original  leased space in excess of expected  revenues on subleasing
of  the  space  or  terminating  original  lease  commitments.  Moving  expenses
associated  with  the  final  relocation  are  included  in  other  general  and
administrative expenses for the years ended December 31, 2003 and 2002.

Fair Value of Financial Instruments

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

Impact of Recently Issued Accounting Standards

In March 2004,  the  Securities  and Exchange  Commission  ("SEC")  issued Staff
Accounting  Bulletin  105,   "Application  of  Accounting   Principles  to  Loan
Commitments"  which provides guidance regarding mortgage loan interest rate lock
commitments  related to loans held for sale as written  options,  effective  for
commitments  entered  into after  March 31,  2004.  Prior to  February  28, 2003
(corresponding to the first closing date of the sale of the Production  Platform
of Matrix Financial as discussed more fully in Note 6), the Company entered into
such  commitments  with customers in connection with  residential  mortgage loan
applications;  however, the amount of these commitments is no longer material to
the Company's consolidated financial statements. The impact of implementing this
guidance  did  not  have a  significant  impact  on the  consolidated  financial
statements.

In December 2004, the FASB issued a revision to SFAS 123, with SFAS 123(R). SFAS
123(R) supersedes APB Opinion No. 25, and amends SFAS No. 95, "Statement of Cash
Flows." SFAS 123(R)  requires all share-based  payments to employees,  including
grants of employee stock options,  to be recognized in the financial  statements
based on their fair values.  Proforma  disclosure,  as included in Note 2 to the

                                      F-19
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

consolidated  financial  statements  above,  is no  longer an  alternative.  The
Company is required to adopt SFAS 123(R) for the interim  period  beginning July
1, 2005.  The  Company  currently  expects to adopt SFAS 123(R) with the interim
period beginning July 1, 2005 under the modified prospective method. See further
discussion in Note 2 to the consolidated  financial statements above. We believe
the  adoption  of SFAS  123(R)  will  have a minor  impact  on the  consolidated
financial  statements.  The impact of the adoption of SFAS No.  123(R) cannot be
predicted  at this time  because  it will  depend on the  levels of  share-based
payments  granted in the future.  However,  had we adopted  SFAS 123(R) in prior
periods,  the impact of the standard would have  approximated the impact of SFAS
123 as  described  above in our  disclosure  of pro forma net income  (loss) and
income (loss) per share in this Note.

In March 2004,  the Emerging  Issues Task Force Issue No. 03-1,  "The meaning of
Other-than-Temporary  Impairment  and Its  Application  to Certain  Investments"
("EITF  03-1"),  was issued.  EITF 03-1 provides  guidance for  determining  the
meaning of "other-than-temporarily impaired" and its application to certain debt
and equity securities within the scope of SFAS No. 115,  "Accounting for Certain
Investments  in  Debt  and  Equity  Securities"  ("SFAS  115")  and  investments
accounted  for under the cost method.  The guidance  requires  that  investments
which have declined in value due to credit  concerns or solely due to changes in
interest rates must be recorded as other-than-temporarily impaired unless it can
be asserted  and  demonstrated  that the Company has the  intention  to hold the
security for a period of time  sufficient  to allow for a recovery of fair value
up to or beyond the cost of the investment,  which might mean to maturity.  EITF
03-1  also  requires  disclosures  assessing  the  ability  and  intent  to hold
investments in instances in which an investor determines that an investment with
a fair value less than cost is not other-than-temporarily impaired. In September
2004, the FASB delayed the effective date for the  measurement  and  recognition
guidance  contained in EITF 03-1, but the  disclosure  guidance was not delayed.
The Company is continuing to assess the impact of this EITF, but does not expect
the  implementation to have a significant  impact on the consolidated  financial
statements.  See Note 8 to the  consolidated  financial  statements  herein  for
required disclosures of EITF 03-1.

In January  2003,  the FASB  issued FIN 46,  which  provides  guidance on how to
identify  a VIE and  determine  when  the  assets,  liabilities,  noncontrolling
interests,  and results of operations of a VIE are to be included in an entity's
consolidated  financial  statements.  A VIE exists when either the total  equity
investment  at risk is not  sufficient  to  permit  the  entity to  finance  its
activities by itself, or the equity investors lack one of three  characteristics
associated with owning a controlling  financial interest.  Those characteristics
include  the direct or  indirect  ability to make  decisions  about an  entity's
activities through voting rights or similar rights, the obligation to absorb the
expected losses of an entity if they occur, or the right to receive the expected
residual returns of the entity if they occur. In December 2003, the FASB revised
FIN 46  with  certain  modifications  and  clarifications.  Application  of this
guidance was effective  for  interests in certain VIEs  commonly  referred to as
special-purpose  entities  (SPEs) as of December 31, 2003.  Application  for all
other types of entities was  required  for periods  ending after March 15, 2004,
unless  previously  applied.  During the fourth  quarter  of 2003,  the  Company
applied the  provisions  of FIN 46 and the  revised  FIN 46 to its  wholly-owned
subsidiary trusts that issued capital securities to third-party investors and to
certain  direct  and  indirect   interests  in  investment   partnerships.   The
application  of FIN 46, and early  adoption of the reissued FIN 46,  resulted in
the  deconsolidation  of the  wholly-owned  subsidiary  trusts.  The  assets and
liabilities of the subsidiary trusts that are  deconsolidated  total $61,835,000
and  $66,525,000,  respectively.  See Note 14 for  further  discussion  of these
trusts and the Company's related obligations.

In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of  Statement  133 on
Derivative  Instruments and Hedging  Activities," ("SFAS 149"), which amends and
clarifies  financial  accounting  and reporting for derivative  instruments  and
hedging activities under SFAS 133, as well as amends certain other existing FASB

                                      F-20
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

pronouncements.  In general,  SFAS 149 is effective for derivative  transactions
entered into or modified and for hedging relationships designated after June 30,
2003.  The  adoption  of this  standard  did not have a  material  impact on the
consolidated financial statements.

In June  2001,  the FASB  issued  SFAS No 142,  "Goodwill  and Other  Intangible
Assets,"  that  supersedes  APB Opinion  No. 17.  Under SFAS 142,  goodwill  and
intangible assets deemed to have indefinite lives are no longer  amortized,  but
are to be reviewed at least annually for impairment, under impairment guidelines
established in the statement. SFAS 142 also changes the amortization methodology
in  intangible  assets that are deemed to have finite lives and adds to required
disclosures  regarding goodwill and intangible assets. SFAS 142 is effective for
fiscal years  beginning after December 15, 2001. The Company adopted SFAS 142 on
January  1, 2002 and its  unamortized  balance of  goodwill  as of that date was
$1,004,000.  Beginning in 2002, the Company ceased its amortization of goodwill.
During the fourth quarter of 2002, under guidelines  contained in the statement,
management performed an analysis concerning potential impairment of the goodwill
carried at ABS, and  determined an  impairment of goodwill was present,  and the
entire goodwill balance of $1,004,000 was written off. The consolidated  balance
of goodwill is $0 at both December 31, 2004 and 2003.

3.  Sale of Majority Interest in Real Estate Disposition Services Subsidiary

On September 10, 2004, the Company announced the sale by Matrix Asset Management
Corporation  ("MAMC")  of  substantially  all of its assets  related to its real
estate management and disposition  business.  After the sale, we have retained a
25%  interest  in the  new  company  created  by  the  purchaser,  Matrix  Asset
Management,  LLC,  ("MAM,  LLC"),  as well as our remaining  operations in MAMC,
renamed MTXC Realty, of a real estate brokerage office operating  exclusively in
the Denver metro area.  As part of the  transaction,  referrals  for the sale of
real  estate  managed by MAM,  LLC in the Denver  metro area  generally  will be
referred to MTXC Realty.  During the third quarter 2004, the Company  recorded a
gain on sale of approximately  $13,500,000.  The Company received payment in the
form of cash and a note receivable of $5,000,000, payable in quarterly principal
and interest  payments over three years,  which is included in other receivables
at December 31, 2004.  The 25% ownership  will be accounted for using the equity
method of accounting.  Due to our 25% ownership, we will continue to reflect the
operations of MTXC Realty,  including the future equity earnings in MAM, LLC, as
continuing operations.  At December 31, 2004, the investment in MAMC included in
other assets in the  consolidated  balance  sheet is  $688,000.  The Company may
require the  purchaser to purchase its 25% interest in MAM, LLC at anytime,  the
purchase price of which may be paid by the purchaser,  at its option, in cash or
a combination of cash and an unsecured promissory note. The purchaser,  in turn,
may require the Company to sell its 25%  interest to the  purchaser  for cash at
any time during the  30-calendar  day period  beginning on December 26th of each
year, commencing December 26, 2007. The purchase price for the 25% interest will
be  determined  in  accordance  with a fair value  formula  that  considers  the
earnings  and net  worth  of MAM,  LLC,  as set  forth in MAM,  LLC's  Operating
Agreement.

For as long as the Company  owns an interest in MAM, LLC and for a period of one
year thereafter,  the Company has agreed that, except in limited  circumstances,
neither  the  Company  nor any of its  affiliates  will  engage in,  directly or
indirectly, the real estate disposition services business. The parties have also
entered into an agreement  that the majority  owner of MAM, LLC, will maintain a
certain  level of  deposits  at  Matrix  Bank  through a date  specified  in the
Contribution and Sales Agreement.

The following unaudited pro forma condensed  consolidated  financial information
presented  for the years ended  December 31, 2004,  2003 and 2002, is based upon
the Company's historical results from operations, adjusted to reflect the impact

                                      F-21
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

of the sale of substantially  all of the assets of MAMC and the retention of the
25% minority  interest in MAM, LLC as if the sale had occurred  January 1, 2002.
The  $13,500,000  pre-tax gain on the sale of the assets of MAMC during the year
ended  December 31, 2004 is also  excluded  from the pro forma  balances as this
gain is a nonrecurring  item that is the direct result of the  transaction.  The
pro  forma  condensed   consolidated  financial  information  is  presented  for
illustrative  purposes  only and is not  indicative  of any  future  results  of
operations  or the  results  that might have  occurred  if the  disposition  had
actually  been  completed  on the  indicated  dates.  MAMC  had  net  assets  of
$1,000,000,  which were sold to the  purchaser.  For all  periods  for which pro
forma  financial  information  is  required,  MAMC had total assets of less than
$10,000,000,  and  accordingly,   presentation  of  consolidated  balance  sheet
information is not required, nor meaningful.
<TABLE>
<CAPTION>

                                                                  Years Ended December 31,
                                 --------------------------------------------------------------------------------------------
                                        As        Pro Forma           As        Pro Forma            As         Pro Forma
                                     Reported    (Unaudited)       Reported    (Unaudited)        Reported      (Unaudited)
                                             2004                          2003                            2002
                                 -----------------------------  ----------------------------    -----------------------------
                                                      (Dollars in thousands, except share information)
<S>                               <C>             <C>            <C>            <C>              <C>             <C>
Net interest income after
   provision for loan and
   valuation losses               $    39,358        39,358      $   38,067        38,067        $    39,889         39,889
Noninterest income                     88,427        68,523          69,329        63,306             61,934         58,028
Noninterest expense                    95,666        90,891         110,968       105,988            118,848        115,686
                                 -----------------------------  ----------------------------    -----------------------------
Income (loss) from continuing
   operations before income taxes      32,119        16,990          (3,572)       (4,615)           (17,025)       (17,025)

Income tax provision (benefit)         10,359         4,404          (2,575)       (3,001)            (7,756)        (8,057)
                                 -----------------------------  ----------------------------    -----------------------------
Income (loss) from continuing
   operations                          21,760        12,586            (997)       (1,614)           (9,269)         (9,712)

Income from discontinued
   operations, net of income tax          137           137           3,322         3,322             5,317           5,317
                                 -----------------------------  ----------------------------    -----------------------------
Net income (loss)                 $    21,897        12,723      $    2,325         1,708        $   (3,952)         (4,395)
                                 =============================  ============================    =============================

Income (loss) per share - basic
                                  $      3.36          1.95      $      0.36           0.26      $     (0.61)         (0.68)
                                 =============================  ============================    =============================
Income (loss) per share -
   assuming dilution              $      3.30          1.92      $      0.36           0.26      $     (0.61)         (0.68)
                                 =============================  ============================    =============================
</TABLE>

4.  Sale of Interest in Matrix Settlement and Clearances Services, LLC

On November 30, 2004, the Company through certain of its  subsidiaries,  entered
into definitive  agreements to sell the 45% membership interest in MSCS, as well
as all of the assets of the trust  operations  of Matrix  Bank,  to MG  Colorado
Holdings,  Inc.  ("MGCH"),  which is an entity  controlled by the  principals of
Optech  Systems,  Inc.,  one of the  original  co-owners  of MSCS along with the
Company.

In consideration of the sale of the 45% membership interest in MSCS, the Company
has received approximately 5% of the outstanding common stock of MGCH, and cash.
This portion of the transaction closed December 1, 2004.

                                      F-22
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

As a  result  of the  sale,  the  Company  recorded  a  pre-tax  gain on sale of
approximately $8,242,000,  which is included in the gain on sale of other assets
for the year ended  December 31, 2004.  The 5%  ownership  interest  retained is
accounted for using the cost basis of accounting.  In  consideration of the sale
of the assets of the trust  operations  of Matrix  Bank,  MGCH will issue common
stock of approximately 2% of the outstanding common stock of MGCH.  Consummation
of the sale of the assets of the trust  operations of Matrix Bank is conditioned
on customary  closing  conditions,  including  receipt of applicable  regulatory
approvals and other necessary  third party consents and approvals.  In the event
that such closing  conditions are not met prior to December 1, 2005, the parties
shall be relieved from any further  obligations  in connection  with the sale of
the assets of the trust operations.

The parties have also entered into an agreement  that  continues the  depository
relationship of the companies through at least September 30, 2006.

The Contribution  Agreement entered into provides for customary  indemnification
by each  party to the  other  for  taxes and  breaches  of  representations  and
warranties.   The   indemnifications  are  subject  to  certain  conditions  and
limitations,  including  a cap on  indemnification  related to the assets of the
trust  operations  of $750,000.  The parties  indemnification  obligations  will
expire on December 1, 2006, provided that indemnification obligations related to
the assets of the trust  operations  of Matrix Bank will  continue  for a period
thereafter as defined in the Contribution Agreement.

The Company and its  subsidiaries,  and former  members of MSCS have agreed that
for a period of four years from  December 1, 2004,  they will not  compete  with
MGCH in the provision of automated mutual fund clearing and settlement  services
through  the  National  Securities  Clearing  Corporation  ("NSCC"),  or in  the
provision of custodial and trust services to outside third party  administrators
or  record  keepers  in  connection  with the NSCC  services.  Additionally,  in
connection  with the receipt of the common stock of MGCH,  the Company and other
stockholders  of MGCH have agreed to transfer and voting  restrictions  on their
shares of MGCH common  stock and have agreed to sell their shares along with the
majority shareholders of MGCH if so requested.

