**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, 2005**


OR


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


**For
      the transition period from __________________ to
      __________________**





**Commission
      file number: 0-21231**





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





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




**700
                17****th****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 checkmark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities


Act.
      Yes
      [ ] No [ Ö ]





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 [ Ö ] 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. [ ]





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):.


Large
      accelerated filer [ ]   Accelerated
      filer [ ]   Non-accelerated
      filer [ Ö ]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange


Act).
      .
      Yes [ ] No [ Ö ]





As
      of
      March 8, 2006, 7,556,573 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,
      2005 was $77,788,000. 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 June 15, 2006 are incorporated by reference into Part
      III of this Form 10-K.













**TABLE
                OF CONTENTS**
            **Page****PART
                I**Item
                1.
            Business
            3Item
                1A.
            Risk
                Factors
            20Item
                1B.
            Unresolved
                Staff Comments
            29Item
                2.
            Properties
            29Item
                3.
            Legal
                Proceedings
            30Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            31**PART
                II**Item
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity Securities
            31Item
                6.
            Selected
                Financial Data
            33Item
                7.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            34Item
                7A.
            Quantitative
                and Qualitative Disclosures about Market Risk
            59Item
                8.
            Financial
                Statements and Supplementary Data
            59Item
                9.
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure
            59Item
                9A.
            Controls
                and Procedures
            59Item
                9B.
            Other
                Information
            59**PART
                III**Item
                10.
            Directors
                and Executive Officers of the Registrant
            60Item
                11.
            Executive
                Compensation
            60Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            60Item
                13.
            Certain
                Relationships and Related Transactions
            60Item
                14.
            Principal
                Accountant Fees and Services
            60**PART
                IV**Item
                15.
            Exhibits
                and Financial Statement Schedules
            60







**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, provides diversified financial
      services. While the Company has historically focused on wholesale banking,
      direct lending, trust activities, mortgage servicing and other fee-based
      services, we have recently announced our intention to redirect our focus to
      community banking, as discussed below.





Matrix
      Bancorp, Inc. was incorporated in Colorado in June 1993 and was formerly called
      “Matrix Capital Corporation.” The trading symbol for our common stock on the
      NASDAQ Global Market is “MTXC.”





**Private
      Placement and Tender Offer**





On
      December 9, 2005, the Company completed a private offering of 5,120,000 shares
      of common stock, $0.0001 par value per share. The shares of our common stock
      were sold at a per share price of $19.00, except shares sold to an affiliate
      of
      our placement agent, which purchased shares at the offering price less the
      placement agent fee, or $17.67 per share. In the private offering, we raised
      an
      aggregate of $97.0 million, less a placement agent fee and certain other costs
      of the offering charged against the proceeds which totaled $10.0 million. The
      net funds raised in the private placement were used to conduct an issuer tender
      offer to purchase shares of our common stock at $19.00 per share. On January
      23,
      2006, the Company completed the tender offer, where 4,184,277 common shares
      were
      tendered at the offering price of $19.00, or $79.5 million. Subsequent to the
      completion of the issuer tender offer, we have 7,556,573 shares of common stock
      outstanding. The purpose of the issuer tender offer was to reduce the insider
      ownership and ultimately increase the market float of our common stock. In
      addition to the costs of the offering noted, we also incurred expenses for
      severance, option buy-outs and other compensation related costs totaling
      approximately $7.9 million.





Concurrently
      with the completion of the private offering, our former Co-Chief Executive
      Officers resigned from the Company, and our new executive management team was
      appointed by our Board of Directors. The Company has added Guy A. Gibson as
      our
      Chairman, Scot T. Wetzel as our President and Chief Executive Officer, William
      D. Snider as our Vice Chairman of Matrix Capital Bank, and Michael J. McCloskey
      as our Chief Operating Officer. The executive management team has significant
      community banking expertise and extensive knowledge of, and relationships in,
      the Colorado Front Range market. Under the direction of this executive
      management team, the Company intends to implement our new business strategy,
      including developing a branch network within such market and building a balance
      sheet of traditional loan and deposit products. As part of the transition,
      our
      Chief Financial Officer, David W. Kloos, and our General Counsel, T. Allen
      McConnell, entered into six-month employment agreements which expire June 30,
      2006, at which time they will resign.





**New
      Business Strategy and Name Change**





Under
      the
      direction of our new executive management team, we intend to utilize our
      existing infrastructure and reporting and accounting systems, as well as the
      income and equity generated from our wholesale banking operations, to fund
      the
      expansion into community branch banking. We intend to serve the needs of small
      to medium sized businesses and individuals in the Colorado Front Range market.
      Our objective is to increase shareholder and franchise value by expanding our
      community banking and lending activities through the recruitment of experienced
      community bankers who are knowledgeable and well-known in the Colorado Front
      Range market, the development of a branch network within such market, and the
      building of a balance sheet consisting of traditional originated loan and
      deposit products. In addition, management will focus on building a brand name,
      maintaining strong asset quality through stringent underwriting standards,
      limiting interest rate risk through the origination of shorter-term and
      adjustable rate assets, and exploring other means to enhance shareholder value.
      Other shorter-term initiatives may include marketing and selling in a
      sale-leaseback transaction our office building in downtown Denver where our
      headquarters are located, utilization of the balance of New Market Tax Credits
      awarded to us in 2004, exercise of our option to sell our remaining 25% interest
      in Matrix Asset Management, LLC and continued streamlining of our non-banking
      subsidiaries. No assurance can be made that any of these shorter-term
      initiatives will occur or that they will occur within the timeframes
      contemplated by our management team. Additionally, management will continue
      to
      evaluate our business operations and performance and may sell other business
      lines, operations or assets if they believe that such sales are in our best
      interests or would enhance shareholder value.





3


The
      Company announced on January 31, 2006 that we have proposed a new brand name
      for
      the Company and our various subsidiaries. The proposed name of the Company
      will
      be “United Western Bancorp, Inc.”, and the proposed name of Matrix Capital Bank
      will be “United Western Bank”. Matrix Bancorp expects to submit the proposed
      name change to “United Western Bancorp, Inc.” for approval at the annual meeting
      of shareholders.





**The
      Subsidiaries**





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




***Matrix
      Capital Bank*** .
      With
      its current branch and headquarter offices in downtown Denver, Colorado, Matrix
      Capital Bank or 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. Please
      see discussion in “New Business Strategy and Name Change” above for a discussion
      of our plans to expand of the footprint of Matrix Bank during 2006, including
      the focus on the expansion of our community banking franchise.




In
      2002,
      Matrix Bank relocated its domicile from Las Cruces, New Mexico to Denver,
      Colorado where it offers all of its existing banking services in the Denver
      market. In connection with the relocation, a subsidiary of Matrix Bank, Matrix
      Tower Holdings, LLC, purchased a high rise building in downtown Denver, Colorado
      in June 2002, named Matrix Financial Center. In addition to Matrix Bank, the
      Company and several of its subsidiaries have their headquarter office space
      in
      Matrix Financial Center.




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 NOW and 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 a former joint venture
      partner, 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 purchases of mortgage backed
      securities and 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, 2005, Matrix Bank had total
      assets of $2.03 billion.




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 the resulting knowledge and activities
      permit Matrix Bank to manage its funding and capital position in a way that
      enhances its performance.




Over
      the
      next several years, through the efforts of the Board of Directors, executive
      management and our employees, Matrix Bank expects to become a more traditional
      community bank. We plan to develop a service-oriented, responsive, energetic,
      business bank that serves the community in which we work and live. Our focus,
      which has historically been transactional and institutional, will change and
      emphasize community banking relationships in the Colorado Front Range market.
      We
      will open new branches of Matrix Bank, commencing in 2006 and will continue
      to
      open branches approximately every six months until we have opened a planned
      five
      branches. We will utilize our existing infrastructure, which includes our
      capital, operational, accounting and reporting systems to fund our expansion
      into community branch banking. See further discussion at “New Business Strategy
      and Name Change” above.




***Matrix
      Financial Services Corporation*** **.** Matrix
      Financial Services Corporation or Matrix Financial, which is a wholly owned
      subsidiary of Matrix Bank, services, through a third party subservicer, acquired
      mortgage servicing rights on a nationwide basis through purchases in the
      secondary market and retention of originated mortgage servicing rights. As
      of
      December 31, 2005, Matrix Financial was responsible for servicing approximately
      29,500 borrower accounts representing $1.72 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, 2005, the
      custodial escrow accounts related to our servicing portfolio maintained at
      Matrix Bank were $34.3 million. Currently, there are no plans to expand the
      operations of Matrix Financial.




4


***Sterling
      Trust Company.*** Sterling
      Trust Company or 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, 2005,
      Sterling Trust administered approximately 43,500 accounts, with assets under
      administration of approximately $3.08 billion. As of December 31, 2005,
      approximately $290 million of the $3.08 billion represented deposits held at
      Matrix Bank.




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




·
            the
                brokering, acquisition and analysis of
                loans;


·
            the
                brokering, analysis and sales of residential mortgage loan servicing
                rights;


·
            mortgage
                loan servicing portfolio valuations, which include the “mark-to-market”
                valuation and analysis required under Statements of Financial Accounting
                Standards No. 140; and


·
            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 related
      to
      the mortgage banking industry, including emerging market trends, prevailing
      market prices, pending regulatory changes and changes in levels of supply and
      demand. Consequently, we are often able to identify certain types of mortgage
      loans and mortgage backed investments that are well suited to our investment
      objectives and unique corporate structure.




***First
      Matrix Investment Services Corp.*** First
      Matrix Investment Services Corp. or First Matrix, 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.




***ABS
      School Services, LLC*** ABS
      School Services, LLC or ABS provides outsourced business services to charter
      schools, and operates under the name “The GEO Group”. Additionally, ABS has a
      financing division, which offers a very 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 segments.




**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.





Approximately
      71.6% of the single-family residential mortgage loans that Matrix Bank owns
      at
      December 31, 2005 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
      primarily consist of 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 1-to-4 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, 2005, at Matrix Bank and Matrix
      Financial we purchased approximately $431.3 million of mortgage loans. Under
      the
      new community banking strategy, it is anticipated that there will be less
      emphasis on the acquisition of bulk loan portfolios, and greater emphasis on
      the
      acquisitions of mortgage backed securities. To the extent that loans are
      acquired, it is anticipated that the acquisitions will be accounted for as
      held
      to maturity loans, as prospectively we plan to sell fewer loan portfolios.





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.





5


Matrix
      Bank performs due diligence on each mortgage loan portfolio that it desires
      to
      purchase. These procedures consist of analyzing all or, in some instances,
      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 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 and
      quality of the valuations on the underlying loan collateral; the payment
      histories of the borrowers, as well as their income and credit worthiness.
      In
      addition, the underwriter attempts to verify that each sample loan conforms
      to
      the standards for loan documentation set by the secondary market for investment
      grade mortgages. In cases where a significant portion of the sample loans
      contain nonconforming documentation, Matrix Bank assesses the additional risk
      involved in purchasing the loans. This process helps Matrix Bank determine
      whether the mortgage loan portfolio meets its investment criteria and, if it
      does, the range of pricing that is appropriate.





During
      2005, Matrix Bank acquired a greater percentage of highly rated mortgage backed
      securities and thus a lesser percentage of whole loans than we had historically.
      The strategy of acquiring securities in lieu of bulk loan portfolios is in
      response to the current interest rate environment which, in the opinion of
      management, has allowed us to acquire securities with comparable risk adjusted
      yields as available by acquiring bulk loan portfolios. See further discussion
      at
      Item 7. - “Liquidity and Capital Resources.”





***Retail
      Originations.*** Matrix
      Bank’s lending office in downtown 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.





***Sale
      of Originated Loans.*** Matrix
      Bank sells in the secondary market certain of the SBA loans and multifamily
      loans it originates. During the year ended December 31, 2005, we sold
      approximately $68.6 million of 1-4 family (principally related to FHA loans
      purchased from our servicing portfolio) and originated SBA loans. 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.