The following unaudited pro forma condensed  consolidated  financial information
presented  for the years ended  December 31, 2004,  2003 and 2002, is based upon
the Company's historical results from operations, adjusted to reflect the impact
of the sale of our interest in MSCS as if the sale had occurred January 1, 2002.
The $8,242,000  pre-tax gain on the sale of our interest in MSCS during the year
ended  December 31, 2004 is also  excluded  from the pro forma  balances as this
gain is a nonrecurring  item that is the direct result of the  transaction.  The
pro  forma  condensed   consolidated  financial  information  is  presented  for
illustrative  purposes  only and is not  indicative  of any  future  results  of
operations  or the  results  that might have  occurred  if the  disposition  had
actually been completed on the indicated dates.

                                      F-23
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                 --------------------------------------------------------------------------------------------
                                        As        Pro Forma           As        Pro Forma            As         Pro Forma
                                     Reported    (Unaudited)       Reported    (Unaudited)        Reported      (Unaudited)
                                             2004                          2003                            2002
                                 -----------------------------  ----------------------------    -----------------------------
                                                      (Dollars in thousands, except share information)
<S>                               <C>             <C>            <C>            <C>              <C>              <C>
Net interest income after
   provision for loan and
   valuation losses               $    39,358        39,358      $   38,067        38,067        $    39,889         39,889
Noninterest income                     88,427        78,693          69,329        68,171             61,934         61,720
Noninterest expense                    95,666        95,666         110,968       110,968            118,848        118,848
                                 -----------------------------  ----------------------------    -----------------------------
Income (loss) from
   continuing operations
   before income taxes                 32,119        22,385          (3,572)       (4,730)           (17,025)       (17,239)
Income tax provision
   (benefit)                           10,359         6,535          (2,575)       (3,030)            (7,756)        (7,840)
                                 -----------------------------  ----------------------------    -----------------------------
Income (loss) from
   continuing operations              21,760         15,850            (997)       (1,700)            (9,269)        (9,399)

Income from discontinued
   operations, net of
   income tax                            137            137           3,322         3,322              5,317          5,317
                                 -----------------------------  ----------------------------    -----------------------------
Net income (loss)                 $   21,897         15,987      $    2,325         1,622        $    (3,952)        (4,082)
                                 =============================  ============================    =============================
Income (loss) per share -
   basic                          $     3.36           2.45      $     0.36          0.25        $     (0.61)         (0.63)
                                 =============================  ============================    =============================
Income (loss) per share -
   assuming dilution              $     3.30           2.41      $     0.36          0.25        $     (0.61)         (0.63)
                                 =============================  ============================    =============================

</TABLE>

5.  Sale of Matrix Capital Bank Branches

On January 30, 2004,  the Company,  through its wholly owned  subsidiary  Matrix
Bank,  entered  into a  definitive  agreement  to sell its two  branches  in Las
Cruces,  New Mexico to FirstBank,  a subsidiary of Access Anytime BanCorp,  Inc.
("FirstBank")  The sale closed on May 1, 2004. The sale included deposits of the
Las  Cruces  branches  that  totaled  approximately  $78,500,000,  and  loans of
approximately $22,800,000, as well as the real estate and leases associated with
the Las Cruces branches. As a result of the sale, the Company recorded a pre-tax
gain of  $5,087,000  which is included in gains on sale of other  assets for the
year ended December 31, 2004.

On July 12, 2004, the Company,  through its wholly owned subsidiary Matrix Bank,
entered into a definitive  agreement to sell its branch in Sun City,  Arizona to
FirstBank.  The sale closed on November 1, 2004.  The sale included  deposits of
the Sun City branch that totaled approximately $104,000,000, a nominal amount of
loans, as well as the real estate and leases  associated  with the branch.  As a
result of the sale, the Company  recorded a pre-tax gain of $4,935,000  which is
included in gains on sale of other assets for the year ended December 31, 2004.

                                      F-24
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

6.   Discontinued Operations

On September 2, 2003, the Company  announced the final closing,  and substantial
completion of the sale by Matrix  Financial of  substantially  all of its assets
associated with its wholesale mortgage origination platform.

On February  23,  2003,  the Company  announced  that its  subsidiaries,  Matrix
Financial and Matrix Bank, entered into a Purchase and Assumption Agreement,  as
amended ("Purchase Agreement"),  to sell substantially all of Matrix Financial's
assets associated with its wholesale mortgage origination platform  ("Platform")
to AmPro  Mortgage  Corporation  ("AmPro" or the "Buyer").  Included in the sale
were the wholesale  production  offices,  the back office personnel that process
the loan originations and a significant portion of the corporate  operations and
personnel.  After the sale, our remaining operations at Matrix Financial consist
primarily of the mortgage  servicing  platform and a limited amount of corporate
personnel and operations.

Upon signing of the Purchase Agreement, the Buyer was not yet licensed to engage
in  any  mortgage  banking  activities  under  state  or  federal  law.  It  was
anticipated  that it would take  approximately  six months from execution of the
Purchase Agreement for the Buyer to obtain the necessary licensing. Accordingly,
Matrix Financial, Matrix Bank and the Buyer desired to structure the transaction
in a manner that transferred  substantially  all the economic risks and benefits
of the operation of the Platform during the Transition Period (defined below) to
the Buyer,  while at the same time  having  Matrix  Financial  and  Matrix  Bank
maintain  continuous  effective  control over the operations of the Platform for
regulatory  purposes.   The  Purchase  Agreement,   therefore,   contemplated  a
two-staged  closing.  The first closing ("Initial Closing Date") occurred on the
date the Purchase  Agreement was signed and was the effective  date for the sale
of the fixed assets,  and the final or second  closing  ("Final  Closing  Date")
occurred six months  following the Initial Closing Date, or August 31, 2003. The
effective  sale date for  accounting  purposes  was  considered  to be the Final
Closing  Date.  The period of  operation  of the Platform in between the Initial
Closing  Date and the  Final  Closing  Date is  referred  to as the  "Transition
Period."

On the  Initial  Closing  Date,  the Buyer  purchased  substantially  all of the
tangible personal property and intangible property associated with the Platform.
There was no gain or loss on the sale of the assets.  The Buyer additionally has
taken the transfer and  assignment  of certain  contract  rights,  real property
leases and equipment  leases from Matrix Financial at or about the Final Closing
Date.

At the Final  Closing  Date,  the Buyer  purchased  any tangible and  intangible
personal property of the Platform that was acquired during the Transition Period
in the ordinary course of business or otherwise  inadvertently  not purchased on
the Initial Closing Date (the "Subsequently Acquired Assets"), as well as Matrix
Financial's loan files, pipeline applications and sales commitments.

The purchase price was determined as follows:
     o    The asset  payment  amount,  which was  $3,342,000  in payment for the
          tangible  and  intangible  assets of the  Platform  as of the  Initial
          Closing Date; plus
     o    The Subsequently Acquired Assets payment amount, which was $577,000 in
          payment for the book value of the  Subsequently  Acquired Assets as of
          the Final Closing Date; plus
     o    The production  premium,  which is generally 20 basis points times the
          original  principal  balance  of all loans  originated  during  the 12

                                      F-25
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

          months  following the Initial  Closing Date at Matrix  Financial  loan
          production  offices purchased by Buyer. The production  premium earned
          and reflected in  discontinued  operations is $226,000 and  $6,836,000
          before  tax  for  the  years  ended   December   31,  2004  and  2003,
          respectively; plus
     o    The  aggregate  locked loan  profitability  amount,  which pays Matrix
          Financial  one-half of the profit over a  specified  threshold  amount
          (the threshold  being  generally 30 basis points) on loans that funded
          during  the first two  months  after the  Initial  Closing  Date which
          resulted from its locked  pipeline as of the Initial  Closing Date and
          which was $160,000 before tax; plus or minus
     o    The transition period gain or loss, which is a mechanism that provides
          for an  approximation  of the accounting for the transaction as if the
          entire sale and transfer occurs on the Initial  Closing Date.  Because
          the  Platform  generated  a profit  during  the  transition  period of
          $11,594,000  before tax,  Matrix  Financial  was  required to pay such
          profit  into an escrow  account,  and has  reflected  the  amount as a
          component of the loss on sale of discontinued operations.

As a result of the sale,  in the year  ended  December  31,  2003,  the  Company
recorded an after tax loss on the sale of the platform of $2,792,000, or $(0.43)
per diluted share,  which is included in income from discontinued  operations in
the  consolidated  statements  of  operations.   The  operating  income  of  the
discontinued   production  platform  is  reflected  in  discontinued  operations
beginning  in the first  quarter of 2002,  and the  consolidated  statements  of
operations for 2002 have been restated to reflect the  production  platform as a
discontinued  operation.  Operating  results  of  the  discontinued  operations,
previously included in our mortgage banking segment, were as follows:
<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                             2004             2003             2002
                                                                       ---------------------------------------------------
                                                                       (Dollars in thousands, except share information)
<S>                                                                    <C>               <C>             <C>
   Net interest income after provision for loan and valuation losses   $            -    $       3,477   $      6,490
   Noninterest income                                                             226           38,309         35,476
   Noninterest expense                                                              -           31,717         33,210
                                                                       ----------------  --------------  -----------------
   Operating income before taxes from discontinued operations                     226           10,069           8,756
      Income tax provision                                                         89            3,955           3,439
                                                                       ---------------- --------------- ------------------
      Operating income from discontinued operations                               137            6,114           5,317

   Loss on sale of production platform, net of income tax
        benefit of $1,806                                                           -           (2,792)              -
                                                                       ---------------- --------------- ------------------
   Income from discontinued operations, net of income taxes            $          137   $        3,322  $        5,317
                                                                       ================ =============== ==================
   Income from discontinued operations per share - basic               $         0.02   $         0.51  $         0.82
                                                                       ================ ==============  ==================
   Income from discontinued operations per share - diluted             $         0.02   $         0.51  $         0.82
                                                                       ===============  ==============  ==================
</TABLE>

For a period of two years from the Initial Closing Date,  Matrix Bank has agreed
that neither Matrix Bank nor any of its affiliates  will engage in,  directly or
indirectly,  the single-family retail or wholesale mortgage origination business
in those states in which the acquired  division operates or is located as of the
Initial  Closing Date.  However,  this  non-compete  provision does not prohibit
Matrix Bank or its affiliates  from engaging in such business in order to comply
with applicable law, rules, regulations,  directives,  agreements or orders from
the Office of Thrift Supervision  ("OTS") or other parties where it is necessary

                                      F-26
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

to resolve  regulatory or supervisory  concerns.  Additionally,  the non-compete
provision  does not apply in the event of a change in control of Matrix  Bank or
the Company.

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

7.   Net Income (Loss) Per Share

The following  table sets forth the  computation  of basic net income (loss) per
share and net income (loss) per share, assuming dilution:
<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                                      2004          2003            2002
                                                                 ----------------------------------------------
                                                                            (Dollars in thousands)
<S>                                                              <C>               <C>             <C>
Numerator:
   Income (loss) from continuing operations, net of tax
     effects                                                     $       21,760    $     (997)     $   (9,269)
                                                                 ==============================================
   Income from discontinued operations, net of tax effects       $          137    $    3,322      $    5,317
                                                                 ==============================================
   Net income (loss)                                              $       21,897    $    2,325      $   (3,952)
                                                                 ==============================================
Denominator:
   Weighted average shares outstanding                                6,520,239     6,494,803      6,462,272
Effect of dilutive securities:
   Common stock options                                                 109,767        44,392              -
                                                                 ----------------------------------------------
Denominator for net income (loss) per share, assuming dilution        6,630,006     6,539,195      6,462,272
                                                                 ==============================================
</TABLE>

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

8.   Investment Securities

Investment securities available for sale were as follows:
<TABLE>
<CAPTION>
                                        December 31, 2004                                 December 31, 2003
                          -----------------------------------------------    ---------------------------------------------
                                       Gross        Gross                                 Gross       Gross
                          Amortized  Unrealized  Unrealized   Carrying       Amortized  Unrealized  Unrealized  Carrying
                            Cost       Gains       Losses       Value          Cost       Gains       Losses      Value
                          -----------------------------------------------    ---------------------------------------------
                                                               (Dollars in thousands)
<S>                       <C>        <C>         <C>          <C>            <C>        <C>         <C>         <C>
Mortgage-backed
   securities             $ 117,316  $      339  $     (145)  $  117,510     $  29,562  $      223  $        -  $  29,785
SBA securities                  930           -          (3)        927         82,515         124         (22)    82,617
                          -----------------------------------------------    ---------------------------------------------
Total                     $ 118,246  $      339  $     (148)  $ 118,437      $ 112,077  $      347  $      (22) $ 112,402
                          ===============================================    =============================================
</TABLE>

Realized  gains on the sale of  securities  available for sale, as determined by
specific identification,  were approximately $430,000,  $564,000 and $78,000 for
the years ended December 31, 2004, 2003 and 2002, respectively.

The Company expects to receive payments on investment  securities  available for
sale over periods that are considerably shorter than the contractual  maturities

                                      F-27
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

of the  securities,  which  range from 6 to 30 years,  due to  prepayments.  The
carrying value of held for sale securities approximates the estimated fair value
due to the variable rate nature of the securities.

Investment securities held to maturity were as follows:
<TABLE>
<CAPTION>
                                                  December 31, 2004                            December 31, 2003
                                    -----------------------------------------------    -------------------------------------
                                    Amortized                                          Amortized
                                    Cost and    Gross        Gross                     Cost and    Gross
                                    Carrying    Unrealized   Unrealized  Estimated     Carrying    Unrealized   Estimated
                                    Value       Gaines       Losses      Fair Value    Value       Gaines       Fair Value
                                    -----------------------------------------------    -------------------------------------
                                                                         (Dollars in thousands)
<S>                                  <C>         <C>         <C>          <C>             <C>           <C>         <C>
Mortgage-backed securities           $   71,555  $      34   $    (174)   $   71,415      $    40,106   $      66   $   40,172
                                     ----------- ----------- ----------- ------------     ------------- ----------- ------------
Total                                $   71,555  $      34   $    (174)   $   71,415      $    40,106   $      66   $   40,172
                                     =========== =========== =========== ============     ============= =========== ============
</TABLE>

The  amortized  cost and  estimated  fair  value  of  investment  securities  by
contractual maturity at December 31, 2004 are as follows:
<TABLE>
<CAPTION>
                                            Available for Sale                         Held to Maturity
                                    Amortized Cost  Estimated Fair Value    Amortized Cost  Estimated Fair Value
                                   -------------------------------------    ------------------------------------
                                                              (Dollars in thousands)
<S>                                <C>              <C>                     <C>              <C>
  Within 1 year                    $            -   $               -       $            -   $            -
  Over 1 year through 5 years                   -                   -                    -                -
  After 5 years through 10 years                -                   -                    -                -
  Over 10 years                               930                 927                    -                -
                                   -------------------------------------    --------------- --------------------
SBA securities                                930                 927                    -                -
Mortgage-backed securities                117,316             117,510               71,555           71,415
                                   -------------------------------------    --------------- --------------------
Total                              $      118,246   $         118,437       $       71,555   $        71,415
                                   =====================================    ====================================
</TABLE>

At December 31, 2004 and 2003,  mortgage  backed  securities  and SBA securities
with a carrying value of $3,571,000 and $1,166,000,  respectively,  were pledged
to secure public deposits and for other purposes required or permitted by law.

Trading securities were as follows:
<TABLE>
<CAPTION>
                                     December 31, 2004               December 31, 2003
                                ----------------------------    ----------------------------
                                   Estimated Fair Value            Estimated Fair Value
                                    and carrying value              and carrying value
                                ----------------------------    ----------------------------
                                                      (Dollars in thousands)
<S>                             <C>                             <C>
SBA securities                  $            126,375            $                 -
                                ----------------------------    ----------------------------
Total                           $            126,375            $                 -
                                ============================    ============================
</TABLE>

The net gain on trading securities was approximately  $50,000, $0 and $0 for the
years ended December 31, 2004, 2003 and 2002, respectively.

                                      F-28
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

The following  table presents  information  pertaining to securities  with gross
unrealized  losses at December 31, 2004,  aggregated by investment  category and
length of time that individual securities have been in continuous loss position,
as follows:
<TABLE>
<CAPTION>
                                                          Less than 12 Months                     12 Months or More
                                                   ----------------------------------     -----------------------------------
                                                   Estimated Fair                          Estimated Fair
                                                        Value          Unrealized              Value           Unrealized
                                                                         losses                                  losses
                                                   ---------------------------------     ----------------- -----------------
                                                                            (Dollars in thousands)
<S>                                                <C>              <C>                  <C>                 <C>
Mortgage backed securities, available for sale     $    117,510     $         145        $            -      $         -
Mortgage backed securities, held to maturity             71,415               174                     -                -
SBA securities                                                -                 -                   927                3
                                                   -----------------------------------   -------------------------------------
Total                                              $    188,925     $         319        $          927      $         3
                                                   ===================================   =====================================
</TABLE>

Management evaluates securities for other-than-temporary  impairment at least on
a quarterly  basis,  and more  frequently  when  economic  or market  conditions
warrant such  evaluation.  Consideration  is given to (1) the length of time and
the extent to which the fair value has been less than  cost,  (2) the  financial
condition and near-term  prospects of the issuer, and (3) the intent and ability
of the  Company  to retain  its  investment  in the  issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.

At  December  31,  2004,  the  Company  does not  believe  that  any  individual
unrealized  loss  represents  other-than-temporary  impairment.  The  unrealized
losses are  attributable  to changes in interest  rates.  The unrealized  losses
reported for  mortgage-backed  securities  relate to five  securities  issued by
FHMA, FHLMC and private institutions and such losses represent between 0.04% and
1.82% of the Company's  amortized cost basis. The unrealized losses reported for
SBA  securities  relate to three  securities and such losses  represent  between
0.06% and 0.66% of the Company's  amortized cost basis. The Company has both the
intent and ability to hold the securities  contained in the previous table for a
time necessary to recover the amortized cost.

9.   Loans Held for Sale and Investment

Loans Held for Investment

Loans held for investment consist of the following:
<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                                2004             2003
                                                                          ----------------------------------
                                                                               (Dollars in thousands)
<S>                                                                        <C>              <C>
Residential loans                                                          $    227,609     $    178,463
Multi-family, commercial real estate, SBA commercial                            134,782          148,842
Construction loans                                                               24,753           21,304
Consumer loans and other                                                            581            2,977
(Discounts) premium, net                                                         (1,194)          (1,000)
Unearned fees                                                                      (840)            (798)
                                                                          ----------------------------------
                                                                                385,691          349,788
Less:  Allowance for loan and valuation losses                                    5,974            4,986
                                                                          ----------------------------------
Loans held for investment, net                                             $    379,717     $    344,802
                                                                          ==================================
</TABLE>

                                      F-29
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

Activity  in the  allowance  for loan and  valuation  losses  on loans  held for
investment is summarized as follows:
<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                                     2004              2003             2002
                                               -----------------------------------------------------
                                                              (Dollars in thousands)
<S>                                            <C>                <C>             <C>
Balance at beginning of year                   $         4,986    $       3,444   $         2,776
Provision for loan and valuation losses                  2,089            2,248             1,700
Charge-offs and transfers                               (1,264)          (1,035)           (1,127)
Recoveries                                                 163              329                95
                                               -----------------------------------------------------
Balance at end of year                         $         5,974    $       4,986   $         3,444
                                               =====================================================
</TABLE>

Loans Held for Sale

Loans held for sale consist of the following:
<TABLE>
<CAPTION>
                                                                              December 31,
                                                                          2004             2003
                                                                    ----------------------------------
                                                                         (Dollars in thousands)
<S>                                                                   <C>              <C>
Residential loans                                                     $   758,543      $   722,192
SBA guaranteed commercial loans, school financing and other               218,231          267,705
Purchase premiums, net                                                     18,246           14,360
                                                                    ----------------------------------
                                                                          995,020        1,004,257
Less:  Allowance for loan and valuation losses                              5,198            4,803
                                                                    ----------------------------------
Loans held for sale, net                                              $   989,822      $   999,454
                                                                    ==================================
</TABLE>

Activity in the allowance  for loan and valuation  losses on loans held for sale
is summarized as follows:
<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                                     2004              2003             2002
                                               -----------------------------------------------------
                                                              (Dollars in thousands)
<S>                                            <C>                <C>             <C>
Balance at beginning of year                   $      4,803       $     5,899     $      6,562
Provision for loan losses                             1,180             1,393            1,121
Charge-offs and transfers                              (785)           (2,515)          (1,871)
Recoveries                                                -                26               87
                                               -----------------------------------------------------
Balance at end of year                         $      5,198       $     4,803     $      5,899
                                               =====================================================
</TABLE>

The  following  lists  information  related  to  nonperforming  loans  held  for
investment and held for sale:
<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                                    2004             2003
                                                                              ----------------------------------
                                                                                   (Dollars in thousands)
<S>                                                                           <C>              <C>
Loans on nonaccrual status in the held for investment portfolio               $     16,558     $     21,006
Loans on nonaccrual status in the held for sale portfolio                           14,787           10,444
                                                                              ---------------------------------
Total nonperforming loans                                                     $     31,345     $     31,450
                                                                              =================================
Interest income that would have been recognized at original contract terms    $        652     $      1,084
                                                                              =================================
</TABLE>

                                      F-30
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

The Company continues to accrue interest on  government-sponsored  loans such as
Federal  Housing  Administration  ("FHA")  insured and  Department  of Veterans'
Affairs  ("VA")  guaranteed  loans  which are past due 90 or more  days,  as the
majority of the interest on these loans is insured or  guaranteed by the federal
government.  The  aggregate  unpaid  principal  balance of  government-sponsored
accruing  loans  that  were  past  due  90 or  more  days  was  $18,097,000  and
$12,164,000 as of December 31, 2004 and 2003, respectively.

Interest  income  that would have been  recorded  for all  nonaccrual  loans was
approximately $652,000, $1,084,000 and $926,000 for the years ended December 31,
2004, 2003 and 2002,  respectively.  Included in nonaccrual  loans were impaired
loans, as defined under SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan,"  totaling  $8,662,000  and  $1,499,000  at December  31, 2004 and 2003,
respectively,  all of which have a specific valuation allocated to the loan. The
majority of the loans deemed impaired were evaluated using the fair value of the
collateral  as the  measurement  method.  The  related  allowance  allocated  to
impaired  loans for 2004 and 2003 was  $2,419,000  and  $622,000,  respectively.
There was no interest  recognized  in 2004 or 2003 on impaired  loans while they
were considered impaired.

10.   Premises and Equipment

Premises and equipment consist of the following:
<TABLE>
<CAPTION>
                                                                         December 31,
                                                                     2004             2003
                                                              ------------------------------------
                                                                    (Dollars in thousands)
<S>                                                           <C>                <C>
Land                                                          $         3,106    $        3,450
Buildings                                                              10,598            14,069
Leasehold improvements                                                  4,330             4,377
Office furniture and equipment                                         12,890            15,152
                                                              ------------------------------------
                                                                       30,924            37,048
Less accumulated depreciation                                          11,887            12,067
                                                              ------------------------------------
Premises and equipment, net                                   $        19,037   $        24,981
                                                              ====================================
</TABLE>

Included in occupancy and equipment expense is depreciation  expense of premises
and equipment of  approximately  $3,572,000,  $3,552,000  and $3,478,000 for the
years ended December 31, 2004, 2003 and 2002, respectively.

                                      F-31
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)


11.   Mortgage Servicing Rights

The activity in the MSRs is summarized as follows:
<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                                            2004             2003             2002
                                                     ----------------------------------------------------
                                                                   (Dollars in thousands)
<S>                                                    <C>               <C>              <C>
  Mortgage servicing rights
    Balance at beginning of year                       $    47,194       $    79,234      $     78,893
    Purchases                                                  871               375                 -
    Originations                                               615             5,082            34,511
    Amortization                                           (16,100)          (32,497)          (24,176)
    Sales                                                        -                 -            (9,994)
    Application of valuation allowance to write down
      permanently impaired MSRs                             (2,600)           (5,000)                -
                                                     ----------------------------------------------------
    Balance before valuation allowance at end of year       29,980            47,194            79,234
                                                     ----------------------------------------------------
  Valuation allowance for impairment of mortgage
    servicing rights
    Balance at beginning of year                            (6,450)          (14,400)             (181)
    Additions                                               (1,656)           (2,400)          (14,219)
    Application of valuation allowance to write down
    permanently impaired MSRs                                2,600             5,000                 -
    Recovery                                                 2,100             5,350                 -
                                                     ----------------------------------------------------
    Balance at end of year                                  (3,406)           (6,450)          (14,400)
                                                     ----------------------------------------------------
  Valuation allowance for foreclosure costs                      -            (1,000)           (1,634)
                                                     ----------------------------------------------------
  Mortgage servicing rights, net                       $    26,574       $    39,744      $     63,200
                                                     ====================================================
</TABLE>

The  Company's  servicing  activity  is  diversified  throughout  50 states with
concentrations at December 31, 2004, in Texas, Missouri,  California, New Mexico
and  Arizona  of  approximately  13.89%,   13.82%,   13.64%,  9.90%  and  6.22%,
respectively,  based on aggregate  outstanding  unpaid principal balances of the
mortgage  loans  serviced.  As of December 31, 2004,  2003 and 2002, the Company
subserviced  loans for others of  approximately  $14,026,000,  $176,921,000  and
$26,613,000, respectively.

The Company's servicing portfolio (excluding  subserviced loans) is comprised of
the following:
<TABLE>
<CAPTION>
                                          December 31, 2004              December 31, 2003
                                    --------------------------------------------------------------
                                                     Principal                      Principal
                                       Number         Balance         Number         Balance
                                      of Loans      Outstanding      of Loans      Outstanding
                                    --------------------------------------------------------------
                                                       (Dollars in thousands)
<S>                                 <C>           <C>                <C>         <C>
Freddie Mac                               4,783   $      196,637        6,194    $      253,245
Fannie Mae                               13,390          722,749       19,257         1,164,589
Ginnie Mae                               11,098          675,067       16,370         1,068,975
VA, FHA, conventional and other
   loans                                  8,687          664,387        9,034           696,727
                                    --------------------------------------------------------------
Total servicing portfolio                37,958    $   2,258,840       50,855     $   3,183,536
                                    ==============================================================
</TABLE>

                                      F-32
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

The Company's  custodial escrow balances shown in the accompanying  consolidated
balance sheets at December 31, 2004 and 2003, pertain to payments held in escrow
in  respect  of taxes and  insurance  and the float on  principal  and  interest
payments on loans serviced and owned by the Company.  The custodial accounts are
maintained at Matrix Bank in  noninterest-bearing  accounts.  The balance of the
custodial  accounts  fluctuates from month to month based on the pass-through of
the principal and interest payments to the ultimate  investors and the timing of
taxes and insurance payments.

The  estimated  aggregate  amortization  of our  MSR's for each of the next five
years  ending  December  31,  2005,  2006,  2007,  2008 and 2009 is  $6,082,000,
$4,561,000,  $3,468,000, $2,660,000 and $2,040,000,  respectively. The estimated
amortization  is based on several  assumptions  as of December 31, 2004 with the
most  significant  being the  anticipated  prepayment  speeds of the  underlying
mortgages.  It is  reasonably  possible  the  actual  prepayment  speeds  of the
underlying  mortgage loans may differ  materially from the estimated  prepayment
speed, and thus, the actual amortization may be significantly different than the
amounts estimated.

12.   Deposits

Deposit account balances are summarized as follows:
<TABLE>
<CAPTION>
                                                            December 31,
                                             2004                                 2003
                             ---------------------------------------------------------------------------
                                           Percent of   Weighted                Percent of    Weighted
                                             Total      Average                  Total        Average
                                Amount      Deposits     Rate        Amount     Deposits        Rate
                             ---------------------------------------------------------------------------
                                                       (Dollars in thousands)
<S>                          <C>             <C>        <C>        <C>          <C>          <C>
Passbook accounts            $         455     0.04%       1.26%   $     5,675      0.58%       1.28%
NOW accounts                       189,671    16.95        0.11        180,733     18.55        0.15
Money market accounts              676,848    60.48        0.91        576,088     59.15        0.71
                             ---------------------------------------------------------------------------
     Subtotal                      866,974    77.47        0.71        762,496     78.28        0.58
Certificate accounts               252,185    22.53        2.48        211,563     21.72        2.89
                             ---------------------------------------------------------------------------
Total Deposits                 $ 1,119,159   100.00%       1.09%     $ 974,059    100.00%       1.07%
                             ===========================================================================
</TABLE>

Included in NOW accounts are  noninterest-bearing  DDA accounts of  $156,478,000
and $136,146,000 at December 31, 2004 and 2003, respectively.

Contractual  maturities of  certificate  accounts as of December 31, 2004 are as
follows:
<TABLE>
<CAPTION>
                     Under 12 months    12 to 36 months     36 to 60 months       Total
                     -----------------------------------------------------------------------
                                          (Dollars in thousands)
<S>                  <C>                <C>                  <C>                 <C>
1.00-1.99%           $       37,254     $           -        $         -         $  37,254
2.00-2.99%                  149,164             2,561                  -           151,725
3.00-3.99%                        -            27,621                 45            27,666
4.00-4.99%                   20,000            13,679              1,861            35,540
                     -----------------------------------------------------------------------
                     $      206,418     $      43,861       $      1,906         $ 252,185
                     =======================================================================
</TABLE>

                                      F-33
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

Approximately   $236,007,000   and   $178,991,000  of  fiduciary   assets  under
administration  by Sterling are included in NOW and money market  accounts as of
December  31,  2004  and  2003,  respectively.  Approximately  $118,129,000  and
$85,338,000 of MSCS customer assets under administration are included in NOW and
money  market  accounts  as  of  December  31,  2004  and  2003,   respectively.
Approximately  $25,142,000  of deposits of the  majority  owner of MAM,  LLC are
included in NOW and money market  accounts as of December 31, 2004.  Included in
certificate  accounts are $247,868,000 and $104,608,000 of brokered  deposits as
of December 31, 2004 and 2003, respectively.

Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                                                   2004              2003             2002
                                            ------------------------------------------------------
                                                           (Dollars in thousands)
<S>                                         <C>               <C>               <C>
Passbook accounts                           $             38  $             74  $            117
NOW accounts                                             261               327               570
Money market                                           4,504             3,602             3,684
Certificates of deposit                                5,862             9,335            17,125
                                            ------------------------------------------------------
Interest expense on deposits                $         10,665  $         13,338  $         21,496
                                            ======================================================
</TABLE>

The aggregate  amount of deposit  accounts with a balance  greater than $100,000
(excluding  brokered  deposits) was  approximately  $855,000 and  $17,954,000 at
December 31, 2004 and 2003, respectively.

13.   Borrowed Money

Borrowed money is summarized as follows:
<TABLE>
<CAPTION>
                                                                                                  December 31,
                                                                                             2004             2003
                                                                                       ----------------------------------
                                                                                             (Dollars in thousands)
<S>                                                                                    <C>                 <C>
Borrowed Money
     $8,215,000  note  payable to a third  party  financial  institution  due in
          quarterly  principal  installments of $357,000 plus interest,  through
          December 31, 2006,  collateralized by the common stock of Matrix Bank;
          interest at LIBOR plus 2.65% (5.425% at December 31, 2004)                   $      4,288         $     6,073
     $12,000,000   revolving   line  of  credit  to  a  third  party   financial
          institution,    through   March   31,   2005,    renewable   annually,
          collateralized  by the common stock of Matrix Bank;  interest at LIBOR
          plus 2.65%  (5.425% at December 31,  2004);  $12,000,000  available at
          December 31, 2004                                                                       -                   -
     Note payable with a bank,  secured by real  estate,  interest at Prime plus
          1.50%, (7% at December 31, 2004), maturing August 30, 2006                          1,713               1,913
     $10,000,000  subordinated debt securities,  interest payments due quarterly
          at  three-month  LIBOR  plus  2.75%  (5.308% at  December  31,  2004),
          maturing February 13, 2014                                                         10,000                   -
     School financing  agreements,  maturing  September 2005,  collateralized by
          school obligations; interest rates based on Prime or variable based on
          the  BMA  mini-swap  index.  Future  financing  commitment  is at  the
          discretion of the third-party lenders                                              15,571               30,439
     Senior notes, interest at 11.50% payable semiannually,  unsecured,  matured
          and paid-in-full September 30, 2004                                                     -                9,545
                                                                                       ---------------------------------
Total                                                                                  $     31,573         $     47,970
                                                                                      ==================================
</TABLE>

                                      F-34
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

On February 13, 2004, the Company issued $10,000,000  floating rate subordinated
debt securities due February 13, 2014.  Quarterly  interest on the securities is
at the floating rate of three-month LIBOR plus 2.75%.

On September 30, 2004, the Company  paid-in-full  the outstanding  principal and
interest  balance  on the  Senior  Notes  pursuant  to  terms  of  the  original
indenture.

As of December 31, 2004, the maturities of borrowed money are as follows:
<TABLE>
<CAPTION>
                                                (Dollars In thousands)
<S>                                                <C>
2005                                               $     17,000
2006                                                      4,573
2007                                                          -
2008                                                          -
2009                                                          -
Thereafter                                               10,000
                                               -----------------------
                                                   $     31,573
                                               ========================
</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  income,  net worth and other  amounts  as defined in the
credit  agreements,  limiting the  Company's  and its  subsidiaries'  ability to
declare dividends or incur additional debt, and requirements to maintain certain
capital levels in certain subsidiaries. These covenants include requirements for
the  Company  to  maintain  "consolidated  tangible  capital"  of not less  than
$60,000,000,  Matrix  Bank to  maintain  "classified  assets" of less than 3% of
total assets,  Matrix Bank to earn not less than  $7,500,000 over the prior four
quarters  as of and for  the  end of  each  fiscal  quarter,  and  maintain  the
requirements  necessary  such that Matrix Bank will not be  classified  as other
than "well capitalized," all as defined in the OTS regulations.  At December 31,
2004, the Company was in compliance with the covenants  described  above. We are
in the process of renewing the revolving line of credit,  and anticipate it will
be renewed  with  similar  terms and  conditions  as those  currently in effect.
However, there can be no assurances that it will be renewed.

School Financing Agreement

The Company had  approximately  $14,783,000 and $29,119,000 at December 31, 2004
and 2003, respectively, in tax-exempt financing it originated to charter schools
into grantor trusts  ("Trusts").  The Trusts then issued Class "A"  Certificates
and  Class "B"  Certificates,  with the Class  "A"  Certificates  being  sold to
various third party investors  under a private  placement at a price of par. One
of the original two grantor  trusts  matured in September  2004.  Cash  proceeds
generated  from  the  sale  or  refinancing  of the  underlying  loans  used  as
collateral  for the  financing  were used to repay the  maturing  facility.  The
remaining grantor trust matures in September 2005.

The "A"  Certificates,  under the grantor  trust,  is  guaranteed by a letter of
credit issued by an unaffiliated financial  institutions.  The "A" Certificates'
interest  rate may be  determined  weekly,  monthly  or for a term for up to one
year.  The interest rate and the term of the interest rate are determined by the
Remarking Agent.

The "B" Certificates are owned in part by the Company. The interest rate paid on
the "A" Certificates is considered the Company's financing cost. The approximate
cost of the  financing  at  December  31,  2004 and 2003 was  2.20%  and  1.54%,
respectively.  The interest that the Company  receives  through its ownership of
the "B" Certificates is tax-exempt.

                                      F-35
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

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

Through a Purchase  and Sale  Agreement,  the Company has sold school  financing
loans to a third party financial  institution.  The Company  provides  scheduled
interest and principal  plus full  recourse in the case of loss or default.  The
transaction was treated as a sale due to the transfer of control over the school
financing  loans.  No gain or loss was recorded at the time of sale as the loans
were sold at carrying value. The balance of the school financing loans sold with
recourse was approximately $7,355,000 at December 31, 2004.

14. Junior Subordinated Debentures Owed to Unconsolidated  Subsidiary Trusts and
Corporation-Obligated  Mandatorily  Redeemable  Capital Securities of Subsidiary
Trusts Holding Solely Debentures of the Company

The Company has sponsored  six trusts,  Matrix  Bancorp  Capital Trust I, Matrix
Bancorp  Capital Trust II, Matrix  Bancorp  Capital  Trust III,  Matrix  Bancorp
Capital Trust IV, Matrix  Bancorp  Capital Trust V, and Matrix  Bancorp  Capital
Trust VI of which 100% of the common equity is owned by the Company.  The trusts
were  formed  for  the  purpose  of  issuing  corporation-obligated  mandatorily
redeemable  capital   securities  (the  "capital   securities")  to  third-party
investors and  investing  the proceeds from the sale of such capital  securities
solely in junior subordinated debt securities of the Company (the "debentures").
The  debentures  held  by  each  trust  are  the  sole  assets  of  that  trust.
Distributions  on the  capital  securities  issued by each trust are  payable at
either  quarterly or semiannually at a rate per annum equal to the interest rate
being  earned by the trust on the  debentures  held by that  trust.  The capital
securities  are  subject  to  mandatory  redemption,  in whole or in part,  upon
repayment  of the  debentures.  The Company has entered into  agreements  which,
taken collectively,  fully and unconditionally  guarantee the capital securities
subject  to the  terms of each of the  guarantees.  The  debentures  held by the
trusts are redeemable as noted below.

In the fourth  quarter of 2003, as a result of applying the provisions of FIN 46
and early  application of FIN 46R,  governing when an equity  interest should be
consolidated,  the Company was  required to  deconsolidate  subsidiary  trusts I
through V from its consolidated financial statements. The deconsolidation of the
net assets and results of  operations  of the trusts had  virtually no impact on
the Company's  consolidated  financial  statements or liquidity position because
the Company continues to be obligated to repay the debentures held by the trusts
and  guarantees  repayment of the capital  securities  issued by the trusts.  In
2004, the Company issued Matrix Bancorp Capital Trust VI which was accounted for
under the provisions of FIN 46R. The consolidated debt obligation related to the
trusts increased from $64,500,000 to $66,525,000 upon  deconsolidation  with the
difference representing the Company's common ownership interests in the trusts.

Junior  Subordinated  Debentures Owed to  Unconsolidated  Subsidiary  Trusts and
Corporation-Obligated  Mandatorily  Redeemable  Capital Securities of Subsidiary
Trusts Holding Solely Debentures of the Company are summarized as follows:

                                      F-36
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                                2004            2003
                                                                                          ---------------------------------
                                                                                               (Dollars in thousands)
<S>                                                                                       <C>                 <C>
Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trusts
Junior  subordinated  debentures  owed to Matrix  Bancorp  Capital  Trust I, 10%
     junior  subordinated  debentures payable quarterly,  unsecured and maturing
     September 30, 2029                                                                   $    13,351         $    28,351
Junior subordinated  debentures  owed to Matrix Bancorp Capital Trust II, 10.18%
     junior  subordinated   debentures  payable  semi-annually,   unsecured  and
     maturing June 8, 2031                                                                     12,400              12,400
Junior subordinated  debentures owed to Matrix Bancorp Capital Trust III, 10.25%
     junior  subordinated   debentures  payable  semi-annually,   unsecured  and
     maturing July 25, 2031                                                                    15,464              15,464
Junior  subordinated  debentures  owed  to  Matrix  Bancorp  Capital  Trust  IV,
     six-month   LIBOR  plus  3.75%   (6.525%  at  December   31,  2004)  junior
     subordinated  debentures  payable  semi-annually,  unsecured  and  maturing
     December 8, 2031                                                                           5,155               5,155
Junior subordinated debentures owed to Matrix Bancorp Capital Trust V, six-month
     LIBOR plus  3.625%  (6.400%  at  December  31,  2004)  junior  subordinated
     debentures payable semi-annually, unsecured and maturing January 25, 2032                  5,155               5,155
Junior subordinated debentures owed to Matrix Bancorp Capital Trust VI, interest
     fixed at 6.425% through October 2009, then  three-month  LIBOR plus 3.625%,
     junior  subordinated   debentures  payable  semi-annually,   unsecured  and
     maturing October 18, 2034                                                                 10,310                   -
                                                                                          ---------------------------------
Total                                                                                     $    61,835         $    66,525
                                                                                          =================================
</TABLE>

On July 30,  1999,  Matrix  Bancorp  Capital  Trust I ("Trust  I"),  a  Delaware
business  trust formed by the Company,  completed the sale of $27,500,000 of 10%
preferred  securities.  Trust I also issued common securities to the Company and
used the net  proceeds  from the offering to purchase  $28,351,000  in principal
amount of 10% junior  subordinated  debentures  of the Company due September 30,
2029.  The preferred  securities  accrue and pay  distributions  quarterly at an
annual  rate  of 10% of the  stated  liquidation  amount  of $25  per  preferred
security.  The  Company  has fully  and  unconditionally  guaranteed  all of the
obligations of Trust I under the preferred securities.  The guarantee covers the
quarterly  distributions  and  payments  on  liquidation  or  redemption  of the
preferred  securities,  but only to the  extent  of  funds  held by Trust I. The
preferred securities are mandatorily  redeemable upon the maturity of the junior
subordinated debentures or upon earlier redemption as provided in the indenture.
The Company has the right to redeem the junior subordinated debentures, in whole
or in part on or after  September 30, 2004, at a redemption  price  specified in
the indenture plus any accrued but unpaid interest to the redemption date. Under
the terms of the indenture,  the Company redeemed $15,000,000 in trust preferred
and common securities on October 29, 2004.

On March 28, 2001,  Matrix  Bancorp  Capital  Trust II ("Trust  II"), a Delaware
business  trust  formed by the Company,  completed  the sale of  $12,000,000  of
10.18%  preferred  securities.  Trust II also issued  common  securities  to the
Company and used the net proceeds from the offering to purchase  $12,400,000  in
principal  amount of 10.18%  junior  subordinated  debentures of the Company due
June  8,  2031.   The  preferred   securities   accrue  and  pay   distributions

                                      F-37
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

semi-annually  at an annual rate of 10.18% of the stated  liquidation  amount of
$1,000  per  preferred  security.  The  Company  has fully  and  unconditionally
guaranteed all of the  obligations  of Trust II under the preferred  securities.
The guarantee covers the semi-annual  distributions  and payments on liquidation
or redemption of the preferred securities,  but only to the extent of funds held
by Trust II.  The  preferred  securities  are  mandatorily  redeemable  upon the
maturity of the junior  subordinated  debentures  or upon earlier  redemption as
provided  in the  indenture.  The  Company  has the right to redeem  the  junior
subordinated  debentures,  in whole or in part,  on or after June 8, 2011,  at a
redemption price specified in the indenture plus any accrued but unpaid interest
to the redemption date.

On July 16, 2001,  Matrix  Bancorp  Capital Trust III ("Trust  III"), a Delaware
business  trust  formed by the Company,  completed  the sale of  $15,000,000  of
10.25%  preferred  securities.  Trust III also issued  common  securities to the
Company and used the net proceeds from the offering to purchase  $15,464,000  in
principal  amount of 10.25%  junior  subordinated  debentures of the Company due
July  25,  2031.  The  preferred   securities   accrue  and  pay   distributions
semi-annually  at an annual rate of 10.25% of the stated  liquidation  amount of
$1,000  per  preferred  security.  The  Company  has fully  and  unconditionally
guaranteed all of the  obligations of Trust III under the preferred  securities.
The guarantee covers the semi-annual  distributions  and payments on liquidation
or redemption of the preferred securities,  but only to the extent of funds held
by Trust III. The  preferred  securities  are  mandatorily  redeemable  upon the
maturity of the junior  subordinated  debentures  or upon earlier  redemption as
provided  in the  indenture.  The  Company  has the right to redeem  the  junior
subordinated  debentures,  in whole or in part,  on or after July 25, 2006, at a
redemption price specified in the indenture plus any accrued but unpaid interest
to the redemption date.

On November 28, 2001,  Matrix Bancorp  Capital Trust IV ("Trust IV"), a Delaware
business  trust  formed by the  Company,  completed  the sale of  $5,000,000  of
floating rate of six-month LIBOR plus 3.75% preferred securities.  Trust IV also
issued  common  securities  to the  Company and used the net  proceeds  from the
offering  to  purchase  $5,155,000  in  principal  amount  of  floating  rate of
six-month  LIBOR plus 3.75% junior  subordinated  debentures  of the Company due
December  8,  2031.  The  preferred  securities  accrue  and  pay  distributions
semi-annually  at the  floating  rate as described  above  percent of the stated
liquidation amount of $1,000 per preferred  security.  The Company has fully and
unconditionally  guaranteed  all  of the  obligations  of  Trust  IV  under  the
preferred  securities.  The guarantee covers the semi-annual  distributions  and
payments on liquidation or redemption of the preferred  securities,  but only to
the extent of funds held by Trust IV. The preferred  securities are  mandatorily
redeemable  upon the  maturity  of the junior  subordinated  debentures  or upon
earlier  redemption as provided in the  indenture.  The Company has the right to
redeem  the junior  subordinated  debentures,  in whole or in part,  on or after
December 8, 2006,  at a redemption  price  specified in the  indenture  plus any
accrued but unpaid interest to the redemption date.