Prior
      to
      the sale of the New Mexico branches of Matrix Bank in 2004, we generally sold
      all of the residential mortgage loans that we originated. Prior to the sale
      of
      the branches and the 2003 sale of the production platform at Matrix Financial,
      we sold under programs established with Fannie Mae, Freddie Mac and Ginnie
      Mae,
      conforming conventional and government loans on a cash basis or pooled and
      exchanged for securities guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae,
      and 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, with standard representations and warranties. 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
      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 the sale
      of
      the production platform in 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.





***Commercial
      and Other Lending.*** Under
      our new community banking strategy discussed above, we expect to expand our
      commercial lending activities in the Colorado Front Range market. Historically,
      we 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 construction loans; commercial real
      estate loans; business and SBA loans; and a very limited amount of financing
      to
      charter schools for the purchase of real estate and equipment. Matrix Bank’s
      loan production office in downtown Denver, Colorado principally originates
      single-family construction, multifamily and commercial real estate loans.





6


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 2005, Matrix Bank originated $38.6 million in SBA
      loans.





Matrix
      Bank generally desires that its commercial lending be 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 2005, Matrix Bank originated $25.9 million of multifamily
      loans. At December 31, 2005, Matrix Bank had a multifamily loan portfolio of
      approximately $69.4 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 very limited financing to charter schools located primarily in Arizona,
      Missouri and Texas for the purchase of real estate. 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, with the
      objective being to reduce the overall size of our charter school loan portfolio.
      As of December 31, 2005, we had a total of $24.0 million loans outstanding
      to
      charter schools. Charter school financing involves inherent risks such
      as:





§
            the
                loan-to-value ratio can be as high as
                100%;


§
            there
                are generally no personal guarantees;
                and


§
            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.





**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, 2005, including loans owned by Matrix Bank and
      Matrix Financial, Matrix Financial serviced through the subservicer
      approximately $1.72 billion of mortgage loans.




7


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, 2005, Matrix Financial’s annual weighted-average
      servicing fee, including ancillary fees, was 0.47%.





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, 2005, on the basis of outstanding principal balances, approximately
      0.65% 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, 2005, we had advanced
      approximately $9.6 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 and other servicer advances are
      estimated and reserved for, and included in the consolidated financial
      statements.





As
      noted
      earlier, during the fourth quarter of 2004, Matrix Financial transferred the
      daily servicing function to a third party subservicer. 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.





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:




**As
                of December 31,****2005**
            
            
            **2004**
            
            
            **2003****(Dollars
                in thousands)**FHA
                insured/VA guaranteed residential
            
            $
            645,903
            
            $
            887,281
            
            $
            1,318,485Conventional
                loans
            
            
            1,019,964
            
            
            1,326,648
            
            
            1,742,096Other
                loans
            
            
            52,131
            
            
            44,911
            
            
            122,955Total
                mortgage servicing portfolio
            
            $
            1,717,998
            
            $
            2,258,840
            
            $
            3,183,536Fixed
                rate loans
            
            $
            1,287,506
            
            $
            1,757,427
            
            $
            2,697,892Adjustable
                rate loans
            
            
            430,492
            
            
            501,413
            
            
            485,644Total
                mortgage servicing portfolio
            
            $
            1,717,998
            
            $
            2,258,840
            
            $
            3,183,536





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.




8




**As
                of December 31,****2005**
            
            
            **2004**
            
            
            **2003****Number**
              **of**
              **Loans**
            
            
            **Percentage**
              **of
                Servicing**
              **Portfolio**
            
            
            **Number**
              **of**
              **Loans**
            
            
            **Percentage**
              **of
                Servicing**
              **Portfolio**
            
            
            **Number**
              **of**
              **Loans**
            
            
            **Percentage**
              **of
                Servicing**
              **Portfolio**Loans
                delinquent for:30-59
                days
            
            
            1,615
            
            
            5.48
            %
            
            2,389
            
            
            6.29
            %
            
            3,366
            
            
            6.62
            %60-89
                days
            
            
            465
            
            
            1.58
            
            
            693
            
            
            1.82
            
            
            1,018
            
            
            2.0090
                days and over
            
            
            1,088
            
            
            3.69
            
            
            1,225
            
            
            3.22
            
            
            1,433
            
            
            2.82Total
                delinquencies
            
            
            3,168
            
            
            10.75
            %
            
            4,307
            
            
            11.34
            %
            
            5,817
            
            
            11.44
            %Foreclosures
            
            
            444
            
            
            1.51
            %
            
            362
            
            
            0.95
            %
            
            438
            
            
            0.86
            %





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:




**As
                of December 31,****2005**
            
            **2004**
            
            **2003**Rate
            
            Number
              of
              Loans
            
            Aggregate
              Principal
              Balance
            
            Percentage
              of
                Aggregate
              Principal
              Balance
            
            Number
              of
              Loans
            
            Aggregate
              Principal
              Balance
            
            Percentage
              of
                Aggregate
              Principal
              Balance
            
            Number
              of
              Loans
            
            Aggregate
              Principal
              Balance
            
            Percentage
              of
                Aggregate
              Principal
              Balance**(Dollars
                in thousands)**Less
                than 7.00%
            
            
            11,605
            
            $
            973,689
            
            
            56.68
            %
            
            14,228
            
            $
            1,201,651
            
            
            53.20
            %
            
            17,240
            
            $
            1,446,158
            
            
            45.43
            %7.00%—
                7.99%
            
            
            5,533
            
            
            365,046
            
            
            21.24
            
            
            7,356
            
            
            516,887
            
            
            22.88
            
            
            10,950
            
            
            846,330
            
            
            26.588.00%—
                8.99%
            
            
            4,335
            
            
            164,194
            
            
            9.56
            
            
            5,915
            
            
            238,491
            
            
            10.56
            
            
            8,492
            
            
            390,254
            
            
            12.269.00%—
                9.99%
            
            
            3,363
            
            
            82,616
            
            
            4.81
            
            
            4,523
            
            
            119,447
            
            
            5.29
            
            
            6,237
            
            
            215,188
            
            
            6.7610.00%
                and over
            
            
            4,641
            
            
            132,453
            
            
            7.71
            
            
            5,936
            
            
            182,364
            
            
            8.07
            
            
            7,936
            
            
            285,606
            
            
            8.97Total
            
            
            29,477
            
            $
            1,717,998
            
            
            100.00
            %
            
            37,958
            
            $
            2,258,840
            
            
            100.00
            %
            
            50,855
            
            $
            3,183,536
            
            
            100.00
            %





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.




**As
                of December 31,****2005**
            
            
            **2004**
            
            
            **2003****Maturity**
            
            
            Number
              of
              Loans
            
            
            Percentage
              of
                Number
              of
                Loans
            
            
            Unpaid
              Principal
              Amount
            
            
            Percentage
              Unpaid
              Principal
              Amount
            
            
            Number
              of
              Loans
            
            
            Percentage
              of
                Number
              of
                Loans
            
            
            Unpaid
              Principal
              Amount
            
            
            Percentage
              Unpaid
              Principal
              Amount
            
            
            Number
              of
              Loans
            
            
            Percentage
              of
                Number
              of
                Loans
            
            
            Unpaid
              Principal
              Amount
            
            
            Percentage
              Unpaid
              Principal
              Amount**(Dollars
                in thousands)**1—
5
                years
            
            
            7,200
            
            
            24.43
            %
            $
            88,183
            
            
            5.13
            %
            
            9,057
            
            
            23.86
            %
            $
            123,858
            
            
            5.48
            %
            
            11,431
            
            
            22.48
            %
            $
            190,283
            
            
            5.98
            %6—10
                years
            
            
            2,840
            
            
            9.63
            
            
            86,265
            
            
            5.02
            
            
            3,199
            
            
            8.43
            
            
            99,337
            
            
            4.40
            
            
            4,958
            
            
            9.75
            
            
            169,379
            
            
            5.3211—15
                years
            
            
            4,547
            
            
            15.43
            
            
            231,723
            
            
            13.49
            
            
            5,596
            
            
            14.74
            
            
            286,816
            
            
            12.70
            
            
            7,055
            
            
            13.87
            
            
            394,119
            
            
            12.3816—20
                years
            
            
            3,101
            
            
            10.52
            
            
            197,970
            
            
            11.52
            
            
            4,141
            
            
            10.91
            
            
            257,277
            
            
            11.39
            
            
            8,080
            
            
            15.89
            
            
            620,435
            
            
            19.4921—25
                years
            
            
            3,905
            
            
            13.25
            
            
            268,121
            
            
            15.61
            
            
            4,260
            
            
            11.22
            
            
            302,877
            
            
            13.41
            
            
            1,274
            
            
            2.51
            
            
            87,013
            
            
            2.73More
                than 25 years
            
            
            7,884
            
            
            26.74
            
            
            845,736
            
            
            49.23
            
            
            11,705
            
            
            30.84
            
            
            1,188,675
            
            
            52.62
            
            
            18,057
            
            
            35.50
            
            
            1,722,307
            
            
            54.10Total
            
            
            29,477
            
            
            100.00
            %
            $
            1,717,998
            
            
            100.00
            %
            
            37,958
            
            
            100.00
            %
            $
            2,258,840
            
            
            100.00
            %
            
            50,855
            
            
            100.00
            %
            $
            3,183,536
            
            
            100.00
            %





Our
      servicing activity is diversified throughout all 50 states with concentrations
      in California, Texas, Missouri and New Mexico of approximately 15.52%, 13.74%,
      13.38% and 11.53%, respectively, based on aggregate outstanding unpaid principal
      balances of the mortgage loans serviced at December 31, 2005.





A
      significant risk of owning mortgage servicing rights is that the underlying
      loans prepay at a rate faster than predicted at acquisition. 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 experienced in 2004 and
      2005,
      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.





9


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





**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **2003**Quarter
                ended:December
                31
            
            
            23.9
            %
            
            23.6
            %
            
            30.3
            %September
                30
            
            
            26.9
            
            
            26.6
            
            
            41.2June
                30
            
            
            24.1
            
            
            32.4
            
            
            38.9March
                31
            
            
            19.8
            
            
            27.4
            
            
            31.3Annual
                average
            
            
            23.7
            %
            
            27.5
            %
            
            35.4
            %





***Sales
      of Servicing Rights.*** Historically,
      we have sold mortgage servicing portfolios. 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.
      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.




***Valuation
      of Servicing Rights.*** 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
      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 2005, 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
      2003, based on a valuation model which incorporates among other things,
      prepayment speeds, we recorded a net recovery of the provision for impairment
      on
      our mortgage servicing rights totaling $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. During 2005, based on
      our
      servicing valuation model, we recorded a net recovery of impairment charges
      of
      $1.2 million. 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. 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. Our
      impairment reserve as of December 31, 2005 was $2.2 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.




To
      mitigate a portion of this risk of impairment, we have in the past hedged a
      portion of our investment. However, based on the underlying characteristics
      of
      the portfolio, and the decision not to increase our investment in mortgage
      servicing, we do not anticipate that we will enter into any future hedge
      specific to our current investment for the foreseeable future.




**Brokerage,
      Consulting and Outsourcing Services**





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





10


***Matrix
      Bancorp Trading.*** Matrix
      Bancorp Trading operates as a full-service mortgage loan and mortgage servicing
      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.





***Consulting
      and Analytic Services.*** Matrix
      Bancorp Trading’s analytics department has 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.





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 believe we have been able to attract brokerage
      clients that we may not otherwise be able to attract. 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.





***School
      Services*** **.** In
      addition to providing limited financing to charter schools as described 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.





***New
      Market Tax Credits.*** New
      Market Tax Credits are awarded under a program administered by the Community
      Development Fund which is a division of the United States Department of
      Treasury. Loans originated under the program receive tax credits over a seven
      year period, in the amount of 5% in years one through three, and 6% in years
      four through seven. In 2004, the Company acquired $12.6 million of New Market
      Tax Credits, and utilized those tax credits through the origination of loans
      eligible under the program. In addition, in 2003, the Company received a $50.0
      million award of New Market Tax Credits. In 2005, we utilized $11.0 million
      of
      this award through our own origination activities, making us eligible for
      utilization of the tax credits, and allocated approximately $14.0 million of
      the
      award to another entity for their utilization. At December 31, 2005, we have
      $25.0 million of New Market Tax Credits yet to be utilized. It is anticipated
      that the majority will be allocated to third parties who will utilize the tax
      credits pursuant to the program. Pursuant to the requirements of the program,
      we
      are required to retain a nominal interest in entities that we allocate the
      tax
      credits to, as well as monitor the entity for compliance and fulfill the
      reporting requirements of the program. Related to those requirements, we do
      provide representations and warranties. During 2005, we realized the benefit
      of
      $1.2 million of tax credits.