On July 25,  2002,  Matrix  Bancorp  Capital  Trust V ("Trust  V"),  a  Delaware
business  trust  formed by the  Company,  completed  the sale of  $5,000,000  of
floating rate of six-month LIBOR plus 3.625% preferred securities.  Trust V also
issued  common  securities  to the  Company and used the net  proceeds  from the
offering  to  purchase  $5,155,000  in  principal  amount  of  floating  rate of
six-month  LIBOR plus 3.625% junior  subordinated  debentures of the Company due
July  25,  2032.  The  preferred   securities   accrue  and  pay   distributions
semi-annually at the floating rate as described above of the stated  liquidation
amount  of  $1,000  per   preferred   security.   The   Company  has  fully  and
unconditionally guaranteed all of the obligations of Trust V under the preferred
securities.  The guarantee covers the semi-annual  distributions and payments on
liquidation or redemption of the preferred securities, but only to the extent of
funds held by Trust V. The preferred securities are mandatorily  redeemable upon
the maturity of the junior subordinated debentures or upon earlier redemption as
provided  in the  indenture.  The  Company  has the right to redeem  the  junior
subordinated  debentures,  in whole or in part,  on or after July 25, 2007, at a
redemption price specified in the indenture plus any accrued but unpaid interest
to the redemption date.

                                      F-38
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

On August 30, 2004,  Matrix  Bancorp  Capital  Trust VI ("Trust VI"), a Delaware
business trust formed by the Company, completed the sale of $10,000,000 of fixed
rate of 6.425%  through  the  interest  payment  date in  October  2009,  then a
floating rate of three-month  LIBOR plus 2.50%  preferred  securities.  Trust VI
also issued common  securities to the Company and used the net proceeds from the
offering to purchase  $10,310,000  in  principal  amount of fixed rate of 6.425%
through the  interest  payment  date in October  2009,  then a floating  rate of
three-month LIBOR plus 2.50% junior  subordinated  debentures of the Company due
October  18,  2034.  The  preferred  securities  accrue  and  pay  distributions
quarterly at the rate as  described  above of the stated  liquidation  amount of
$1,000  per  preferred  security.  The  Company  has fully  and  unconditionally
guaranteed all of the  obligations  of Trust VI under the preferred  securities.
The guarantee covers the quarterly  distributions and payments on liquidation or
redemption of the preferred securities,  but only to the extent of funds held by
Trust VI. The preferred securities are mandatorily  redeemable upon the maturity
of the junior subordinated  debentures or upon earlier redemption as provided in
the  indenture.  The  Company  has the right to redeem the  junior  subordinated
debentures,  in whole or in part,  on or after October 18, 2009, at a redemption
price  specified in the  indenture  plus any accrued but unpaid  interest to the
redemption date.

All of the junior  subordinated  debentures  owed to  unconsolidated  subsidiary
trusts mature in periods greater than 5 years from December 31, 2004.

15.   FHLBank Borrowings

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

The balances of FHLBank borrowings are as follows:
<TABLE>
<CAPTION>
                                                December 31,
                                           2004             2003
                                     ------------------------------------
                                             (Dollars in thousands)
<S>                                  <C>               <C>
FHLBank of Topeka borrowings         $    359,000      $    311,000
FHLBank of Dallas borrowings              147,118           147,204
                                     ------------------------------------
                                     $    506,118      $    458,204
                                     ====================================
</TABLE>

Advances  of  $176,000,000  and  $266,000,000  at  December  31,  2004 and 2003,
respectively,  were borrowed under  Convertible  Advance ("CA") and Short Option
Advance ("SOA") Agreements with the FHLBank. These CA and SOA borrowings require
the payment of interest  monthly and principal at maturity,  have a term of five
to ten years,  but are  callable by the FHLBank  beginning  after a six-month to
five-year lockout period, depending on the particular CA or SOA borrowing. After
the expiration of the lockout period,  the CA and SOA borrowings are callable at
various  intervals.  If the  FHLBank  exercises  its call  option on a CA or SOA
borrowing,  the FHLBank is required to offer replacement  funding to the Company
at a market rate of interest for the remaining  term of the CA or SOA borrowing.
Additionally,  under the terms of the CA and SOA Agreements,  the Company is not
permitted to prepay or otherwise  retire a callable CA or SOA borrowing prior to
the final  maturity date. At December 31, 2004, the interest rates on the CA and
SOA borrowings  ranged from 2.69% to 5.63%, and their possible call dates varied
from January 2005 to November 2006.  Advances of $40,000,000  and $0 at December
31,  2004 and  2003,  respectively,  were  borrowed  under  fixed  rate  advance

                                      F-39
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

agreements  with  FHLBank.  These  fixed  borrowings  have  a  term  of  one  to
four-years, carry interest rates from 2.87% to 3.92% and mature November 2005 to
May 2008. Community investment advances of $1,118,000 and $1,204,000 at December
31, 2004 and 2003,  respectively,  were borrowed under a fixed term and rate. At
December 31, 2004, the advances are at a rate of 5.84% and mature June 2014. All
advances are secured by first lien mortgage  loans and SBA pooled  securities of
Matrix Bank and all of its FHLBank stock.

As of December 31, 2004, the maturities of FHLBank borrowings are as follows:
<TABLE>
<CAPTION>
                                        (Dollars In thousands)
<S>                                         <C>
2005                                        $     309,000
2006                                               10,000
2007                                                    -
2008                                               10,000
2009                                               26,000
Thereafter                                        151,118
                                      ----------------------------
                                            $     506,118
                                      ============================
</TABLE>

Matrix  Bank is on full  custody  status at FHLBank of  Dallas,  which  requires
Matrix Bank to place loan  collateral at the FHLBank of Dallas.  At December 31,
2004,  first lien  mortgages of  $201,847,000  and  securities  of $903,000 were
pledged for  FHLBank of Dallas  advances.  Matrix Bank is on blanket  collateral
status at  FHLBank  of Topeka,  which  requires  Matrix  Bank to  identify,  yet
maintain in its  possession,  loan collateral  pledged at FHLBank of Topeka.  At
December 31, 2004, first lien mortgages of $417,903,000 and guaranteed SBA loans
of $52,777,000 were pledged for the FHLBank of Topeka advances.  At December 31,
2004,  mortgage  backed and SBA pooled  securities  in the custody of FHLBank of
Topeka with a balance of  $240,754,000  were also  pledged for  advances.  As of
December 31, 2004,  Matrix Bank had available unused borrowings from the FHLBank
of Topeka for advances of approximately $267,772,000.

16.   Income Taxes

The income tax (benefit) provision consists of the following:
<TABLE>
<CAPTION>
                                     Years ended December 31,
                             2004              2003             2002
                      ------------------------------------------------------
                                    (Dollars in thousands)
<S>                   <C>                <C>                  <C>
Current:
   Federal            $    10,819        $      2,586         $      832
   State                    1,708                 366                  -
Deferred:
  Federal                  (1,810)             (2,941)            (4,306)
   State                     (269)               (437)              (843)
                      ------------------------------------------------------
Provision (benefit)   $   10,448         $       (426)        $   (4,317)
                      ======================================================
</TABLE>

                                      F-40
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

A reconciliation  of the provision  (benefit) for income taxes with the expected
income taxes based on the statutory federal income tax rate follows:
<TABLE>
<S>                                                                      <C>               <C>              <C>
                                                                               Years ended December 31,
                                                                        2004              2003             2002
                                                                 ------------------------------------------------------
                                                                                (Dollars in thousands)

Expected income tax (benefit) provision                          $           11,320    $         646    $      (2,811)
State income tax (benefit) provision, net of federal benefit                  1,682              100             (556)
New market tax credits                                                         (630)               -                -
Other                                                                        (1,924)          (1,172)            (950)
                                                                 ------------------------------------------------------
Provision (benefit) for income taxes                             $           10,448    $        (426)   $      (4,317)
                                                                 ======================================================
</TABLE>

The actual  tax  provision  (benefit)  differs  from the  expected  tax  expense
(computed by applying the applicable United States Federal corporate tax rate of
34% and the  composite  state tax rates,  which  range from 4.5% to 8.0%) to the
income  (loss)  before  taxes for the years ended 2004,  2003 and 2002.  This is
principally due to state income tax expense and various income and expense items
which  are  not  deductible  for  tax  purposes,   including  certain  meal  and
entertainment  deductions,  nontaxable  interest income,  utilization of certain
state net operating loss carry-forwards and the recognition of tax credits under
the New Market Tax Credit program.

During  2004,  the  Company  acquired  $12,600,000  of New  Market  Tax  Credits
allocation.  Under the program,  the Company anticipates it will make qualifying
loans and the Company  will  receive  Federal  income tax  credits  that will be
recognized  over the next seven years with 2004 being the first  year.  In 2004,
the tax credit recognized under the allocation was $630,000. In addition, during
2004, the Company signed an agreement that confirmed and  implemented  its award
of $50,000,000 allocation of New Market Tax Credits. Related to this allocation,
no benefit was recorded in 2004. The Company is reviewing options related to the
allocation to determine the best method for utilization.

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,
                                                     2004             2003
                                               -------------------------------
                                                    (Dollars in thousands)
<S>                                            <C>             <C>
Deferred tax assets:
   Allowance for loan and valuation losses     $      6,326    $     5,401
   Deferred fees                                      1,547          1,367
   State operating loss carryforwards                   793          1,302
   Other                                                974            201
                                               -------------------------------
Subtotal                                              9,640          8,271
   Valuation allowances                                (793)        (1,302)
                                               -------------------------------
Total deferred tax assets                             8,847          6,969
                                               -------------------------------
</TABLE>

                                      F-41
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
                                                           December 31,
                                                     2004             2003
                                               -------------------------------
                                                    (Dollars in thousands)
<S>                                            <C>              <C>
Deferred tax liabilities:
   Mortgage servicing rights                   $     (3,709)    $      (6,435)
   Gain on sale of building                          (1,283)           (1,318)
   Installment gain on sale of interest
     in subsidiary                                   (1,809)                -
   Other                                             (2,526)           (1,775)
                                               -------------------------------
Total deferred tax liabilities                       (9,327)           (9,528)
                                               -------------------------------
Net deferred tax liability                     $       (480)    $      (2,559)
                                               ===============================
</TABLE>

A  valuation  allowance  is  recorded  when it is more likely than not that some
portion or all of the  deferred  tax assets will not be  realized.  The ultimate
realization  of the deferred tax assets depends on the ability of the Company to
generate  sufficient  taxable income of the appropriate  character in the future
and in the appropriate taxing jurisdictions. The Company considers the scheduled
reversal of deferred tax liabilities,  projected future taxable income,  and tax
planning  strategies  in making this  assessment.  The  Company  has  provided a
valuation allowance for state operating loss carryforwards in those states where
its  operations  have  decreased,  currently  ceased,  or where the  Company has
withdrawn  entirely.  These  states are  generally  jurisdictions  where  Matrix
Financial formerly operated mortgage origination  activities with the production
platform  that  was  sold in 2003 as  discussed  in Note 6. No  other  valuation
allowances for deferred tax assets are considered necessary at December 31, 2004
or 2003. The amount of the deferred tax asset  considered  realizable,  however,
could be  reduced in the near term if  estimates  of future  taxable  income are
reduced.

The net deferred  tax  liability  is recorded in the  accompanying  consolidated
balance sheets in income taxes payable and deferred  income tax  liability.  The
current and other income tax payable of  $1,827,000  and $949,000 as of December
31,  2004 and 2003,  respectively,  is  recorded  in income  taxes  payable  and
deferred income tax liability.

17.   Regulatory

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

Matrix Bank is subject to various regulatory capital  requirements  administered
by the OTS.  Failure to meet minimum capital  requirements  can initiate certain
mandatory,  and possibly additional discretionary actions by regulators that, if
undertaken,  could  have a direct  material  effect  on  Matrix  Bank's  and the
Company's consolidated  financial statements.  Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, Matrix Bank must meet
specific capital guidelines that involve quantitative  measures of Matrix Bank's
assets,  liabilities  and certain  off-balance  sheet  commitments as calculated
under  regulatory  accounting  practices.  Matrix  Bank's  capital  amounts  and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require  Matrix  Bank to maintain  minimum  amounts and ratios (set forth in the
following  table) of total and Tier I capital (as defined in the regulations) to

                                      F-42
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

risk-weighted assets (as defined in the regulations),  and of Tier I capital (as
defined in the  regulations)  to total  assets (as defined in the  regulations).
Management believes,  as of December 31, 2004 and 2003, that Matrix Bank met all
applicable capital adequacy requirements.

As of December 31, 2004, the most recent  notification  from the OTS categorized
Matrix  Bank as well  capitalized  under the  regulatory  framework  for  prompt
corrective  action.  To be  categorized  as well  capitalized,  Matrix Bank must
maintain minimum total risk-based,  Tier I risk-based and Tier I leverage ratios
as set forth in the table.  There have been no  conditions  or events since that
notification that management believes have changed the institution's category.
<TABLE>
<CAPTION>
                                                                                     To Be Well Capitalized
                                                                                         Under Prompt
                                                                 For Capital          Corrective Action
                                          Actual              Adequacy Purposes          Provisions
                                   --------------------------------------------------------------------------
                                      Amount      Ratio       Amount       Ratio       Amount      Ratio
                                   --------------------------------------------------------------------------
                                                            (Dollars in thousands)
<S>                                 <C>           <C>        <C>          <C>          <C>         <C>
As of December 31, 2004
   Total Capital
     (to Risk Weighted Assets)      $ 122,432       13.0%    $ 74,456       8.0%       $ 94,320      10.0%
   Core Capital
     (to Adjusted Tangible Assets)    115,076        6.3       72,796       4.0          90,995       5.0
   Tier I Capital
     (to Risk Weighted Assets)        115,076       12.2          N/A        N/A         56,592       6.0

As of December 31, 2003
   Total Capital
     (to Risk Weighted Assets)      $ 108,689       12.1%    $ 72,104       8.0%       $ 90,129      10.0%
   Core Capital
     (to Adjusted Tangible Assets)    101,293        6.2       65,715       4.0          82,143       5.0
   Tier I Capital
     (to Risk Weighted Assets)        101,293       11.2          N/A        N/A         54,078       6.0
</TABLE>

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

Matrix  Bank is required  to  maintain  vault cash or balances  with the Federal
Reserve  Bank  of  Kansas  City  in a  noninterest-earning  account  based  on a
percentage of deposit liabilities.  The required reserve balance was $24,111,000
and $35,301,000 at December 31, 2004 and 2003, respectively.

As a wholly owned subsidiary of Matrix Bank,  Matrix Financial is subject to OTS
regulation.  In addition,  Matrix  Financial is also subject to  examination  by
various  regulatory  agencies  involved in the mortgage banking  industry.  Each
regulatory agency requires the maintenance of a certain amount of net worth, the
most  restrictive  of  which  required  $1,699,000  at  December  31,  2004  and
$2,492,000 at December 31, 2003. At December 31, 2004 and 2003, Matrix Financial
was in compliance with these regulatory requirements.