**Self-Directed
      Trust and Custody Activities**





***Self-Directed
      Trust and Custody Services.*** The
      Company’s trust and custody activities are provided through Sterling Trust.
      Trust and custodial activities were also performed at Matrix Bank through April
      30, 2005, which was the closing date of the sale of the assets of the trust
      department of Matrix Bank as discussed more fully below.





11


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 our former joint venture partner, Matrix Settlement
      & Clearance Services, in providing trust and custodial services to third
      party administrators, broker-dealers and banks. During the fourth quarter of
      2004, we sold our interest in Matrix Settlement and Clearance Services, and
      agreed to sell the assets of the trust operations of Matrix Bank, which portion
      of the transaction closed April 30, 2005. The sale of the trust operations
      generated a gain on sale of $300 thousand included in other income for the
      year
      ended December 31, 2005. The clearing and custody services provided by Matrix
      Settlement and Clearance Services and the trust operations of Matrix Bank
      generate deposits and, through the closing date for the sale of the assets
      of
      the trust department of Matrix Bank, 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 through September 30, 2006, with an automatic renewal of
      two
      1-year periods unless terminated by either party. At December 31, 2005, deposits
      maintained by the new company at Matrix Bank totaled approximately $173.2
      million.





At
      December 31, 2005, Sterling Trust had approximately 43,500 accounts with assets
      under administration of approximately $3.08 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. In originating mortgage loans, Matrix Financial and Matrix Bank
      have historically competed mainly with other mortgage companies, finance
      companies, savings associations and commercial banks.  With
      the
      implementation of our community banking strategy, as discussed more fully in
      “New Business Strategy and Name Change” above, our competition will increase and
      is expected to include nationwide banks, regional banks and other community
      banks that provide loan and deposit products and services in the markets in
      which we operate. In addition, we will also face competition from many other
      types of financial institutions, including savings and loan associations,
      finance companies, brokerage firms, insurance companies, credit unions, mortgage
      banks and other financial intermediaries. In particular, our competitors will
      include several major financial companies whose greater resources may afford
      them a marketplace advantage by enabling them to maintain numerous locations
      and
      mount extensive promotional and advertising campaigns. Additionally, banks
      and
      other financial institutions with larger capitalization and financial
      intermediaries not subject to bank regulatory restrictions may have larger
      lending limits that would allow them to serve the credit needs of larger
      customers. Areas of competition include interest rates for loans and deposits,
      efforts to obtain loan and deposit customers and a range in quality of products
      and services provided, including new technology-driven products and services.
      Technological innovation continues to contribute to greater competition in
      domestic and international financial services markets as technological advances
      enable more companies to provide financial services. If we are unable to attract
      and retain banking customers, we may be unable to achieve our anticipated loan
      and deposit growth and our business, financial condition and results of
      operations may be adversely affected.





12


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:





§
            recruiting
                qualified and experienced sales people;


§
            developing
                innovative sales techniques;


§
            offering
                superior analytical services;


§
            providing
                financing opportunities to its customers through its affiliation
                with
                Matrix Bank; and


§
            seeking
                to provide a higher level of service than is furnished by its competitors.





If
      we are
      unable to attract and retain brokerage and consulting customers, our business,
      financial condition and results of operations may be adversely
      affected.





Sterling
      Trust faces considerable competition in all of the services and products that
      it
      offers, mainly from other self-directed trust companies, broker-dealers and
      third party administrators. 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. If we are unable
      to attract and retain customers in our trust operations, our business, financial
      condition and results of operations may be adversely affected.





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. Due to the strategy implemented in 2003 to reduce the capital
      committed to this business, the impact from increased competition is not
      expected to have an adverse affect on our business, financial condition or
      results of operations.





**Employees**




At
      December 31, 2005, the Company had 309 employees. We believe that our relations
      with our employees are good. The Company is not party to any collective
      bargaining agreement. With the implementation of the community banking strategy,
      we anticipate increasing the number of employees at Matrix Bank.




**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 Office of Thrift Supervision
      (“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, mortgage backed securities
      and certain loans to small businesses. 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.





13


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 with one another. 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,
      the effectiveness of our controls designed to combat money laundering would
      be
      considered as part of the application process. We have established policies
      and
      implemented 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 Chief Executive Officer 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 existing requirements of Sarbanes-Oxley. We have
      existing policies, procedures and systems designed to comply with these
      regulations, and are further enhancing, documenting and testing such policies,
      procedures and systems to ensure continued compliance with these regulations.





14


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. These reports are made available as soon as
      reasonably practicable after these reports are filed with or furnished to the
      Securities and Exchange Commission. The Company has also made available on
      its
      website its Audit, Compensation and Nominating Committee charters and corporate
      governance guidelines.





***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:





§
            establishes
                a comprehensive framework of activities in which Matrix Bank can
                engage;


§
            limits
                the types and amounts of investments permissible for Matrix Bank;


§
            limits
                the ability of Matrix Bank to extend credit to any given borrower;


§
            significantly
                limits the transactions in which Matrix Bank may engage with its
                affiliates;


§
            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;


§
            places
                limitations on capital distributions by savings associations, such
                as
                Matrix Bank, including cash dividends;


§
            imposes
                assessments to the OTS to fund their operations;


§
            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;


§
            requires
                Matrix Bank to maintain certain noninterest-bearing reserves against
                its
                transaction accounts;


§
            establishes
                various capital categories resulting in various levels of regulatory
                scrutiny applied to the institutions in a particular category; and


§
            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.





15


***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, 2005, the FICO
      assessment for both Savings Association Insurance Fund and Bank Insurance Fund
      insured institutions was equal to 1.34 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.





On
      February 15, 2006, federal legislation to reform federal deposit insurance
      was
      signed into law. This new legislation requires, among other things, the merger
      of the Savings Association Insurance Fund and the Bank Insurance Fund into
      a
      unified insurance deposit fund, an increase in the amount of federal deposit
      insurance coverage from $100 thousand to $130 thousand (with a cost of living
      adjustment to become effective in five years), and the reserve ratio to be
      modified to provide for a range between 1.14% and 1.50% of estimated insured
      deposits. The new legislation requires the FDIC to issue regulations
      implementing the law and changes required by the law will not become effective
      until final regulations have been issued, which must be no later than 270 days
      from the date of the enactment of the legislation.





***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, 2005, Matrix Bank had $42.5 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.





16


***Matrix
      Bank’s Capital Ratios.*** Federal
      law requires, among other things, that federal bank regulatory authorities
      take
“prompt corrective action” with respect to savings institutions that do not meet
      minimum capital requirements. For these purposes, the law establishes five
      categories: well capitalized, adequately capitalized, undercapitalized,
      significantly undercapitalized and critically undercapitalized. The OTS has
      adopted regulations to implement the prompt corrective action legislation.
      An
      institution is deemed to be:





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


§
            “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;


§
            “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%;


§
            “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


§
            “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, 2005, Matrix Bank was a “well capitalized” institution.





“Undercapitalized”
      institutions must adhere to growth, capital distribution and dividend and other
      limitations and are required to submit a capital restoration plan with the
      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:




**As
                of December 31, 2005****Core**
              **Capital**
            
            
            **Risk-Based**
              **Capital****(Dollars
                in thousands)**Shareholder’s
                equity/GAAP capital
            
            $
            128,564
            
            $
            128,564Disallowed
                assets
            
            
            (1,493
            )
            
            (1,493
            )Unrealized
                gain on available for sale securities
            
            
            (18
            )
            
            (18
            )Additional
                capital items:General
                valuation allowances
            
            
            -
            
            
            4,482Low-level
                recourse and residual interests
            
            
            -
            
            
            (517
            )Regulatory
                capital as reported to the OTS
            
            
            127,053
            
            
            131,018Minimum
                capital requirement as reported to the OTS
            
            
            80,987
            
            
            73,098Regulatory
                capital—excess
            
            $
            46,066
            
            $
            57,920Capital
                ratios
            
            
            6.28
            %
            
            14.34
            %Well
                capitalized requirement
            
            
            5.00
            %
            
            10.00
            %





***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, 0.2% 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, 2005 totaling $34.0 million.




17


***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, 2005, 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.





***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 U.S. Department of Housing and Urban Development
      (“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.




***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:




·
            purchase,
                sell, discount and negotiate notes, drafts, checks and other evidences
                of
                indebtedness;


·
            purchase
                and sell securities;


·
            issue
                subordinated debentures and promissory notes; and


·
            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 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.




18


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




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




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




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




·
            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;


·
            the
                Texas Banking Commissioner determines that the Texas trust company
                has
                exceeded its powers;


·
            the
                Texas trust company has violated the law;
                or


·
            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, 2005.





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,
      2005, First Matrix was in compliance with these requirements with net capital
      of
      $1.3 million, which was approximately $1.3 million in excess of its required
      net
      capital of $7 thousand.




19


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





**Item
      1A. Risk Factors**





Ownership
      of the common stock and other securities of the Company involves certain risks.
      Holders of the Company’s securities and prospective investors should carefully
      consider the following risk factors in evaluating an investment in the Company’s
      securities. If any of the risks discussed below actually occur, our business,
      financial condition and results of operations could be materially adversely
      affected. In addition, other risks of which we are not currently aware, which
      relate to the banking and financial services industries in general, or which
      we
      do not now believe are material, may cause earning to be lower, or impair our
      future financial condition or results of operations.





**Risks
      Relating to Ownership of Our Common Stock**





***The
      number of shares that will become available for sale could adversely affect
      the
      future market for our common stock.*** As
      of
      March 8, 2006, we had 7,556,573 shares of common stock outstanding. Of the
      outstanding shares, 5,120,000 shares of common stock, or 67.8%, were restricted
      shares sold in our private offering on December 9, 2005. Pursuant to a
      registration rights agreement, we have filed a registration statement with
      the
      SEC with respect to the 5,120,000 shares and have agreed to keep such
      registration statement effective for two years or until such earlier date as
      all
      of those 5,120,000 shares purchased in the private offering have either been
      sold pursuant to the registration statement or may be sold without registration
      under the Securities Act. Sales of substantial amounts of restricted shares
      of
      our common stock in the public market, or the perception that these sales may
      occur, could cause the market price of our common stock to decline.





***Our
      Board of Directors may authorize the issuance of additional shares that may
      cause dilution*** .
      Our
      articles of incorporation permit our Board of Directors, without shareholder
      approval, to: authorize the issuance of additional common or preferred stock
      in
      connection with future equity offerings, acquisitions of securities or other
      assets of companies; and classify or reclassify any unissued preferred stock
      and
      to set the preferences, rights and other terms of the classified or reclassified
      shares, including the issuance of shares of preferred stock that have the
      preference rights over the common stock with respect to dividends, liquidation,
      voting and other matters. The issuance of additional shares of our common stock
      could be dilutive to shareholders if they do not invest in future offerings.
      Moreover, to the extent that we issue options or warrants to purchase our common
      stock in the future and those options or warrants are exercised or we issue
      restricted stock, shareholders may experience future dilution.





***Control
      by our executive officers and directors will limit individual ability to
      influence the outcome of matters requiring shareholder approval and could
      discourage a potential acquisition by third parties.*** **** As
      of
      March 8, 2006, our executive officers and directors beneficially owned
      approximately 17.7% of the outstanding shares of our common stock. These
      shareholders, if acting together, would be able to influence significantly
      all
      matters requiring approval by our shareholders, including the election of our
      Board of Directors and the approval of mergers or other business combination
      transactions. The concentration of ownership could have the effect of delaying
      or preventing a change in our control or otherwise discourage a potential
      acquirer from attempting to obtain control of us, which in turn could have
      an
      adverse affect on the market price of our common stock or prevent our
      shareholders from realizing a premium over the market price for their shares
      of
      common stock.





***We
      may not have the ability to pay dividends in the
      future.*** We have
      not paid any dividends on our equity. Any future determination as to dividend
      policy will be made at the discretion of our Board of Directors and will depend
      on a number of factors, including our future earnings, capital requirements,
      financial condition and future prospects and such other factors that our Board
      of Directors may deem relevant. Our ability to pay dividends is restricted
      by
      various provisions in our debt instruments, the most restrictive of which is
      a
      line of credit we have with another financial institution, which provides that
      the payment of dividends, together with other “restricted payments”, as defined
      in such line of credit, are limited to 25% of our net income. Additionally,
      we
      are prohibited from paying dividends on our common stock if the scheduled
      payments on our junior subordinated debentures and trust preferred securities
      have not been made. The ability of Matrix Bank and other subsidiaries to pay
      dividends to us may be restricted due to certain regulatory requirements.





20


**Risks
      Related to our Business Strategy**





***We
      may be unable to successfully implement our community banking business strategy.*** Our
      executive management team intends to adopt a traditional, community-focused
      commercial banking strategy as discussed in Item 1., “New Business Strategy and
      Name Change” above. In order to execute this new business strategy we must,
      among other things:





·
            attract
                sufficient commercial business deposits;


·
            attract
                and maintain business banking relationships with businesses in the
                Colorado Front Range market;


·
            attract
                and retain experienced and successful commercial and community bankers;


·
            identify
                and pursue suitable opportunities for opening new branches in the
                Colorado
                Front Range market; and


·
            maintain
                adequate regulatory capital and comply with applicable federal and
                state
                regulations.





Failure
      to achieve these strategic goals could adversely affect our ability to
      successfully implement our new business strategies and our overall financial
      condition and results of operations. See further discussion of the business
      strategy at Item 1., “New Business Strategy and Name Change.”





***Matrix
      Bank’s expansion of its direct originations of residential and commercial loans
      may be adversely impacted by rising interest rates.*** Over the
      past several years financial institutions have been operating in a low interest
      rate environment, which has fostered growth in residential and commercial
      lending and increased loan volumes. A rapid or substantial increase in interest
      rates during the time our management team plans to expand Matrix Bank’s retail
      franchise may thereafter result in decreased demand for loans and slower growth
      of Matrix Bank’s traditional community banking business, which may adversely
      affect our results of operations and financial condition.





***We
      may not be able to effectively manage our proposed
      growth*** .
      Our
      executive management’s business strategy contemplates, in part, an increase in
      our franchise value through the development of a branch network for Matrix
      Bank,
      the increase in retail and commercial deposits and use of such funds to
      originate higher yielding traditional loan products. The expansion plans of
      our
      management team may significantly burden our infrastructure, and our executive
      management may be unable to oversee such expansion successfully or be able
      to
      effectively manage the development of our new business lines.





***No
      assurance can be made that our proposed asset dispositions will be accomplished
      or that other strategies may be undertaken.*** Our
      executive management team contemplates disposing of certain assets, including
      marketing and selling in a sale-leaseback transaction our office building in
      downtown Denver where our headquarters are located. We also intend to monetize
      the remaining $25.0 million allocation of New Market Tax Credits that were
      awarded to us during 2004. Furthermore, our management team is evaluating the
      potential exercise of the put option for our remaining 25% interest in a former
      subsidiary, Matrix Asset Management LLC, which we would expect to result in
      a
      gain to us of not less than $2.5 million. We cannot provide assurances that
      any
      or all of the dispositions discussed above will be accomplished, pursued or
      that
      anticipated returns will be realized. In addition, our management team will
      continue to evaluate our business operations and performance and may sell other
      business or assets when we believe that such sales are in our best interests.





***Changes
      in economic conditions in the Colorado Front Range market could have a material
      adverse effect upon the implementation and success of our business
      strategy.*** The
      implementation and success of our business strategy depends primarily on the
      general economic conditions of the Colorado Front Range market. The local
      economic conditions in our market area will have a significant impact on
      residential and commercial loans originated, the ability of the borrowers to
      repay these loans and the value of the collateral securing these loans. A
      significant decline in general economic conditions caused by inflation,
      recession, unemployment or other factors beyond our control would affect these
      local economic conditions in our market area and could adversely affect our
      financial condition and results of operations.





***Our
      past operating results and financial condition will likely not be representative
      of our future results and financial condition.*** Over the
      last several years, we have sold our interest in various subsidiaries, sold
      bank
      branches and discontinued certain operations. In addition, our management team
      expects to implement our strategic plan to expand the retail operations of
      Matrix Bank, through the opening of new branches and expand Matrix Bank’s direct
      originations of residential and commercial loans. These changes in our
      operations and new business strategies will make period-to-period comparisons
      difficult and our past operating results and financial condition will likely
      not
      be indicative of our future results and financial condition.





21


**Risks
      Related to Our Business**





***Matrix
      Bank relies on institutional deposits and Matrix Bank must offer competitive
      interest rates and services in order to attract and retain such
      deposits.*** A
      significant portion of Matrix Bank’s total deposits are funds deposited as a
      result of unaffiliated institutional relationships maintained by Matrix Bank.
      Institutional depositors generally are more sensitive to interest rate levels
      due to the amount of money they maintain on deposit than retail consumers who
      bank at a branch office. Matrix Bank’s future success in retaining and
      attracting institutional depositors depends, in part, on Matrix Bank’s ability
      to offer competitive rates and services. If Matrix Bank loses one or more of
      these institutional relationships, its liquidity, profitability and results
      of
      operations may be significantly and adversely affected. See further discussion
      of deposits at Note 12 of the consolidated financial statements included
      elsewhere in this document.





***Matrix
      Bank relies upon brokered deposits, which are potentially volatile and subject
      to withdrawal by customers.*** Brokered
      deposits are deposits that we obtain from or through a deposit broker. Brokered
      deposits are considered to be volatile and could be subject to withdrawal.
      Matrix Bank must offer competitive interest rates on its brokered deposits
      due
      to the high level of competition among financial institutions for these
      deposits. Brokered deposits are priced based on the current general level of
      interest rates and, unlike retail deposits, do not take into account regional
      pricing. Matrix Bank’s ability to continue to acquire brokered deposits is
      subject to its ability to price these deposits at competitive levels, which
      may
      substantially increase Matrix Bank’s funding costs. In addition, if Matrix
      Bank’s capital levels were to fall below “well capitalized” under the Prompt
      Corrective Action standards of the Federal Deposit Insurance Corporation, or
      the
      FDIC, Matrix Bank’s ability to accept, renew or roll over these deposits would
      be subject to its receiving a waiver from the FDIC. Furthermore, Matrix Bank
      would be limited on the rate that it could pay for these deposits to 75 basis
      points over the effective yield on deposits that Matrix Bank offers in its
      normal market area or the national rate for deposits of comparable maturity.
      If
      Matrix Bank were to fail to receive a waiver from the FDIC or if Matrix Bank
      were otherwise unable to maintain its brokered deposits, its liquidity,
      profitability and results of operations may be significantly and adversely
      affected. See further discussion of deposits at Note 12 of the consolidated
      financial statements included elsewhere in this document.





***Matrix
      Bank relies on FHLBank system borrowings for secondary and contingent liquidity
      sources.*** Matrix
      Bank utilizes borrowings from the FHLBank system for secondary and contingent
      sources of liquidity. Also, from time to time, Matrix Bank utilizes this
      borrowing source to capitalize on market opportunities to fund investment and
      loan initiatives. If Matrix Bank were unable to borrow from the FHLBank system,
      it would have to find alternative sources of liquidity, which, if available,
      would probably be at a higher cost and on terms that do not match the structure
      of its liabilities as well as FHLBank system borrowings do. See further
      discussion of our FHLBank system borrowings at Item 7. “Asset and Liability
      Management” and at Note 15 of the consolidated financial statements included
      elsewhere in this document.





***Matrix
      Bank’s existing and proposed commercial lending activity and the commercial
      loans that are and will be held in Matrix Bank’s loan portfolio exposes Matrix
      Bank to credit risks.*** Matrix
      Bank currently originates and purchases commercial loans, and our management
      team expects to expand its direct originations of commercial real estate and
      business loans in the Colorado Front Range market. When originating or
      purchasing commercial loans, Matrix Bank will undertake an analysis of the
      credit risk, the value of the underlying collateral and other more intangible
      factors. The commercial loans held in Matrix Bank’s loan portfolio exposes, and
      new commercial lending activity will expose, Matrix Bank to risks, particularly
      in the case of loans to small businesses. These risks include possible errors
      in
      Matrix Bank’s credit analysis, the uncertainty of the borrower’s ability to
      repay the loans, the uncertainty of future economic conditions and the
      possibility of loan defaults. Commercial lending generally includes higher
      interest rates and shorter terms of repayment than non-commercial lending.
      Accordingly, Matrix Bank is subject to greater credit risk with the commercial
      lending and commercial loans held in its loan portfolio. See further discussion
      of our non-performing loans at Item 7. “Asset and Liability
      Management”





***Our
      business is subject to interest rate risk, and variations in interest rates
      may
      negatively affect our financial performance*** .
      Changes
      in the interest rate environment may reduce our profits. A substantial portion
      of our income is derived from the differential, or “spread,” between the
      interest earned on loans, securities and other interest-earning assets, and
      the
      interest paid on deposits, borrowings and other interest-bearing liabilities.
      Because of the differences in the maturities and repricing characteristics
      of
      our interest-earning assets and interest-bearing liabilities, changes in
      interest rates do not produce equivalent changes in interest income earned
      on
      interest-earning assets and interest paid on interest-bearing liabilities.
      In
      rising interest rate environments, loan repayment rates will decline, and in
      falling interest rate environments, loan repayment rates will increase. In
      addition, an increase in the general level of interest rates may adversely
      affect the ability of some borrowers to pay the interest on and principal of
      their obligations. Changes in interest rates also significantly impact the
      valuation of our mortgage servicing rights and loans held for sale. Both of
      these assets are carried at the lower of cost or market. As interest rates
      decline and mortgage loans prepay faster, mortgage servicing rights decline
      in
      value. Changes in mortgage prepayments, interest rates and other factors can
      cause the value of this asset to decrease rapidly over a short period of time.
      Changes in interest rates, prepayment speeds and other factors may also cause
      the value of our loans held for sale to change, possibly resulting in a charge
      to earnings. When interest rates rise, the cost of borrowing increases.
      Accordingly, changes in levels of market interest rates could materially and
      adversely affect our net interest spread, asset quality and loan origination
      volume. See further discussion at Item 7. “Asset and Liability
      Management”.





22


***Our
      investment portfolio includes securities that are sensitive to interest rates
      and variations in interest rates may result in losses.*** These
      investment securities are sensitive to interest rate fluctuations. Our
      management team anticipates that our investment securities portfolio may
      increase or decrease in the future. Our investment securities portfolio consists
      primarily of mortgage backed securities and SBA securities. The value and
      performance of our investment securities portfolio is sensitive to changes
      in
      the general interest rates and economic downturns. Decreases in the market
      value
      of our investment securities portfolio and declining interest rates could reduce
      the performance of the investment securities portfolio, which could adversely
      affect our financial condition and results of operations. We invest in bulk
      loan
      purchases and mortgage backed obligations, which may lead to volatility in
      cash
      flow and market risk. See detail of our investment securities portfolio in
      Note
      8 to the consolidated financial statements contained elsewhere in this
      document.





***We
      invest in bulk loan purchases and mortgage backed obligations, which may lead
      to
      volatility in cash flow and market risk.*** Our
      loan
      portfolio largely consists of single-family residential loans acquired through
      bulk purchases. Our investment portfolio largely consists of mortgage backed
      securities primarily secured by pools of mortgages on single-family residences.
      When we acquire such mortgage backed securities and loans, we anticipate that
      the underlying mortgages will prepay at a projected rate, thereby generating
      an
      expected yield. Prepayment rates generally increase as interest rates fall
      and
      decrease when interest rates rise, but changes in prepayment rates are difficult
      to predict. Many of our mortgage backed securities and bulk loan purchases
      were
      acquired at a premium purchase price. In accordance with applicable accounting
      rules, we will write-off such premiums when necessary due to loan prepayments
      with respect to our held for sale loan portfolio and amortize such premiums
      over
      the expected lives of our mortgage backed securities and loans held for
      investment. If the mortgage loans we acquire or that secure our mortgage backed
      securities prepay more rapidly than anticipated, we would have to write-off
      or
      amortize the premium on an accelerated basis, which would thereby adversely
      affect our profitability.