First Matrix,  headquartered in Denver,  Colorado,  a wholly owned subsidiary of
Matrix Bancorp  Trading,  is a broker-dealer  registered with the SEC under rule
15c3-3(k)(2)(ii).  First  Matrix is subject to the SEC's Net  Capital  Rule that
requires the  maintenance  of minimum net capital and requires that the ratio of
aggregate indebtedness to net capital, both as defined by the regulations, shall
not exceed 15 to 1. At  December  31,  2004,  First  Matrix  had net  capital of
$1,059,000,  which was  $1,032,000  in excess of its  required  net  capital  of
$27,000.  First Matrix's aggregate indebtedness to net capital ratio was 0.36 to
1.

                                      F-43
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

Sterling Trust, a Texas trust company, is generally required to maintain minimum
restricted  capital of at least  $1,000,000,  and may be  required  to  maintain
additional  capital  if the Texas  Banking  Commissioner  determines  that it is
necessary to protect the safety and soundness of Sterling. At December 31, 2004,
Sterling was in compliance with capital requirements under Texas law.

18.   Shareholders' Equity

Stock Option Plan

The Company has elected to follow APB Opinion No. 25 and related interpretations
in accounting for its employee stock options.  Under Opinion No. 25, because the
exercise  price of the Company's  employee stock options equals the market price
of the  underlying  stock on the  date of  grant,  no  compensation  expense  is
recognized.  As discussed in Note 2 above,  this  accounting will change in 2005
with the adoption of SFAS 123(R) and compensation expense for non-vested options
and on all new options issued will be reflected in the financial statements. See
Note 2 to the consolidated financial statements herein for further discussion.

In 1996, the board of directors and  shareholders  adopted the 1996 Stock Option
Plan,  which  amended and  restated the  Company's  stock option plan adopted in
1995. The Company's 1996 Stock Option Plan, as amended,  allows for the grant of
options to substantially all of the Company's  full-time employees and directors
for up to  950,000  shares  of  the  Company's  common  stock.  Options  granted
generally  have  ten-year  terms  and  vest  based on the  determination  by the
Company's compensation committee.

The 1996 Stock Option Plan  authorized  the granting of incentive  stock options
("Incentive Options") and nonqualified stock options ("Nonqualified Options") to
purchase  common  stock to  eligible  persons.  The 1996  Stock  Option  Plan is
currently  administered by the compensation  committee  ("administrator") of the
board of directors.  The 1996 Stock Option Plan provides for  adjustments to the
number of shares and to the exercise price of  outstanding  options in the event
of a declaration of stock dividend or any recapitalization  resulting in a stock
split, combination or exchange of shares of common stock.

No Incentive  Option may be granted  with an exercise  price per share less than
the fair market value of the common stock at the date of grant. The Nonqualified
Options may be granted with any exercise price  determined by the  administrator
of the 1996 Stock Option Plan. To date, all grant prices have equaled the market
price of the underlying  stock on the date of the grant.  The expiration date of
an option is determined by the administrator at the time of the grant, but in no
event may an option be  exercisable  after the  expiration of ten years from the
date  of  grant  of  the  option.   All  options   granted   to-date  have  been
non-qualified.

The 1996 Stock Option Plan further  provides that, in most instances,  an option
must be exercised by the optionee  within 30 days after the  termination  of the
consulting  contract  between such  consultant and the Company or termination of
the optionee's  employment  with the Company,  as the case may be, if and to the
extent such option was exercisable on the date of such termination.  To date, no
options have been granted to consultants.

Pro forma information regarding net income (loss) and income (loss) per share is
required  by SFAS 123 and SFAS 148 and is included in Note 2. The fair value for
these  options was estimated at the date of grant using a  Black-Scholes  option
pricing model with the following weighted-average assumptions for 2004, 2003 and

                                      F-44
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

2002, respectively:  risk-free interest rates of 4.2%, 4.2% and 4.5%; a dividend
yield of zero percent;  volatility  factors of the expected  market price of the
Company's common stock of 0.46, 0.49 and 0.52; and a  weighted-average  expected
life of the option of four years.

The  Black-Scholes  option  valuation model used in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable. In
addition,  option  valuation  models  require  the  input of  highly  subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics  significantly  different from those
of traded options,  and because changes in the subjective input  assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.

A summary of the Company's stock option  activity and related  information is as
follows:
<TABLE>
<CAPTION>
                                                       Years ended December 31,
                                        2004                     2003                      2002
                             ------------------------------------------------------------------------------
                                            Weighted                 Weighted                  Weighted
                                            Average                   Average                  Average
                                            Exercise                 Exercise                  Exercise
                               Options       Price       Options       Price      Options       Price
                             ------------------------------------------------------------------------------
<S>                          <C>           <C>           <C>        <C>           <C>         <C>
Outstanding, beginning of
   year                          609,750  $    10.10       678,125  $    10.11     611,825   $    9.99
Granted                           65,000       10.03        35,000        9.29      86,500       11.12
Exercised                        (81,950)       5.25        (9,000)       9.00      (1,700)       9.11
Forfeited                       (152,250)      10.25       (94,375)      10.07     (18,500)      10.44
                             -------------             -------------            -------------
Outstanding, end of year         440,550       10.94       609,750       10.10     678,125       10.11
                             =============             =============            =============


Exercisable end of year          312,050  $    11.42       436,900  $    10.24     397,655    $  10.31

Weighted average fair value
   of options granted during
   the year                   $   4.96                  $   2.72                 $    6.20
                             =============             =============            =============
</TABLE>

Options  outstanding  at December 31, 2004,  have exercise  prices  ranging from
$7.00 to $26.50 per share as outlined in the following table:
<TABLE>
<CAPTION>
                                                           Weighted
                       Number of        Weighted           Average          Number of         Weighted
   Range of             Options      Average Exercise      Remaining         Options       Average Exercise
Exercise Prices        Outstanding    Price Per Share   Contractual Life   Exercisable      Price Per Share
-----------------------------------------------------------------------------------------------------------
<S>                   <C>         <C>                   <C>                <C>             <C>
$    7.00 - 7.88          7,500   $         7.29        $       6.50             4,500     $        7.29
     8.00 - 8.69         85,500             8.55                5.76            62,400              8.53
     9.20 - 9.69         84,000             9.53                8.80            17,400              9.37
   10.00 - 10.90        119,300            10.41                4.51            95,000             10.29
   11.01 - 11.41         15,000            11.14                9.39             5,000             11.01
   12.00 - 13.88         56,500            12.49                4.03            55,000             12.46
   14.25 - 16.38         70,750            15.05                2.51            70,750             15.05
           26.50          2,000            26.50                4.33             2,000             26.05
                  -----------------------------------------------------------------------------------------
Total                   440,550   $        10.94        $       5.39           312,050     $       11.42
                  =========================================================================================
</TABLE>

                                      F-45
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

Employee Stock Purchase Plan

In 1996,  the board of  directors  and  shareholders  adopted an Employee  Stock
Purchase Plan ("Purchase  Plan") and authorized,  as amended,  250,000 shares of
common stock ("ESPP Shares") for issuance there under.  The Purchase Plan became
effective upon  consummation of the initial public offering.  The price at which
ESPP  Shares  are sold under the  Purchase  Plan is 85% of the lower of the fair
market value per share of common stock on the  enrollment or the purchase  date.
As of December  31,  2004,  there were 79,785 ESPP Shares  available  for future
issuance.  The Purchase Plan has been suspended for 2005 due to unfavorable  tax
treatment and uncertainty  surrounding new accounting  pronouncements  and their
effect on the  feasibility  of offering the Purchase  Plan for the Company.  The
Company will reevaluate the Purchase Plan at the end of 2005 and determine if it
will offer the program in future years.

19.   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, 2004 are approximately as follows:
<TABLE>
<CAPTION>
                                   (Dollars in thousands)
<S>                                   <C>
2005                                  $       1,100
2006                                            902
2007                                            323
2008                                            154
2009                                            150
Thereafter                                      375
                                 -------------------------
                                      $       3,004
                                 =========================
</TABLE>

Total  rent  expense  aggregated   approximately   $1,134,000,   $1,050,000  and
$1,534,000 for the years ended December 31, 2004,  2003 and 2002,  respectively,
and is recorded in occupancy and equipment expense.

The Company,  through  Matrix Tower  Holdings,  LLC, an operating  subsidiary of
Matrix Bank,  is a lessor of office  space under  various  operating  leases for
Matrix  Financial  Center.  Annual  amounts  expected for future  minimum rental
income as of December 31, 2004 are approximately:
<TABLE>
<CAPTION>
                                   (Dollars in thousands)
<S>                                   <C>
2005                                  $     2,180
2006                                        1,781
2007                                        1,353
2008                                          534
2009                                          226
Thereafter                                     65
                                 --------------------------
                                      $     6,139
                                 ==========================
</TABLE>

                                      F-46
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

Total  rental  income  for the years  ended  December  31,  2004,  2003 and 2002
aggregated approximately $2,150,000, $2,050,000 and $1,172,000, respectively.

Included in the expected future office rents are the following  amounts under an
operating lease with MGCH of $135,000,  $136,000,  $113,000, $0 and $0 for 2005,
2006, 2007, 2008 and 2009, respectively.

Off-Balance Sheet Risk and Concentration of Commitments

A summary of the contractual amount of significant commitments follows:
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                             2004              2003
                                                                       ------------------------------------
                                                                             (Dollars in thousands)
<S>                                                                     <C>              <C>
Commitments to extend credit:
  Loans secured by mortgages                                            $      32,499    $      50,155
  Construction loans                                                           37,522           12,833
  Commercial lines of credit                                                      337            1,583
  Commercial loans                                                              2,468              747
  Consumer loans                                                                  323              848
Standby letters of credit                                                       3,078            3,455
Commitments to purchase single family mortgage loans                           60,120                -
Commitments to purchase USDA and SBA loans                                     37,905           56,020
Commitments to sell USDA and SBA loans and SBA securities                      16,042          109,774
</TABLE>

The Company is party to various  financial  instruments with  off-balance  sheet
risk in the  normal  course  of  business  to meet  the  financing  needs of its
customers.  These financial instruments include undisbursed  commercial mortgage
construction loans,  commercial lines of credit, credit card lines of credit and
stand-by  letters of credit.  These financial  instruments  involve,  to varying
degrees,  elements  of credit risk in excess of the  amounts  recognized  in the
consolidated financial statements.

The  Company's  exposure to credit loss, in the event of  nonperformance  by the
other party,  to off-balance  sheet  financial  instruments  with credit risk is
represented by the contractual  amounts of those  instruments.  The Company uses
the same credit policies in making commitments and conditional obligations as it
does for on balance sheet instruments with credit risk.

Commitments  to extend  credit  are  agreements  to lend to, or provide a credit
guarantee  for, a customer  as long as there is no  violation  of any  condition
established in the contract.  Such  instruments  generally have fixed expiration
dates or other termination clauses and may require the payment of a fee. Because
many of these  instruments  are expected to expire without being drawn upon, the
total commitment amounts do not necessarily  represent future cash requirements.
The Company evaluates each customer's  creditworthiness on a case-by-case basis,
and the amount of collateral or other security obtained is based on management's
credit evaluation of the customer.

Standby  letters of credit are conditional  commitments  issued to guarantee the
performance of a customer to a third party.  Standby letters of credit generally
are  contingent  upon the failure of the  customer to perform  according  to the
terms of the underlying contract with the third party.

                                      F-47
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

Matrix Bank  enters  into  commitments  for the  purchase  or sale of  primarily
variable rate,  single family mortgage loans,  USDA and SBA loans,  which have a
government guarantee as to principal, and SBA pooled securities. These contracts
are also considered derivative instruments under SFAS 133, and the fair value of
these  contracts  are  recorded  on the  consolidated  balance  sheets as either
derivative  assets  or  liabilities  and  included  in  other  assets  or  other
liabilities.

Risk Management Activities for MSRs

Ownership  of MSRs  exposes  the Company to  impairment  of the value of MSRs in
certain  interest rate  environments.  The incidence of prepayment of a mortgage
loan increases during periods of declining interest rates as the homeowner seeks
to refinance  the loan to a lower  interest  rate. If the level of prepayment on
segments of the Company's mortgage  servicing  portfolio achieves a level higher
than projected by the Company for an extended period of time, then impairment in
the  associated  basis in the MSRs may  occur.  In 2001  through  mid-2002,  the
Company  implemented  a strategy to mitigate this risk of retaining a portion of
originated  servicing as management  believed that retaining  servicing that was
generated in the lower  interest  rate  environment  will incur less  prepayment
risk. During 2002,  interest rates continued to decrease,  which resulted in the
Company  incurring a significant  allowance  provision  against the value of its
investment  in  mortgage  servicing  rights,  as well as an  increased  level of
repayment   activity.   Due  to  the  interest  rate   environment  and  capital
constraints,  in late 2002 the Company  began to sell the  majority of its newly
originated servicing. The strategy is to reduce the Company's overall investment
in mortgage servicing rights.

In the fourth quarter 2002, the Company elected to reinstate its hedging program
to reduce the risk of loss in fair value of the mortgage servicing rights due to
declining  interest  rates.  The  decision  was  based on the  historically  low
interest rates, the continued  weakening economy,  the geopolitical  environment
and the impairment that the Company incurred to-date.  During the second quarter
of 2004,  based on the underlying  characteristics  of the servicing  portfolio,
among other  things,  the Company  made the decision to remove the hedge and did
not reconstitute  the hedging  position  throughout the remainder of 2004. There
are no amounts  hedged at December 31, 2004.  At December 31, 2003,  the Company
hedged approximately  $530,000,000  notional balance of its servicing portfolio,
or  18.8%.  During  2004 and 2003,  the  Company  recorded  gains on the sale of
derivatives of $164,000 and $708,000,  respectively,  which is recorded in other
income.  During  the fourth  quarter  2002,  the  Company  hedged  approximately
$400,000,000  notional  balance  of its  servicing  portfolio,  or  7.5%.  As of
December 31, 2002, the Company  removed the hedge and recorded a gain on sale of
the  derivatives of $800,000,  which is recorded in other income.  The hedge was
reinstated on January 2, 2003, at approximately $600,000,000 notional balance.

Contingencies - Liabilities and Guarantees

In the  period  between  2000 and 2003,  Matrix  Financial  originated  and sold
approximately   $8,900,000,000  of  residential   mortgage  loans.  Matrix  Bank
continues  to be involved in the  purchase and  subsequent  sale of  residential
mortgage loans.  These loans were and are sold to investors in the normal course
of business.  These  agreements  usually  require  certain  representations  and
warranties concerning credit information,  loan documentation,  collateral,  and
insurability.  On occasion,  investors have requested  Matrix Bank to repurchase
loans or to indemnify  them against  losses on certain loans which the investors
believe do not comply with  applicable  representations.  Upon completion if its
own  investigation   regarding  the  investor  claims,   Matrix  Bank  generally
repurchases or provides indemnification on certain loans.