***Loan
      servicing income derived from residential mortgage loan servicing rights may
      be
      adversely affected during periods of declining interest
      rates.*** Owning
      residential mortgage loan servicing rights carries interest rate risk because
      the total amount of servicing fees earned, as well as the amortization of the
      investment in the servicing rights, fluctuates based on loan prepayments
      (affecting the expected average life of a portfolio of residential mortgage
      servicing rights). The rate of prepayment of mortgage loans may be influenced
      by
      changing national and regional economic trends, such as recessions or depressed
      real estate markets, as well as the difference between interest rates on
      existing mortgage loans relative to prevailing mortgage rates. During periods
      of
      declining interest rates, many borrowers refinance their mortgage loans.
      Accordingly, as prepayments of mortgage loans increase, the loan administration
      fee income related to the residential mortgage loan servicing rights
      corresponding to a mortgage loan ceases as mortgage loans are prepaid.
      Consequently, the market value of portfolios of residential mortgage loan
      servicing rights tends to decrease during periods of declining interest rates,
      since greater prepayments can be expected, and as a result, the amount of loan
      administration income received also decreases. See further discussion at Item
      1.
“Mortgage Servicing Activities”, and at Item 7. “Asset and Liability
      Management”.





***We
      may have fluctuations in our quarterly results.*** Our
      financial results are subject to significant quarterly fluctuations as a result
      of, among other things, the variance in the number and magnitude of purchases
      and sales of loans and/or servicing rights consummated by us from time to time.
      In addition, a portion of our revenues is derived from brokerage fees, the
      timing and receipt of which are unpredictable. Our operating results will
      fluctuate significantly in the future as a result of a variety of factors,
      some
      of which are outside of our control, including general economic conditions,
      economic conditions in the financial industry, the effects of governmental
      regulations and regulatory changes, capital expenditures and other costs
      relating to the expansion of operations, the introduction of new services by
      us
      or our competitors and the mix of services sold. In response to a changing
      competitive environment, we may elect from time to time to make certain pricing,
      service, or marketing decisions or enter into strategic alliances or make
      investments that could have a material adverse effect on our business, results
      of operations, financial condition and cash flow. Accordingly, our results
      of
      operations for any particular quarter are not necessarily indicative of the
      results that may be achieved for any succeeding quarter or for the full fiscal
      year.





23


***A
      downturn in Matrix Bank’s real estate markets could hurt its
      business.*** A
      downturn in the real estate markets in which Matrix Bank originates, purchases
      and services mortgage and other loans could hurt its business because these
      loans are secured by real estate. Real estate values and real estate markets
      are
      generally affected by changes in national, regional or local economic
      conditions, fluctuations in interest rates and the availability of loans to
      potential purchasers, changes in tax laws and other governmental statutes,
      regulations and policies and acts of nature. If real estate prices decline,
      the
      value of real estate collateral securing the loans could be reduced. Matrix
      Bank’s ability to recover on defaulted loans by foreclosing and selling the real
      estate collateral would then be diminished and Matrix Bank would be more likely
      to suffer losses on defaulted loans. Matrix Bank’s real property collateral is
      located throughout the United States. Any such downturn could have a material
      adverse effect on our business, financial condition and results of operations.





***Our
      loan and servicing rights portfolios are geographically
      concentrated.*** Our loan
      portfolio is concentrated in California, Colorado, Georgia, Illinois and Texas,
      while our loan servicing portfolio is concentrated in California, Texas,
      Missouri and New Mexico. The geographic areas in which concentrations exist
      vary
      from time to time. Consequently, our results of operations and financial
      condition are dependent upon general trends in the markets in which
      concentrations exist and, more specifically, their respective residential,
      multi-family and commercial real estate markets. An economic decline in a
      particular geographic area may adversely affect the ability of borrowers to
      repay the loans or the values of properties or other assets that may secure
      our
      loans. In addition, certain geographic areas, including California, may be
      more
      vulnerable to risks of natural disasters, such as earthquakes and mudslides,
      which are not typically covered by standard hazard insurance policies maintained
      by borrowers. Moreover, Florida and Texas are vulnerable to hurricanes, and
      flood damage is not typically covered by standard hazard insurance policies
      maintained by borrowers. Uninsured disasters may adversely impact borrowers’
ability to repay loans made by us and the value of collateral underlying such
      loans, which could have a material adverse effect on our results of operations
      and financial condition. See further discussion at Item 1. “Mortgage Servicing
      Activities.”





***We
      face strong competition from financial service companies and other companies
      that offer banking services, which could hurt our
      business.*** Pursuant
      to our community business strategy, we expect to expand our retail and
      commercial banking operations in the Colorado Front Range market. Increased
      competition within this market may result in reduced loans and deposits.
      Ultimately, we may not be able to compete successfully against current and
      future competitors. Many competitors offer the financial and banking services
      that we offer, or intend to offer, in the Colorado Front Range market. See
      further discussion of competition at Item 1. “Competition”. If we are unable to
      attract and retain banking customers, we may be unable to achieve our
      anticipated loan and deposit growth and our business, financial condition and
      results of operations may be adversely affected.





***The
      allowance for loan losses may not be adequate to cover actual
      losses.*** A
      significant source of risk arises from the possibility that losses could be
      sustained because borrowers, guarantors and related parties may fail to perform
      in accordance with the terms of their loans. The underwriting and credit
      monitoring policies and procedures that the Company has adopted to address
      this
      risk may not prevent unexpected losses that could harm our business, financial
      condition, results of operations and cash flows. Unexpected losses may arise
      from a wide variety of specific or systemic factors, many of which are beyond
      the Company’s ability to predict, influence or control.





Like
      other financial institutions, the Company maintains an allowance for loan losses
      to provide for loan defaults and non-performance. The Company’s allowance for
      loan losses may not be adequate to cover actual loan losses, and future
      provisions for loan losses could materially and adversely affect our business,
      financial condition, results of operations and cash flows. The allowance for
      loan losses reflects the Company’s estimate of the probable losses inherent in
      the loan portfolio at the relevant balance sheet date. The Company’s allowance
      for loan losses is based on prior experience, as well as an evaluation of the
      known risks in the current portfolio, composition and growth of the loan
      portfolio and economic factors. The determination of an appropriate level of
      loan loss allowance is an inherently difficult process and is based on numerous
      assumptions. The amount of future losses is susceptible to changes in economic,
      operating and other conditions, including changes in interest rates that may
      be
      beyond the Company’s control, and these losses may exceed current estimates. We
      cannot assure you that the Company will not increase its allowance for loan
      losses further or that regulators will not require Matrix Bank to increase
      its
      allowance. Either of these occurrences could harm our results of operations.
      See
      further discussion at Item 7. “Asset and Liability Management.”




24


***The
      mortgage loans that we hold are subject to risks of delinquency, foreclosure
      and
      loss, which could result in losses to us.*** The
      residential and commercial mortgage loans held in our loan portfolio are secured
      by residential and commercial properties and are subject to risks of
      delinquency, foreclosure and loss of principal and interest. The ability of
      a
      borrower to repay a loan secured by residential property typically is dependent
      primarily upon the income or assets of the borrower. In addition, other factors
      that affect the risk of our mortgage loan portfolio include:





·
            property
                location and condition;


·
            competition
                and demand for comparable properties;


·
            changes
                in zoning laws for the property or its surrounding area;


·
            environmental
                contamination at the property;


·
            the
                occurrence of any uninsured casualty at the property;


·
            changes
                in national, regional or local economic
                conditions;


·
            declines
                in regional or local real estate values;


·
            increases
                in interest rates and/or real estate tax rates;


·
            changes
                in governmental rules, regulations and fiscal policies, including
                environmental legislation and tax laws; and


·
            other
                events such as acts of God, natural disasters, war, terrorism, social
                unrest and civil disturbances.




In
      the
      event of any default under a mortgage loan held in our mortgage loan portfolio,
      we will bear a risk of loss of principal to the extent of any deficiency between
      the value of the collateral that we can realize upon foreclosure and sale and
      the principal and accrued interest of the mortgage loan and the cost of
      foreclosing on the related property. Losses resulting from mortgage loan
      defaults and foreclosures could have a material adverse effect on our income
      and
      cash flow from operations.





In
      the
      event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such
      borrower will be deemed to be secured only to the extent of the value of the
      underlying collateral at the time of bankruptcy, as determined by the bankruptcy
      court. The lien securing the mortgage loan will be subject to the avoidance
      powers of the bankruptcy trustee or debtor-in-possession to the extent the
      lien
      is unenforceable under state law. Foreclosure of a mortgage loan can be an
      expensive and lengthy process that can have a substantial negative effect on
      our
      originally anticipated return on the foreclosed mortgage loan.





***The
      loan portfolios we acquire include loans that have had past payment
      delinquencies and as a result there is a higher risk of foreclosure and
      potential added foreclosure costs and expenses to us*** .
      Our
      loan portfolio includes mortgage loans that were originated by numerous lenders
      throughout the United States under various loan programs and underwriting
      standards. The loan portfolio includes some mortgage loans that we acquired
      that
      had payment delinquencies in the past or, to a lesser extent, were delinquent
      at
      the time we purchased the mortgage loan. As a part of our prior business
      strategy, portfolios of mortgage loans with varying degrees of current and
      past
      delinquencies were purchased at discounts. Although we perform due diligence
      at
      the time loans are purchased, the risk of continuing or recurrent delinquency
      remains. We assume substantially all risk of loss associated with mortgage
      loans
      we acquire in the case of foreclosure. This risk includes the cost of the
      foreclosure, the loss of interest, and the potential loss of principal to the
      extent that the value of the underlying collateral is less than our investment
      in the mortgage loan. See further discussion at Item 7. “Asset and Liability
      Management”.





***Our
      revenues from mortgage loan servicing can also be adversely affected by
      delinquencies and defaults.*** We are
      also affected by mortgage loan delinquencies and defaults on mortgage loans
      that
      we service. Under many types of mortgage servicing contracts, the servicer
      must
      forward to the owner of the loan all or part of the scheduled payments and
      mortgage and hazard insurance and tax payments even though sufficient escrow
      funds may not have been paid by borrowers. Until we are able to recover these
      advances, we must incur the cost of funds on the advance. Further, we must
      bear
      the increased costs of attempting to collect delinquent or defaulted mortgage
      loans and may experience losses if we are unable to recover the advanced funds.
      See further discussion at Item 1. “Mortgage Servicing Activities.”





***We
      are exposed to risk of environmental liabilities with respect to properties
      to
      which we take title.*** In the
      course of our business we may foreclose and take title to real estate and could
      be subject to environmental liabilities with respect to these properties. We
      may
      be held liable to a governmental entity or to third parties for property damage,
      personal injury, investigation and clean-up costs incurred by these parties
      in
      connection with environmental contamination, or we may be required to
      investigate or clean up hazardous or toxic substances or chemical releases
      at a
      property. The costs associated with investigation or remediation activities
      could be substantial. In addition, if we are the owner or former owner of a
      contaminated site, we may be subject to common law claims by third parties
      based
      on damages and costs resulting from environmental contamination emanating from
      the property. If we become subject to significant environmental liabilities,
      our
      business, financial condition, results of operations and cash flows could be
      materially adversely affected.





25


***If
      we sell mortgage loans or mortgage servicing rights and the underlying loan
      defaults, we may be liable to the purchaser for unpaid principal and interest
      on
      the loan.*** In
      the
      ordinary course of selling mortgage loans or mortgage servicing rights and
      in
      accordance with industry standards, we make certain representations and
      warranties to purchasers. If a loan defaults and there has been a breach of
      representations or warranties and we have no recourse against a third party,
      we
      may become liable for the unpaid principal and interest on the defaulted loan.
      In such a case, we may be required to repurchase the mortgage loan and bear
      any
      subsequent loss on the loan. When we purchase mortgage servicing rights or
      mortgage loans, we also are exposed to liability to the extent that an
      originator or other seller of the servicing rights is unable to honor its
      representations and warranties to us. The Company has established a reserve
      for
      repurchases that may be required in connection with loans we originated and
      sold
      in connection with the sale of our wholesale production platform in 2003.





***If
      a loan originator or seller of mortgage loans and mortgage servicing rights
      breaches its representations and warranties to us, we may be at risk if such
      seller does not have the financial capacity to pay for damages we incur as
      a
      result of such breach or to repurchase any such loan.*** We
      generally receive representations and warranties from the originators and
      sellers from whom we purchase mortgage loans and mortgage servicing rights,
      as
      well as contractually providing for recourse relating to performance of the
      loans we purchase. However, in the event of an originator’s and/or seller’s
      breach of such representations and warranties, we may be subject to the risk
      of
      loss that may result from such a breach if the seller and/or originator does
      not
      have the financial capacity to pay for any damages we incur or to repurchase
      loans when called upon by us to do so.





***Our
      loans to charter schools involve additional risk of default if the school’s
      charter is not renewed or revoked or if laws governing charter schools are
      materially changed.*** We offer
      limited financing to charter schools in several states, including Arizona,
      Missouri and Texas. In addition to the risks associated with commercial lending
      generally, which are discussed elsewhere in these Item 1A. “Risk Factors,”
financing of charter schools carries some additional, unique, risks. Charter
      schools are typically organized under charters granted by sponsoring
      governmental entities. The parameters of individual charters are generally
      dictated by the state law authorizing the organization of charter schools,
      as
      well as the sponsoring governmental entity of the particular charter school.
      The
      law under which each charter school is organized provides that the charter
      of a
      particular school will be reviewed periodically, sometimes annually and
      sometimes on a less frequent basis. In addition, at the expiration of a charter,
      the sponsoring governmental entity generally has sole discretion over whether
      to
      renew a school’s charter. We run the risk that the charter of a school or
      schools that we finance will not be renewed or will be revoked. If such an
      occurrence happens, the principal source of re-payment on our financing of
      such
      school or schools will effectively disappear. In such an event, it is likely
      that we would realize a significant loss with respect to such financing of
      the
      school in question because we would effectively have no recourse to the charter
      school or, since the sponsoring governmental entity does not guarantee or
      otherwise become liable for the obligations of a charter school, the sponsoring
      governmental entity.





Appropriations
      for charter schools are generally made based upon the number of students
      enrolled in a particular charter school. In the event a particular charter
      school is unable to attract and keep enrolled a minimum number of students,
      such
      school would not be appropriated enough money to meet its obligations, including
      its obligations under the lease financing arrangements with us.





We
      are
      also subject to the risk that the states in which charter schools are authorized
      to operate will determine to repeal or otherwise significantly alter the laws
      under which such charter schools operate. If the authorizing laws were repealed
      in states where we have outstanding financings, the result would be much the
      same as if the charter of a particular school were not renewed or were revoked;
      however, the impact on us would tend to be much more significant because the
      repeal would affect all schools financed by us in that state as opposed to
      one
      particular school in the case of non-renewal or revocation of a charter. If
      the
      laws were significantly changed or altered in a particular state, the impact
      on
      us would depend on the nature of the change or alteration.





***Curtailment
      of government guaranteed loan programs could affect our SBA
      business.*** Our SBA
      business relies on originating, purchasing, pooling and selling government
      guaranteed loans, in particular those guaranteed by the SBA. From time to time,
      the government agencies that guarantee these loans reach their internal limits
      and cease to guarantee loans for a period of time. In addition, these agencies
      may change their rules for loans or the U.S. Congress may adopt legislation
      that
      would have the effect of discontinuing or changing the programs. If changes
      occur, the volumes of loans that qualify for government guarantees could
      decline. Lower volumes of origination of government guaranteed loans may reduce
      the profitability of our SBA business.





26


***Failure
      in our automated systems and controls could subject us to increased operating
      costs as well as litigation and other liabilities.*** We
      depend
      heavily upon our automated systems and controls for our business and operations.
      These systems and controls support the evaluation, acquisition, monitoring,
      collection and administration of our loan and servicing portfolios, depository,
      general accounting and other management functions, as well as the consulting
      and
      brokerage functions we perform. The failure of the automated systems, including
      a failure of data integrity or accuracy, could have a material adverse effect
      on
      our business and financial condition.





The
      computer systems and network infrastructure we use could be vulnerable to
      unforeseen problems. Our operations are dependent upon our ability to protect
      our computer equipment against damage from fire, power loss, telecommunications
      failure or a similar catastrophic event. Any damage or failure that causes
      an
      interruption in our operations could have an adverse effect on our financial
      condition and results of operations. In addition, our operations are dependent
      upon our ability to protect the computer systems and network infrastructure
      utilized by us against damage from physical break-ins, security breaches and
      other disruptive problems caused by the Internet or other users. Such computer
      break-ins and other disruptions would jeopardize the security of information
      stored in and transmitted through our computer systems and network
      infrastructure, which may result in significant liability to us and deter
      potential customers. Although we, with the help of third-party service
      providers, intend to continue to implement security technology and establish
      operational procedures to prevent such damage, there can be no assurance that
      these security measures will be successful. A failure of such security measures
      could have an adverse effect on our financial condition and results of
      operations.





***Security
      of our computer systems and network infrastructure is important to our business
      and our ability to protect customer information, and breaches of our computer
      and network security may result in customer information being compromised and/or
      identity theft, which would have a material adverse effect upon our
      business.*** In our
      business, we maintain personal and financial information about our current,
      past
      and potential customers on our computer systems and network infrastructure,
      such
      as customer names, addresses, social security numbers, tax identification
      numbers, bank account numbers, information on loan applications and other
      sensitive personal and financial information about our customers. In addition,
      many of our customers use the Internet and connect to our website to access
      their bank accounts to retrieve information about their accounts, as well as
      conduct online transactions, such as online bill payments. If the security
      of
      our encrypted computer systems and network infrastructure responsible for
      storing our customers' personal and financial data and information and/or the
      security of our online banking Internet services are breached by an unauthorized
      person or entity, then the customer's information that is stolen from us could
      be potentially misused by any such unauthorized person. This could include
      the
      loss of privacy of such customer's non public information through the sale
      and/or disclosure of such information to third parties, as well as the potential
      that the stolen customer information could be used in such a way that results
      in
      identity theft of the customer. We cannot be certain that advances in criminal
      capabilities, new discoveries in the field of cryptography or other developments
      will not compromise or breach our encrypted computer systems and network
      infrastructure that is responsible for the storage of our customer's personal
      and financial information. If our security measures fail to protect our
      customer's information, our existing and future customer base may be adversely
      affected, we may become subject to customer lawsuits, the public perception
      of
      us may be diminished, and our results of operations and financial condition
      would be adversely affected.





***We
      operate in a highly regulated environment and may be adversely affected by
      changes in laws and regulations.*** We are
      subject to extensive regulation, supervision and examination. Matrix Bank is
      regulated by the OTS and the FDIC, and we are regulated by the OTS. Matrix
      Bank
      also belongs to the FHLBank System and, as a member of such system, is subject
      to certain regulations promulgated by the FHLBank of Topeka and FHLBank of
      Dallas. Any change in the laws or regulations applicable to us, or in banking
      regulators’ supervisory policies or examination procedures, whether by the OTS,
      the FDIC, the FHLBank System, the United States Congress or other federal or
      state regulators could have a material adverse effect on our business, financial
      condition, results of operations and cash flows.





This
      regulation and supervision limits the activities in which we may engage. The
      purpose of regulation and supervision is primarily to protect the FDIC’s
      insurance fund and our depositors and borrowers, rather than our shareholders.
      Regulatory authorities have extensive discretion in the exercise of their
      supervisory and enforcement powers. They may, among other things, impose
      restrictions on the operation of a banking institution, the classification
      of
      assets by such institution and such institution’s allowance for loan losses.
      Regulatory and law enforcement authorities also have wide discretion and
      extensive enforcement powers under various consumer protection and civil rights
      laws, including the Truth-in-Lending Act, the Equal Credit Opportunity Act,
      the
      Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage
      Disclosure Act, the Truth-in-Saving Act, the Federal Trade Commission Act and
      Colorado’s deceptive acts and practices law. These laws also permit private
      individual and class action lawsuits and provide for the recovery of attorneys
      fees in certain instances. No assurance can be given that the foregoing
      regulations and supervision will not change so as to affect us adversely. See
      further discussion at Item 1. “Regulation and Supervision.”





27


***Sterling
      Trust is subject to regulation as a trust company and could be the subject
      of
      third party actions as a result of the trust services it provides.*** As
      a
      Texas-chartered trust company, Sterling Trust is subject to supervision,
      regulation and examination by the Texas Department of Banking. Pursuant to
      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. Sterling Trust is also
      subject to Internal Revenue Service and Department of Labor regulations. This
      regulation and supervision limits the activities in which Sterling Trust may
      engage and the Texas Department of Banking has supervisory and enforcement
      power
      with respect to Sterling Trust’s operations. No assurance can be given that the
      foregoing regulations and supervision will not change so as to affect Sterling
      Trust or us adversely. See further discussion at Item 1. “Regulation and
      Supervision.”





As
      a
      custodian of self-directed individual retirement accounts and other retirement
      accounts, Sterling Trust does not provide investment advice, nor does it
      maintain discretion, with regard to the investment choices made by its customers
      and their representatives. Nevertheless, Sterling Trust has been in the past,
      and may be in the future, subject to claims by third parties that the provision
      by Sterling Trust of these self-directed custodial services constitute a breach
      of contract, breach of fiduciary duty, or similar breach or violation of duty
      or
      law. While we believe federal law and the laws of the various states in which
      we
      operate support our view of Sterling Trust’s duties, or lack thereof, in that
      regard, there can be no assurances that any third party that takes a contrary
      position will not prevail in any litigation or other proceeding challenging
      the
      matter.





***Our
      ability to service our debt and pay dividends is subject to our ability to
      receive dividends from our subsidiaries.*** We are a
      separate legal entity from our subsidiaries and do not have significant
      operations of our own. We currently depend on our cash and liquidity as well
      as
      dividends from our subsidiaries to pay our operating expenses. No assurance
      can
      be made that in the future our subsidiaries will have the capacity to pay the
      necessary dividends to satisfy our obligations. The availability of dividends
      from Matrix Bank is limited by various statutes and regulations. It is possible,
      depending upon the financial condition of Matrix Bank and other factors, that
      the OTS could assert that the payment of dividends or other payments by Matrix
      Bank are an unsafe or unsound practice. In the event our subsidiaries are unable
      to pay dividends sufficient to satisfy our obligations, we may not be able
      to
      service our debt, pay our obligations as they become due or pay dividends on
      our
      common stock. Consequently, under such circumstances, an inability to receive
      dividends from our subsidiaries could have a material adverse effect on our
      financial condition, results of operations and prospects.





***The
      brokerage services provided by Matrix Bancorp Trading may adversely affect
      revenue or result in losses*** .
      Our
      subsidiary, Matrix Bancorp Trading, provides brokerage services to financial
      institutions and financial services companies operating within the mortgage
      banking industry. Matrix Bancorp Trading's brokerage business, by its nature,
      is
      subject to potential defaults by its clients, which include a client's failure
      to pay for loans, mortgage backed securities and/or mortgage servicing rights
      that they agreed to purchase, as well as a client's failure to deliver loans,
      mortgage backed securities or mortgage servicing rights that they agreed to
      sell. In addition, Matrix Bancorp Trading's brokerage business involves credit
      and/or default risk involving the counterparty of a transaction that Matrix
      Bancorp Trading brokers on behalf of its clients. These credit and default
      risks
      consist of the risk of insolvency or other inability of the counterparty to
      a
      particular transaction to perform its obligations in such transaction. Any
      or
      all of these risks in a transaction that Matrix Bancorp Trading brokers may
      result in such brokered transaction not closing and Matrix Bancorp Trading
      losing its commissions, which would have an adverse effect upon Matrix Bancorp
      Trading's revenue and may result in losses due to the resources and expenses
      incurred by Matrix Bancorp Trading to broker such failed
      transaction.