                                      F-48
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

The Company  maintains a liability for estimated  losses on loans expected to be
repurchased or on which indemnification is expected to be provided and regularly
evaluates  the  adequacy  of  this  repurchase  liability  based  on  trends  in
repurchase  and  indemnification  requests,  actual loss  experience,  and other
relevant factors including economic  conditions.  Total loans repurchased during
the years ended December 31, 2004, 2003 and 2002 were $14,337,000,  $30,565,000,
and  $9,591,000,  respectively.  Loans  indemnified  that remain  outstanding at
December 31, 2004 totaled $22,187,000, of which $12,227,000 are guaranteed as to
principal by FHA. Losses charged  against the liability for estimated  losses on
repurchase and  indemnification  were $3,660,000,  $1,915,000,  and $681,000 for
2004, 2003 and 2002,  respectively.  At December 31, 2004 and 2003 the liability
for estimated  losses on  repurchase  and  indemnification  was  $2,505,000  and
$1,691,000,   respectively,  and  was  included  in  other  liabilities  on  the
consolidated balance sheets.

Contingencies - Legal

The  Company  and its  subsidiaries  are  from  time to time  party  to  various
litigation  matters,  in  most  cases  involving  ordinary  and  routine  claims
incidental to our business.  The Company accrues liabilities when it is probable
that the  future  costs  will be  incurred  and  such  costs  can be  reasonably
estimated.  Such  accruals are based upon  developments  to date,  the Company's
estimates  of the outcome of these  matters and its  experience  in  contesting,
litigating and settling other  matters.  Because the outcome of most  litigation
matters is inherently  uncertain,  the Company will generally only accrue a loss
for a pending litigation matter if, for example,  the parties to the matter have
entered into definitive settlement agreements or a final judgment adverse to the
Company  has been  entered.  Based on  evaluation  of the  Company's  litigation
matters and  discussions  with internal and external legal  counsel,  management
believes than an adverse  outcome on one or more of the matters set forth below,
against  which no accrual  for loss has been made at  December  31,  2004 unless
otherwise noted, is reasonably  possible but not probable,  and that the outcome
with respect to one or more of these matters,  if adverse,  is reasonably likely
to have a  material  adverse  impact  on the  consolidated  financial  position,
results of operations or cash flows of the Company.

A former  customer of Matrix Bank is a debtor in a Chapter 11  proceeding  under
the  Bankruptcy  Code  styled In re  Apponline.com,  Inc.  and  Island  Mortgage
Network,  Inc.  pending in the United  States  Bankruptcy  Court for the Eastern
District of New York. Prior to the bankruptcy  filing,  Matrix Bank had provided
the  customer,  Island  Mortgage  Network,  Inc.  ("Island  Mortgage"),  with  a
purchase/repurchase  facility  under  which  Matrix Bank  purchased  residential
mortgage  loans,  with  Island  Mortgage  having  the  right  or  obligation  to
repurchase  such mortgage loans within a specified  period of time.  Matrix Bank
has initiated an adversary claim in the Bankruptcy  Court against the State Bank
of Long Island seeking to recover losses sustained by Matrix Bank as a result of
the fraud  perpetrated by Island Mortgage.  State Bank, among other things,  was
the depository bank for Island Mortgage. Matrix Bank also believes that any loss
it  sustained  as a result of its  dealings  with Island  Mortgage  are insured.
Matrix Bank cannot  accurately assess at this time whether and to what extent it
will receive  compensation  from any source for any loss it incurred as a result
of its  relationship  with Island  Mortgage.  The  Trustee  for Island  Mortgage
initiated  an  avoidable  preference  action  against  Matrix  Bank  relating to
approximately  $6,100,000  that was returned to Matrix Bank in  connection  with
mortgage  loans slated to be purchased by Matrix Bank but which never closed and
funded. During the fourth quarter of 2004, Matrix Bank entered into an agreement
with the Trustee to pay the estate of Island Mortgage  approximately  $3,650,000
to  settle  all of the  claims  of the  Trustee  relating  to this  matter.  The
settlement was paid in January 2005. The settlement  amount is included in other
liabilities in the consolidated balance sheet at December 31, 2004. This matter,
with regard to the Trustee of Island Mortgage, is now closed.

                                      F-49
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

Sterling  Trust  Company has been named a defendant in an action filed July 1999
styled Roderick Adderley,  et al. v. Advanced Financial  Services,  Inc., et al.
that was tried in Tarrant  County,  Texas  district court in the spring of 2000.
The jury returned a verdict  adverse to Sterling Trust with respect to two of 12
theories  of  liability  posed by the  plaintiffs,  and the court  has  signed a
judgment  for  certain  of  the  plaintiffs  in  the  amount  of   approximately
$6,400,000,  plus post-judgment interest and conditional attorneys' fees for the
plaintiffs in connection with any appeals.  Sterling Trust appealed the judgment
to the Court of Appeals for the Second  District of Texas (Fort Worth).  On July
31, 2003,  the Court of Appeals  affirmed and reversed in part the jury verdict.
The  Court  of  Appeals   affirmed  the  jury's  award  for  actual  damages  of
approximately $6,200,000, plus post-judgment interest and conditional attorneys'
fees for the appeals (currently estimated to be approximately  $3,600,000),  but
denied the punitive award of approximately $250,000.  Sterling Trust appealed to
the Supreme  Court of Texas,  and the Supreme  Court of Texas has agreed to hear
the  appeal.  Oral  arguments  were held  before the  Supreme  Court of Texas on
September  29,  2004,  and the case is  awaiting  a  decision  from  the  Court.
Notwithstanding  the fact that the Supreme  Court of Texas has taken this appeal
by Sterling Trust, no assurances can be given that the appeal will be successful
or that the Supreme Court of Texas will render an opinion  favorable to Sterling
Trust.  Because  management has  determined  that the loss in this matter is not
probable,  no accrual for loss has been recorded in these financial  statements.
The  ultimate  legal and  financial  liability,  if any,  of the Company in this
matter cannot be estimated with certainty at this time.

Related to the matter  described in the previous  paragraph,  Sterling Trust and
several officers of the Company have been named defendants in an action in which
the plaintiffs have asserted  various theories of liability,  including  control
person  theories of  liability  under the Texas  Securities  Act and  fraudulent
transfer  theories of liability,  to seek to impose  liability on the defendants
for the judgment  described  above. The parties have agreed to abate this action
pending the  outcome of the appeal  mentioned  in the  previous  paragraph.  The
defendants  believe they have adequate  defenses and intend to vigorously defend
this action. The ultimate legal and financial liability,  if any, of the Company
cannot be estimated with certainty at this time.

Sterling Trust was named a defendant in several  putative class action  lawsuits
instituted  in  November  2000 by one  law  firm  in  Pennsylvania.  All of such
lawsuits  were  originally  filed in the United  States  District  Court for the
Western District of Pennsylvania.  On April 26, 2001, the District Court for the
Western  District of Pennsylvania  ordered that all of such cases be transferred
to the United States  District  Court for the Western  District of Texas so that
Sterling Trust could properly present its motion to compel arbitration. Sterling
Trust filed separate  motions to compel  arbitration  in these  actions,  all of
which were granted.  Each of the six plaintiffs timely filed arbitration demands
with the American Arbitration  Association.  The demands seek damages and allege
Sterling Trust  breached  fiduciary  duties and was negligent in  administrating
each claimant's self-directed individual retirement account holding a nine-month
promissory note. Each of these  arbitration  actions has been abated pending the
outcome of the Superior Court of the State of California matter described below.
Sterling Trust believes it has meritorious defenses and is defending the matters
vigorously.  The ultimate legal and financial  liability of the Company, if any,
in this matter cannot be estimated with certainty at this time.

Sterling  Trust has been named a defendant in an action  filed in December  2001
that is pending in  Superior  Court of the State of  California.  The  complaint
seeks class action status,  requests  unspecified  damages and alleges negligent
misrepresentation,  breach of fiduciary  duty and breach of written  contract on
the part of Sterling  Trust.  In November 2004, the Court certified two classes,

                                      F-50
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

one consisting of California  plaintiffs  alleging  breach of fiduciary duty and
second class  consisting of plaintiffs  nationwide  alleging breach of contract.
The Company  believes it has  meritorious  defenses and is defending  the matter
vigorously.  The ultimate legal and financial  liability of the Company, if any,
in this matter cannot be estimated with certainty at this time.

Matrix Financial has been named as a defendant in an arbitration action filed on
September  17, 2003 with the American  Arbitration  Association.  The  complaint
alleges that Matrix Financial underpaid Veteran Home Loans for services provided
to Matrix  Financial by Veteran Home Loans in connection  with its assistance in
originating mortgage loans, and seeks general damages for breach of contract. In
February 2005, we agreed to settle this matter.  In  consideration of payment of
$85,000 by Matrix Financial, the parties exchanged mutual releases and dismissed
the arbitration. This matter is now closed.

Matrix  Financial  was named in March 2004 as a  defendant  in a putative  class
action  lawsuit  filed in the United  States  Bankruptcy  Court for the Southern
District of  Alabama.  The  plaintiff  claims  that  Matrix  Financial  filed an
improper  and  false  affidavit  in  connection  with  plaintiff's   Chapter  13
bankruptcy  proceeding  because the signature page of the affidavit was executed
separate  and apart from the other  pages,  and has asked the Court to award the
plaintiff actual damages,  punitive damages,  injunctive relief, attorney's fees
and  other  relief  as may be  appropriate.  Matrix  Financial  believes  it has
meritorious defenses and intends to defend this action vigorously.  The ultimate
legal and financial  liability of the Company,  if any, in this matter cannot be
estimated with certainty at this point.

Related Party Transactions

In June of 2002,  the Company  accepted the  resignation of Guy A. Gibson as the
President and Chief Executive  Officer of the Company.  Mr. Gibson served on the
Board of Directors of the Company and provided certain  consulting  services for
the  Company  until  June of 2004.  Under  the terms of a  Consulting  Agreement
entered into with Mr. Gibson,  the Company paid Mr. Gibson  $250,000 in 2004 for
his consulting  services.  The expense is recorded in compensation  and employee
benefits expense in the consolidated statements of operations.

At December  31, 2004,  deposits  held at Matrix Bank  include  $118,129,000  in
custodial  accounts for customers of MSCS,  and  $25,142,000 in accounts for the
majority owner of MAM, LLC.

20.   Defined Contribution Plan

The Company has a 401(k) defined contribution plan (Plan) covering all employees
who have elected to participate in the Plan.  Each  participant may make pre-tax
contributions  to the  Plan  up to 25% of  such  participant's  earnings  with a
maximum of $13,000 in 2004. The Company makes a matching  contribution of 50% of
the first 6% of the  participant's  compensation  deferred of the  participant's
total  contribution.  Matching  contributions made by the Company vest over five
years. The Company  contributed  approximately  $507,000,  $643,000 and $716,000
during the years ended December 31, 2004, 2003 and 2002, respectively, which and
was recorded in compensation  and employee  benefits expense in the consolidated
statements of operations.


                                      F-51
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

21.   Fair Value of Financial Instruments

The carrying  amounts and estimated fair value of financial  instruments  are as
follows:
<TABLE>
<CAPTION>
                                                                            December 31,
                                                                  2004                       2003
                                                       -------------------------------------------------------
                                                                      Estimated                  Estimated
                                                          Carrying       Fair       Carrying       Fair
                                                           Amount       Value        Amount        Value
                                                       -------------------------------------------------------
                                                                       (Dollars in thousands)
<S>                                                      <C>           <C>         <C>           <C>
Financial assets:
   Cash and cash equivalents                             $   42,869    $   42,869  $   34,510    $   34,510
   Investment securities - available for sale               118,437       118,437     112,402       112,402
   Investment securities - held to maturity                  71,555        71,415      40,106        40,172
   Investment securities  - trading                         126,375       126,375           -             -
   Loans held for sale, net                                 989,822       996,016     999,454     1,003,092
   Loans held for investment, net                           379,717       379,456     344,802       341,937
   FHLBank stock                                             33,481        33,481      30,682        30,682
   Derivative assets                                            221           221          21            21

Financial liabilities:
   Deposits                                            $  1,119,159   $ 1,118,488  $  974,059    $  977,280
   Custodial escrow balances                                 51,598        51,598      85,466        85,466
   FHLBank borrowings                                       506,118       509,036     458,204       469,415
   Borrowed money and junior subordinated debentures         93,408        94,494     114,495       115,018
   Derivative liabilities                                         -             -          39            39

</TABLE>

The following methods and assumptions were used by the Company in estimating the
fair value of the financial instruments:

The carrying amounts  reported in the  consolidated  balance sheets for cash and
cash  equivalents,   FHLBank  stock,   custodial  escrow  balances  and  certain
components of borrowed money  approximate  those assets' and  liabilities'  fair
values based on the short-term nature of the asset or liability.

The fair values of loans are based on quoted  market  prices where  available or
outstanding  commitments from reputable  investors.  If quoted market prices are
not  available,  fair values are based on quoted  market prices of similar loans
sold  in   securitization   transactions,   adjusted  for  differences  in  loan
characteristics.

The fair values of investment  securities are based primarily upon quoted market
prices.

The value of  derivative  financial  instruments  are based on  changes  in fair
values of the  underlying  commitments  and  contracts  to which they  relate as
determined by available market prices.

The fair value disclosed for FHLBank  borrowings is estimated using a discounted
cash flow  calculation  that applies  interest rates  currently being offered on
FHLBank borrowings.

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).

                                      F-52
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

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, 2004 and 2003,  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).