***We
      will be exposed to risks relating to the evaluations of internal controls over
      financial reporting required by Section 404 of the Sarbanes-Oxley Act of
      2002.*** We are
      currently in the process of evaluating our internal control system to allow
      management to report on, and our independent auditors to audit, our control
      over
      financial reporting. We will be performing the system and process evaluations
      and testing, and any necessary remediation, required for compliance with the
      management certification and auditor attestation requirements of Section 404
      of
      the Sarbanes-Oxley Act of 2002 (“SOX”). These systems are necessary to produce
      accurate financial reports and prevent fraudulent financial activity. As a
      “non-accelerated” filer, we are required to comply with SOX beginning with our
      Annual Report on Form 10-K for the year ending on or after July 15, 2007;
      however, if our market capitalization as of June 30, 2006 equals or exceeds
      $75.0 million, which we expect will be the case, we will be required to comply
      with SOX beginning with our Annual Report on Form 10-K for the fiscal year
      ending on December 31, 2006. We cannot be certain as to the timing of completion
      of our evaluation, testing and remediation actions or the impact of the same
      on
      our operations. Furthermore, upon completion of this process, we may identify
      control deficiencies of varying degrees of severity under applicable SEC and
      Public Company Accounting Oversight Board rules and regulations that may remain
      unremediated. As a public company, we are required to report, among other
      things, control deficiencies that constitute a “material weakness” or changes in
      internal controls that, or are reasonably likely to, materially affect internal
      controls over financial reporting. A “material weakness” is a significant
      deficiency, or combination of significant deficiencies, that results in more
      than a remote likelihood that a material misstatement of the annual or interim
      financial statements will not be prevented or detected. If we fail to implement
      the requirements of SOX in a timely manner, we may be subject to sanctions
      or
      investigations by regulatory authorities such as the SEC or the NASDAQ. In
      addition, if any material weakness or deficiency is identified and is not
      remedied, investors may lose confidence in the accuracy of our reported
      financial information, and the price of our common stock could be significantly
      adversely affected as a result.





28


**Risks
      Associated with General Economic Conditions**





General
      economic conditions, whether regional or industry-related or due to a recession
      throughout the United States, affect consumers’ decisions to buy or sell
      residences as well as the number of residential mortgage loan delinquencies
      and
      foreclosures, the value of collateral supporting loan portfolios, administrative
      costs in evaluating and processing loan applications and the costs and
      availability of funds that companies rely upon in order to make or purchase
      loans. Changes in the level of consumer confidence, real estate values,
      prevailing interest rates and investment returns expected by the financial
      community could make loans of the types originated, purchased, serviced and
      sold
      by the Company less attractive to borrowers or investors.





**Item
      1B. Unresolved Staff Comments**





None.





**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:




**Location**
            **Square
                Feet/Acres**
            
            **Owned/Leased**
            
            **Occupant**
            
            **Monthly
                Rent or Mortgage Payment**Denver,
                CO (1)
            178,152
            
            Owned
            
            Matrix
                Bancorp and various of its subsidiaries
            
            N/APhoenix,
                AZ
            5,549
            
            Leased
                through November 30, 2006
            
            Matrix
                Financial and ABS
            
            $
                9,942Phoenix,
                AZ
            17,421
            
            Leased
                through August 31, 2007
            
            Matrix
                Financial
            
            $
                8,885Scottsdale,
                AZ
            300
            
            Leased
                through January 31, 2006
            
            Matrix
                Bank
            
            $
                1,783Highlands
                Ranch, CO
            18
            
            Leased
                Month to Month
            
            Matrix
                Bancorp
            
            $
                2,400Dallas,
                TX
            6
            
            Leased
                through April 6, 2007
            
            Matrix
                Bancorp
            
            $
                875Waco,
                TX
            11,294
            
            Leased
                through June 30, 2011
            
            Sterling
                Trust
            
            $
                13,553Waco,
                TX
            8,116
            
            Leased
                through June 30, 2011
            
            Sterling
                Trust
            
            $
                7,305Waco,
                TX
            1,204
            
            Leased
                through December 31, 2006
            
            Sterling
                Trust
            
            $
                1,385Memphis,
                TN
            3,305
            
            Leased
                through September 7, 2006
            
            First
                Matrix and Matrix Bancorp Trading
            
            $
                5,963San
                Francisco, CA
            1,300
            
            Leased
                through June 30, 2008
            
            Matrix
                Bancorp Trading
            
            $
                3,300Salt
                Lake City, UT
            785
            
            Leased
                through June 30, 2006
            
            Matrix
                Bancorp Trading
            
            $
                633Denver,
                CO
            1,200
            
            Leased
                through July 31, 2006
            
            Matrix
                Bancorp Trading
            
            $
                1,795Mesa,
                AZ
            7,616
            
            Owned
            
            ABS
            
            N/ASpringerville,
                AZ
            12,904
            
            Owned
            
            ABS
            
            N/ASt.
                Louis, MO
            6,144
            
            Leased
                through June 30, 2012
            
            ABS
            
            $
                12,500St.
                Louis, MO
            5,500
            
            Owned
            
            ABS
            
            N/ASt.
                Louis, MO
            42,000
            
            Owned
            
            ABS
            
            N/AFlower
                Mound, TX
            27,000
            
            Owned
            
            ABS
            
            N/AFlower
                Mound, TX
            29.162
                Acres
            
            Owned
            
            ABS
            
            N/AFt.
                Lupton, CO
            389
                Lots
            
            Owned
            
            Matrix
                Funding
            
            N/A


__________





(1)
            Of
                this 178,152 square feet, approximately 60,225 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.






29


**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, currently Chairman of the Board and formerly President and
      CEO of Matrix Bancorp, Richard V. Schmitz, formerly the Co-Chief Executive
      Officer and Chairman of the Board of Matrix Bancorp, and D. Mark Spencer,
      formerly the President, Co-Chief Executive Officer and a director of Matrix
      Bancorp, were 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 (“Adderley II”), seeking to
      impose joint and several liability on these defendants for the former judgment
      against Sterling Trust in *Roderick Adderley, et al. v. Advance Financial Services, Inc., et al. (“Adderley
      I”)* .
      This
      case has settled and is now closed. See “--Sterling Trust” below.





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 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. In the
      fourth quarter of 2005, Matrix Bank agreed to settle its claims against State
      Bank in return for payment by State Bank to Matrix Bank of $475 thousand, and
      this adversary proceeding is now closed with respect to Matrix
      Bank.





***Sterling
      Trust.*** Sterling
      Trust was 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. As
      previously disclosed, on December 22, 2005, Sterling Trust entered into a Final
      Compromise Settlement Agreement and Release in connection with Adderley I.
      Under
      the settlement agreement, Sterling Trust paid an aggregate of $3,150,000 to
      the
      plaintiffs in final settlement of all of the plaintiffs claims against all
      of
      the defendants in the Adderley I action and the related action described below,
      including a full release from each plaintiff in favor of each defendant in
      both
      actions. A related action, Adderley II, that had been abated by agreement of
      the
      parties pending final outcome of the Adderley I case, was also dismissed
      pursuant to the settlement agreement. The Agreement was also made for the
      benefit of Matrix Bancorp, Inc. and Matrix Capital Bank, each of which is a
      signatory to the Agreement and each of which had been named a defendant in
      the
      related action. Although not signatories to the Agreement, the Agreement was
      also made for the benefit of The Vintage Group, Inc. and Vintage Delaware
      Holdings, Inc., two subsidiaries named as defendants in the related action;
      and
      Guy A. Gibson, current Chairman of the Board of Matrix Bancorp and former
      President and CEO of Matrix Bancorp, D. Mark Spencer, former President, Co-CEO
      and director of Matrix Bancorp, and Richard V. Schmitz, former President, Co-CEO
      and director of Matrix Bancorp, individuals named as defendants in the related
      action.




30


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
      a llege
      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 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 the fourth quarter of 2005, Sterling Trust was
      granted summary judgment as to all claims against it by the plaintiffs. Once
      the
      summary judgment order is entered by the court, the plaintiffs will have a
      certain number of days to appeal the decision. There can be no assurances that
      such decision in favor of Sterling Trust will not be appealed by the plaintiffs
      or, if so appealed, that the decision in favor of Sterling Trust will not be
      overturned. In the event such decision in favor of Sterling Trust were
      overturned by the appellate courts, the Company continues to believe it has
      meritorious defenses and will continue to defend 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 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. In January 2006, the Plaintiff withdrew her Motion for Class
      Certification, but has indicated that she will continue to pursue her claim
      individually. 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, 2005.





**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 Global Market under
      the
      symbol “MTXC.” The following table sets forth the high and low sales prices for
      our common stock on the NASDAQ Global Market for the periods
      indicated.




Market
                PriceQuarter
                Ended:
            
            
            High
            
            
            LowDecember
                31, 2005
            
            $
            19.43
            
            $
            12.52September
                30, 2005
            
            
            13.79
            
            
            12.50June
                30, 2005
            
            
            13.59
            
            
            11.75March
                31, 2005
            
            
            12.90
            
            
            12.00December
                31, 2004
            
            $
            13.00
            
            $
            11.52September
                30, 2004
            
            
            13.91
            
            
            9.95June
                30, 2004
            
            
            12.49
            
            
            10.75March
                31, 2004
            
            
            11.70
            
            
            8.91







31


On
      March
      8, 2006, the closing price of our common stock was $22.50 per share. Also,
      as of
      that date, the approximate number of holders of record of our common stock
      was
      109. This number does not include beneficial owners who hold their shares in
      a
      depository trust in “street” name.





As
      discussed in Item 1. “Private Placement and Tender Offer”, on December 9, 2005,
      we sold 5,120,000 shares of our common stock to “accredited investors” in a
      private offering exempt from registration under the Securities Act of 1933.
      We
      entered into a registration rights agreement on December 9, 2005 with the
      placement agent in the private offering in which we agreed, for the benefit
      of
      the investors in our common stock in the private offering, to file a
      registration statement with the SEC with respect to resales of the common stock
      sold in the private offering. We also agreed to use our reasonable best efforts
      to keep the registration statement effective for two years or such earlier
      date
      as all of the common stock purchased under the private offering has either
      been
      sold pursuant to this registration statement or may be sold without registration
      under the Securities Act of 1933. The net proceeds from the private offering
      were used by us to fund our issuer tender offer, which commenced December 21,
      2005 and closed January 23, 2006. We purchased 4,184,277 of our common stock
      at
      $19.00 in the issue tender offer.





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 as 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, 2005 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.





Plan
                Category
            
            
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            
            Weighted
                average exercise price of outstanding options, warrants and
                rights
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected incolumn
                (a))(a)
            
            (b)
            
            (c)Equity
                compensation plans approved by security holders
            
            
            (1
            )
            
            2,000
            
            $
            26.50
            
            
            868,622





(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 was been suspended for the 2005
      calendar year. The Company is considering re-implementing the plan for 2006
      or
      2007.




32


**** **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 and is treated as 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, 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. The results from continuing operations as reflected
      herein are not necessarily reflective of the financial results that might have
      occurred had the disposition of the platform actually had been completed on
      the
      indicated date, and are not indicative of any future results.