22.   Parent Company Condensed Financial Information

Condensed financial information of Matrix Bancorp, Inc. (Parent) is as follows:
<TABLE>
<CAPTION>
                                                                         December 31,
                                                                     2004             2003
                                                              ------------------------------------
                                                                    (Dollars in thousands)
<S>                                                           <C>                 <C>
Condensed Balance Sheets
Assets:
   Cash                                                       $       12,124      $      3,192
   Other receivables                                                     197                 -
   Premises and equipment, net                                           583               696
   Other assets                                                        3,768             5,311
   Investment in and advances to subsidiaries                        168,906           157,146
                                                              ------------------------------------
Total assets                                                  $      185,578      $    166,345
                                                              ====================================

Liabilities and shareholders' equity:
   Borrowed money and junior subordinated debentures owed to
     unconsolidated subsidiary trusts                         $       76,123      $     82,143
   Other liabilities                                                  17,140            14,518
                                                              ------------------------------------
Total liabilities                                                     93,263            96,661
Shareholders' equity:
   Common stock                                                            1                 1
   Additional paid-in capital                                         21,432            20,615
   Retained earnings                                                  70,756            48,859
   Accumulated other comprehensive income                                126               209
                                                              ------------------------------------
Total shareholders' equity                                            92,315            69,684
                                                              ------------------------------------
Total liabilities and shareholders' equity                    $      185,578      $    166,345
                                                              ====================================

(a)  The Parent's  debt is set forth in a table  following the condensed  statements of cash flows.  The Parent also  guarantees a
     portion of the financing related to charter schools. See Note 13 and Note 14 for additional information regarding the debt.
</TABLE>

                                      F-53
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
                                                            Years ended December 31,
                                                      2004             2003            2002
                                               ----------------------------------------------------
                                                             (Dollars in thousands)
<S>                                            <C>                <C>              <C>
Condensed Statements of Operations
Income (loss):
  Interest income on inter-company advances    $           41    $           52    $       1,232
  Other                                                  (515)               46              57
                                               ----------------------------------------------------
Total income (loss)                                      (474)               98           1,289

Expenses:
  Compensation and employee benefits                    4,255             4,468           4,584
  Occupancy and equipment                                 606               745             817
  Interest on borrowed money                            7,526             7,628           7,766
  Professional fees                                       367               947             299
  Other general and administrative                       (314)              731             943
                                               ----------------------------------------------------
Total expenses                                         12,440            14,519          14,409
                                               ----------------------------------------------------

Loss before income taxes and equity
   income of subsidiaries                             (12,914)          (14,421)        (13,120)
Income taxes (b)                                            -                 -               -
                                               ----------------------------------------------------
Loss before equity income of subsidiaries             (12,914)          (14,421)        (13,120)
Equity income of subsidiaries                          34,811            16,746           9,168
                                               ----------------------------------------------------
Net income (loss)                              $       21,897    $        2,325    $     (3,952)
                                               ====================================================
<FN>
(b)  The Company's tax sharing agreement with its subsidiaries  provides that the subsidiaries will pay the Parent an amount equal
     to its individual current income tax (benefit) provision  calculated on the basis of the subsidiary filing a separate return.
     In the event a subsidiary  incurs a net operating loss in future periods,  the subsidiary will be paid an amount equal to the
     current income tax refund the subsidiary would be due as a result of carry-back of such loss,  calculated on the basis of the
     subsidiary filing a separate return.  Accordingly,  the Parent's condensed statements of operations do not include any income
     tax benefit for the current losses.
</FN>
</TABLE>
<TABLE>
<CAPTION>
                                                                   Years ended December 31,
                                                           2004               2003              2002
                                                    --------------------------------------------------------
                                                                    (Dollars in thousands)
<S>                                                 <C>                <C>               <C>
Condensed Statements of Cash Flows
Operating activities:
   Net income (loss)                                $         21,897   $         2,325   $        (3,952)
   Adjustments to reconcile net income (loss) to
     net cash provided by (used in) operating
     activities:
       Equity income of subsidiaries                        (34,811)           (16,746)           (9,168)
       Dividends from subsidiaries                           14,249              6,593             8,485
       Depreciation and amortization                            432                566               757
       Unrealized (loss) gain on securities
         available for sale                                     (83)               183                 1
       Loss on sublease                                           -                  -               700

</TABLE>

                                      F-54
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
                                                                   Years ended December 31,
                                                           2004               2003              2002
                                                    --------------------------------------------------------
                                                                    (Dollars in thousands)
<S>                                                 <C>                   <C>                 <C>
Condensed Statements of Cash Flows
   Changes in assets and liabilities:
       Increase in other liabilities                           2,622             2,284             4,647
       Decrease in other receivables
          and other assets                                     1,426             2,527               534
                                                    --------------------------------------------------------
Net cash provided by (used in) operating activities            5,732            (2,268)            2,004

Investing activities:
   Purchases of premises and equipment                         (299)              (193)             (274)
   Repayment of (investment in and advances to)
     subsidiaries                                             8,802              5,987            (5,042)
                                                    --------------------------------------------------------
Net cash provided by (used in) investing activities           8,503              5,794            (5,316)

Financing activities:
   Repayments of notes payable and revolving line
     of credit                                              (11,330)           (11,778)          (34,877)
   Proceeds from notes payable and revolving line
     of credit                                                9,760             10,350            34,396
   Shares repurchased                                             -                  -              (726)
   (Repayments) proceeds from capital securities of
     subsidiary trusts, net                                  (4,550)                 -             4,917
   Proceeds from issuance of common stock                       817                240               301
                                                    --------------------------------------------------------
Net cash (used in) provided by financing activities          (5,303)            (1,188)            4,011
                                                    --------------------------------------------------------
Increase in cash                                              8,932              2,338               699
Cash at beginning of year                                     3,192                854               155
                                                    --------------------------------------------------------
Cash at end of year                                 $         12,124   $         3,192   $           854
                                                    ========================================================
</TABLE>

Parent Company Debt is set forth below:
<TABLE>
<CAPTION>
                                                        December 31,
                                                2004              2003
                                          ------------------------------------
                                                 (Dollars in thousands)
<S>                                       <C>                 <C>
Subordinated Debt                         $        10,000     $          -
Bank stock loan                                     4,288            6,073
Senior notes                                            -            9,545
                                          ------------------------------------
Total term notes                                   14,288           15,618
Junior subordinated debentures owed
  to unconsolidated subsidiary trusts              61,835           66,525
                                          ------------------------------------
Total debt                                $       76,123     $      82,143
                                          ====================================
</TABLE>

As of December 31, 2004, the maturities of debt are as follows:
<TABLE>
<CAPTION>
                                        (Dollars in thousands)
<S>                                         <C>
2005                                        $     1,428
2006                                              2,860
2007                                                  -
2008                                                  -
2009                                                  -
Thereafter                                       71,835
                                     ----------------------------
                                            $    76,123
                                     ============================
</TABLE>

                                      F-55
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

23.      Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
                                           -----------------------------------------------------------------
                                                Fourth          Third           Second          First
                                               Quarter         Quarter         Quarter         Quarter
                                           -----------------------------------------------------------------
                                                      (Dollars in thousands, except share data)
<S>                                        <C>             <C>               <C>             <C>
   2004
   Operations:
   Net interest income before provision
      for loan and valuation losses        $      11,406   $    10,586      $    10,285      $    10,350
   Provision for loan and valuation
      losses                                         981           543              445            1,300
   Noninterest income                             26,202        26,333           18,482           17,410
   Noninterest expense                            23,067        24,993           22,472           25,134
                                           -----------------------------------------------------------------
   Income from continuing operations
      before income taxes                         13,560        11,383            5,850            1,326
   Income tax provision                            3,941         4,271            1,988              159
                                           -----------------------------------------------------------------
   Income from continuing operations               9,619         7,112            3,862            1,167

   Discontinued operations:
   Income from discontinued operations,
      net of income taxes                              -             -                -              137
                                           -----------------------------------------------------------------
   Net income                              $       9,619   $     7,112      $     3,862      $     1,304
                                           =================================================================
   Net income per share data:
                                           -----------------------------------------------------------------
   Basic                                   $        1.48   $      1.09      $      0.59      $      0.20
                                           =================================================================
   Diluted                                 $        1.45   $      1.07      $      0.58      $      0.20
                                           =================================================================

   Balance Sheet:
   Total assets                           $    1,888,860   $ 1,877,336      $ 1,736,805      $ 1,753,823
   Total loans, net                            1,369,539     1,421,131        1,307,214        1,281,280
   Shareholders' equity                           92,315        82,058           74,197           71,269


   2003
   Operations:
   Net interest income before provision
      for loan and valuation losses        $       9,966   $    10,295      $    10,710      $    10,737
   Provision for loan and valuation
      losses                                         990         1,114              842              695
   Noninterest income                             15,675        14,782           21,047           17,825
   Noninterest expense                            24,185        23,932           34,101           28,750
                                           -----------------------------------------------------------------
   Income (loss) from continuing
      operations before income taxes                 466            31           (3,186)            (883)
   Income tax benefit                               (185)         (289)          (1,558)            (543)
   Income (loss) from continuing
      operations                                     651           320           (1,628)            (340)

   Discontinued operations:
   Income (loss) from discontinued
      operations, net of income taxes                373        (2,360)           3,057            2,252
                                           -----------------------------------------------------------------
   Net income (loss)                       $       1,024   $    (2,040)    $      1,429      $     1,912
                                           =================================================================
</TABLE>

                                      F-56
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)
<TABLE>
<CAPTION>
                                           -----------------------------------------------------------------
                                                Fourth          Third           Second          First
                                               Quarter         Quarter         Quarter         Quarter
                                           -----------------------------------------------------------------
                                                      (Dollars in thousands, except share data)
<S>                                        <C>             <C>             <C>               <C>
   Net income (loss) per share data:
                                           -----------------------------------------------------------------
   Basic                                   $         0.16  $      (0.31)   $     0.22        $        0.30
                                           =================================================================
   Diluted                                 $         0.16  $      (0.31)   $     0.22        $        0.29
                                           =================================================================

   Balance Sheet:
   Total assets                            $  1,723,924    $  1,601,340    $  1,744,670     $   1,697,475
   Total loans, net                           1,344,256       1,282,838       1,384,642         1,376,386
   Shareholders' equity                          69,684          68,299          70,324            68,856
</TABLE>

24.   Segments of the Company and Related Information

The Company has four reportable segments under SFAS No. 131,  "Disclosures About
Segments  of an  Enterprise  and Related  Information":  a  traditional  banking
subsidiary,  a  mortgage  banking  subsidiary,   two  brokerage  and  consulting
subsidiaries  and  a  school  services   subsidiary.   The  traditional  banking
subsidiary provides deposit and lending services to its customers and also makes
investments in residential  mortgage loans. The mortgage banking subsidiary owns
residential  MSRs and services the mortgage loans underlying those MSRs, and has
some minimal mortgage  origination  activity.  The brokerage  subsidiaries offer
brokerage and consulting  services for residential  MSRs and brokerage  services
for loan  activities,  retail  and fixed  income  activities,  and SBA loans and
securities.  The school services  subsidiary  provides  outsourced  business and
consulting  services,  as well as financing to charter  schools.  The  remaining
subsidiaries  are included in the "all other" category for purposes of Statement
No. 131  disclosures and consist  primarily of the Company's  trust  operations,
real estate disposition  services and the Parent company  operations.  The gains
generated in the year ended December 31, 2004 on the sale of  substantially  all
of the assets of MAMC,  as  discussed in Note 3, and on the sale of our interest
in MSCS, as discussed in Note 4, are included in noninterest  income in the "all
other" category.

The Company  evaluates  performance  and allocates  resources based on operating
profit or loss before income taxes.  Accordingly,  the information  presented in
this table is from continuing  operations,  which excludes the financial results
of the  wholesale  production  platform  for  all of the  years  presented.  The
platform was sold in 2003 as discussed in Note 6. The accounting policies of the
reportable  segments  are  the  same  as  those  described  in  the  summary  of
significant accounting policies.  Transactions between affiliates, the resulting
revenues of which are shown in the intersegment revenue category,  are conducted
at market  prices  (i.e.,  prices that would be paid if the  companies  were not
affiliates).

For the years ended December 31:
<TABLE>
<CAPTION>
                                                       Servicing
                            Traditional   Mortgage    Brokerage and     School
                              Banking     Banking      Consulting      Services    All Others      Total
                           ----------------------------------------------------------------------------------
                                                        (Dollars in thousands)
<S>                        <C>           <C>         <C>              <C>         <C>           <C>
2004
Revenues from external
   customers:
     Interest income       $    66,433  $     3,479  $          135   $   3,845   $        534   $    74,426
     Noninterest income          7,639       28,915          10,419       2,862         38,592        88,427

Intersegment revenues            2,510        1,038           2,474           9          1,890         7,921

Interest expense                23,105        2,567               -       1,027          5,100        31,799

Depreciation/amortization          677       16,449             112         943          1,727        19,908
</TABLE>


                                      F-57
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

<TABLE>
<CAPTION>
                                                       Servicing
                            Traditional   Mortgage    Brokerage and     School
                              Banking     Banking      Consulting      Services    All Others      Total
                           ----------------------------------------------------------------------------------
                                                        (Dollars in thousands)
<S>                         <C>          <C>          <C>             <C>         <C>            <C>
Segment income (loss) from
   continuing operations
   before income taxes
                           $    33,381  $   (15,925) $        2,425   $     212   $     12,026   $   32,119

Segment assets (a)           1,850,868       73,610           7,791      43,319        172,520    2,148,108

2003
Revenues from external
   customers:
     Interest income       $    62,286  $     5,132  $          285   $   5,607   $        397   $   73,707
     Noninterest income          8,345       32,538          10,707       2,240         15,499       69,329

Intersegment revenues            3,059        3,236           2,028          11          1,814       10,148

Interest expense                22,773        3,082              47           5          6,092       31,999

Depreciation/amortization          702       32,758             123         778          1,622       35,983
Segment income (loss) from
   continuing operations
   before income taxes
                                23,355      (12,608)          4,028      (4,616)       (13,731)      (3,572)

Segment assets (a)           1,647,833      114,743           9,244      62,768        182,925    2,017,513

2002
Revenues from external
   customers:
     Interest income       $    71,320  $     5,220  $          123   $   6,823   $        502   $   83,988
     Noninterest income          4,677       31,499           9,273       6,445         10,040       61,934

Intersegment revenues            3,019        3,694           1,192          11          2,260       10,176

Interest expense                31,037        3,019             154       2,771          4,297       41,278

Depreciation/amortization          602       25,433             109       1,405          1,383       28,932

Segment income (loss) from
   continuing operations
   before income taxes
                                20,081      (19,377)          2,311      (6,736)       (13,304)    (17,025)

Segment assets (a)           1,556,268      527,328           7,209      70,237         50,842    2,211,884

(a) See reconciliation to total consolidated assets in the following table.
</TABLE>


                                      F-58
<PAGE>
                      Matrix Bancorp, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

<TABLE>
<CAPTION>
                                                            2004             2003              2002
                                                     -------------------------------------------------------
                                                                     (Dollars in thousands)
<S>                                                  <C>                <C>               <C>
Revenues for year ended December 31:
Interest income for reportable segments              $        73,892    $       73,310    $      83,486
Noninterest income for reportable segments                    49,835            53,830           51,894
Intersegment revenues for reportable segments                  6,031             8,334            7,916
Other revenues                                                41,016            17,710           12,802
Elimination of intersegment revenues                          (7,921)          (10,148)         (10,176)
                                                     -------------------------------------------------------
Total consolidated revenues                          $       162,853    $      143,036    $     145,922
                                                     =======================================================


                                                            2004             2003              2002
                                                     -------------------------------------------------------
                                                                     (Dollars in thousands)
Income (loss) for year ended December 31:
Total income (loss) for reportable segments          $        20,093    $       10,159    $      (3,721)
Other loss                                                    12,516           (13,117)         (12,664)
Elimination of intersegment profit (loss)                       (490)             (614)            (640)
                                                     -------------------------------------------------------
Income (loss) before income taxes                    $        32,119    $       (3,572)   $     (17,025)
                                                     =======================================================

Assets as of December 31:
Total assets for reportable segments                  $    1,975,588    $    1,834,588    $   2,161,042
Other assets                                                 172,520           182,925           50,842
Elimination of intersegment receivables                     (236,040)         (282,574)        (497,514)
Other intersegment eliminations                              (23,208)          (11,015)         (12,965)
                                                     -------------------------------------------------------
Total consolidated assets                             $    1,888,860    $    1,723,924    $   1,701,405
                                                     =======================================================



                                                            2004             2003              2002
                                                     -------------------------------------------------------
Other Significant Items for the year
 ended December 31:

Depreciation/amortization expense:
   Segment totals                                    $        18,181    $       34,361    $      27,549
   Intersegment adjustments                                    1,727             1,622            1,383
                                                     -------------------------------------------------------
Consolidated totals                                  $        19,908    $       35,983    $      28,932
                                                     =======================================================

Interest expense:
   Segment totals                                    $        26,699    $       25,907    $      36,981
   Intersegment adjustments                                    5,100             6,092            4,297
                                                     -------------------------------------------------------
Consolidated totals                                  $        31,799    $       31,999    $      41,278
                                                     =======================================================
</TABLE>



                                      F-59