**As
                of and for the****Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****(Dollars
                in thousands, except per
                share data)**Statement
              of Operations DataNet
                interest income before provision for loanand
                valuation losses
            
            $
            46,723
            
            $
            42,627
            
            $
            41,708
            
            $
            42,710
            
            $
            30,183Provision
                for loan and valuation losses
            
            
            1,665
            
            
            3,269
            
            
            3,641
            
            
            2,821
            
            
            2,980Net
                interest income after provision for loanand
                valuation losses
            
            
            45,058
            
            
            39,358
            
            
            38,067
            
            
            39,889
            
            
            27,203Noninterest
                income:Loan
                administration
            
            
            10,103
            
            
            15,253
            
            
            21,668
            
            
            27,359
            
            
            28,273Brokerage
            
            
            9,846
            
            
            10,629
            
            
            10,873
            
            
            8,105
            
            
            4,815Trust
                services
            
            
            7,217
            
            
            7,853
            
            
            6,781
            
            
            5,345
            
            
            4,036Real
                estate disposition services
            
            
            1,391
            
            
            7,786
            
            
            6,624
            
            
            4,153
            
            
            2,572Gain
                on sale of loans and securities
            
            
            2,017
            
            
            6,618
            
            
            14,267
            
            
            5,480
            
            
            4,163Gain
                on sale of assets
            
            
            300
            
            
            31,767
            
            
            -
            
            
            -
            
            
            3,425Gain
                on sale of mortgage servicing rights, net
            
            
            -
            
            
            -
            
            
            -
            
            
            675
            
            
            167School
                services
            
            
            1,690
            
            
            2,871
            
            
            2,420
            
            
            4,616
            
            
            5,427Other
            
            
            5,518
            
            
            5,650
            
            
            6,696
            
            
            6,201
            
            
            5,509Total
                noninterest income
            
            
            38,082
            
            
            88,427
            
            
            69,329
            
            
            61,934
            
            
            58,387Noninterest
                expense
            
            
            84,029
            
            
            95,666
            
            
            110,968
            
            
            118,848
            
            
            85,585(Loss)
                income from continuing operations beforeincome
                taxes
            
            
            (889
            )
            
            32,119
            
            
            (3,572
            )
            
            (17,025
            )
            
            5Income
                tax (benefit) expense
            
            
            (2,447
            )
            
            10,359
            
            
            (2,575
            )
            
            (7,756
            )
            
            (887
            )Income
                (loss) from continuing operations
            
            $
            1,558
            
            $
            21,760
            
            $
            (997
            )
            $
            (9,269
            )
            $
            892Income
                (loss) from continuing operations per shareassuming
                dilution(1)
            
            $
            0.22
            
            $
            3.28
            
            $
            (0.15
            )
            $
            (1.43
            )
            $
            0.14Weighted
                average common shares assuming dilution
            
            
            7,036,128
            
            
            6,630,006
            
            
            6,539,195
            
            
            6,462,272
            
            
            6,560,454**Balance
                Sheet Data**Total
                assets
            
            $
            2,079,388
            
            $
            1,888,860
            
            $
            1,723,924
            
            $
            1,701,405
            
            $
            1,646,940Securities
            
            
            540,194
            
            
            316,367
            
            
            152,508
            
            
            29,073
            
            
            6,963Total
                loans, net
            
            
            1,353,385
            
            
            1,369,539
            
            
            1,344,256
            
            
            1,393,810
            
            
            1,340,700Mortgage
                servicing rights, net
            
            
            20,708
            
            
            26,574
            
            
            39,744
            
            
            63,200
            
            
            78,712Deposits(2)
            
            
            1,124,044
            
            
            1,119,159
            
            
            974,059
            
            
            933,957
            
            
            866,235Custodial
                escrow balances
            
            
            49,385
            
            
            51,598
            
            
            85,466
            
            
            151,790
            
            
            129,665FHLBank
                borrowings
            
            
            615,028
            
            
            506,118
            
            
            458,204
            
            
            385,785
            
            
            303,361Other
                borrowings
            
            
            90,953
            
            
            93,408
            
            
            114,495
            
            
            125,903
            
            
            222,032Total
                shareholders’ equity(3)
            
            
            180,728
            
            
            92,315
            
            
            69,684
            
            
            66,936
            
            
            71,312**Operating
                Ratios and Other Selected Data**Return
                from continuing operations on averagetotal
                assets(4)
            
            
            0.08
            %
            
            1.22
            %
            
            (0.06
            )%
            
            (0.57
            )%
            
            0.56
            %Return
                from continuing operations on averageequity(4)
            
            
            1.56
            
            
            28.45
            
            
            (1.45
            )
            
            (13.07
            )
            
            1.34Average
                equity to average total assets(4)
            
            
            5.01
            
            
            4.30
            
            
            4.14
            
            
            4.35
            
            
            4.18Net
                interest margin(4)(5)
            
            
            2.52
            
            
            2.68
            
            
            2.88
            
            
            3.06
            
            
            2.14Operating
                efficiency ratio(6)
            
            
            91.32
            
            
            61.05
            
            
            73.33
            
            
            76.88
            
            
            71.95Total
                amount of loans purchased for sale
            
            $
            1,168,453
            
            $
            1,738,181
            
            $
            1,636,986
            
            $
            1,127,632
            
            $
            97,486Balance
                of owned servicing portfolio (end of period)
            
            
            1,717,998
            
            
            2,258,840
            
            
            3,183,536
            
            
            5,333,627
            
            
            5,656,365Trust
                assets under administration (end of period)
            
            
            3,079,117
            
            
            18,195,726
            
            
            13,280,435
            
            
            7,876,329
            
            
            6,017,085**Ratios
                of Earnings to Fixed Charges(7)**Including
                interest on deposits
            
            
            0.98x
            
            
            1.99x
            
            
            0.89x
            
            
            0.60x
            
            
            1.00xExcluding
                interest on deposits
            
            
            0.97x
            
            
            2.49x
            
            
            0.82x
            
            
            0.18x
            
            
            0.99x




**Loan
                Performance Ratios and Data**Allowance
                for loan and valuation losses
            
            $
            9,997
            
            $
            11,172
            
            $
            9,789
            
            $
            9,343
            
            $
            9,338Nonperforming
                loans(8)
            
            
            16,894
            
            
            31,345
            
            
            31,450
            
            
            30,818
            
            
            37,251Nonperforming
                loans/total loans(8)
            
            
            1.24
            %
            
            2.27
            %
            
            2.32
            %
            
            2.20
            %
            
            2.76
            %Nonperforming
                assets/total assets(8)
            
            
            1.03
            
            
            1.82
            
            
            2.32
            
            
            2.30
            
            
            2.77Net
                loan charge-offs/average loans(4)
            
            
            0.20
            
            
            0.14
            
            
            0.23
            
            
            0.21
            
            
            0.17Allowance
                for loan and valuation losses/total
                loans
            
            
            0.73
            
            
            0.81
            
            
            0.72
            
            
            0.67
            
            
            0.69Allowance
                for loan and valuation losses/nonperforming
                loans
            
            
            59.17
            
            
            35.64
            
            
            31.13
            
            
            30.32
            
            
            25.07






33


__________





(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, 2005, 2004, 2003, 2002 and 2001, the total balance of
                brokered deposits was $42.5 million, $247.9 million, $104.6 million,
                $327.3 million and $303.0 million, respectively.


(3)
            Total
                Shareholders’ Equity at December 31, 2005 includes approximately $87.0
                million in proceeds from the private offering. The Company used
                approximately $79.5 million of the proceeds in January 2006 to complete
                the issuer tender offer and purchase shares of the Company’s common stock.
                This use of proceeds reduced total shareholders equity in January
                2006.
                See further discussion at Item 1., “Private Placement and Tender Offer.”


(4)
            Calculations
                are based on average daily balances where available and monthly averages
                otherwise.


(5)
            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.


(6)
            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.


(7)
            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.


(8)
            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.





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





**Overview**





The
      following management’s discussion and analysis or MD&A, of the financial
      condition and results of operations of the Company is intended to help the
      reader understand the Company, our operations and our present business
      environment. MD&A is provided as a supplement to, and should be read in
      conjunction with our consolidated financial statements and the notes thereto,
      as
      well as other data included in this document.





This
      overview summarizes the MD&A, which includes the following
      sections:





·
            General –
                a general description of our business and industry, and our measures
                of
                financial performance, as well as a description of significant
                transactions occurring during the year ended December 31, 2005.


·
            Comparison
                of Results of Operations – an analysis of our financial performance
                comparing year-to-year results, focusing on the varied sources of
                the
                Company’s revenues and nature of the Company’s
                expenses.


·
            Industry
                Specific Analysis – several separate analysis specific to the
                operations of a thrift including our lending activities, credit quality
                and asset and liability management.


·
            Liquidity
                and Capital Resources – a description of our liquidity, debt and
                capital structure.


·
            Critical
                Accounting Policies – a discussion of our accounting policies that
                require critical judgments and estimates from management.


·
            Contractual
                Obligations, Commitments, Contingent Liabilities and Off-Balance
                Sheet
                Arrangements – a discussion of the various obligations and
                commitments of the Company.


·
            Forward
                Looking Statements – cautionary information about forward looking
                statements and a description of certain risks and uncertainties that
                could
                cause our actual results to differ materially from the Company’s
                historical results or our current expectations or projections.






34




**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 Doña 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 2, 2003,
      we announced the final closing and substantial completion of the sale of the
      production platform of Matrix Financial, effective February 28, 2003, which
      is
      treated as discontinued operations in prior period financials. On January 30,
      2004, Matrix Bank sold its two branches in Las Cruces, New Mexico, and on July
      12, 2004, sold its Sun City, Arizona branch. 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.




**Private
      Placement and Tender Offer**





On
      December 9, 2005, the Company completed a private offering of 5,120,000 shares
      of common stock, $0.0001 par value per share. The shares of our common stock
      were sold at a per share price of $19.00, except shares sold to an affiliate
      of
      our placement agent, which purchased shares at the offering price less the
      placement agent fee, or $17.67 per share. In the private offering, we raised
      an
      aggregate of $97.0 million, less a placement agent fee and certain other costs
      associated with raising the capital of $10.0 million, resulting in net proceeds
      of $87.0 million. The funds raised in the private placement were used to conduct
      an issuer tender offer to purchase shares of our common stock at $19.00 per
      share. On January 23, 2006, the Company completed the tender offer, where
      4,184,277 common shares were tendered at the offering price of $19.00, or $79.5
      million. Subsequent to the completion of the issuer tender offer, we have
      7,556,573 shares of common stock outstanding. The purpose of the issuer tender
      offer was to reduce the insider ownership and ultimately increase the market
      float of our common stock.





Concurrently
      with the completion of the private offering, our former Co-Chief Executive
      Officers resigned from the Company, and our new executive management team was
      appointed. The Company has added Guy A. Gibson as our Chairman, Scot T. Wetzel
      as our President and Chief Executive Officer, William D. Snider as our
      Vice-Chairman of Matrix Bank, and Michael J. McCloskey as our Chief Operating
      Officer. The executive management team has significant community banking
      expertise and extensive knowledge of, and relationships in, the Colorado Front
      Range market. Under the direction of this management team, the Company intends
      to utilize our existing infrastructure and systems to fund the expansion of
      our
      community banking franchise to serve the needs of small to medium sized
      businesses and individuals in the Colorado Front Range market, and to develop
      a
      branch network within such market and to build a balance sheet of traditional
      loan and deposit products.





**Operations**





The
      principal components of our revenues consist of:




35




·
            net
                interest income recorded by Matrix Bank, Matrix Financial and ABS
                School
                Services;


·
            trust
                service fees generated by Sterling Trust and, until disposition of
                the
                assets of its trust services division, Matrix Bank;


·
            loan
                administration fees generated by Matrix
                Financial;


·
            gains
                on sales of single-family residential mortgage loans, multifamily
                loans
                and SBA loans and securities;


·
            brokerage
                and consulting fees generated by Matrix Bancorp Trading and First
                Matrix;


·
            services
                fees generated by MTXC Realty and our equity earnings under equity
                method
                accounting of our minority interest in Matrix Asset Management, LLC;
                and


·
            school
                service fees generated by ABS.





Our
      results of operations are influenced by changes in interest rates and the effect
      of these changes on our interest margins, 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





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.





In
      2005,
      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
      interest rate environment in 2005 caused continued compression of our net
      interest margin during much of the year. The increases in short term interest
      rates by the Federal Reserve beginning in June of 2004 and continuing quarterly
      through 2005 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. Many of the bulk loan portfolios acquired were at adjustable-rates,
      and
      were acquired at a modest premium. The interest rate environment has caused
      a
      significant increase in prepayment activity as the loans get closer to their
      adjustment periods. The higher prepayment activity has resulted in much greater
      than anticipated premium amortization, reducing the yield on the assets. Also,
      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, it is likely 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, there should be reduced refinance activity in mortgage loans and
      thus
      reduced mortgage servicing amortization and possibly a recovery of our recorded
      impairment. As many of the assets owned by the Company are variable rate,
      increases in longer-term rates, should 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 businesses, 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 2005, primarily driven by deposits generated by subsidiaries of
      the
      Company for Matrix Bank.





Through
      our business strategy discussed in Item 1. “New Business Strategy and Name
      Change”, we will focus on utilizing our existing infrastructure and reporting
      and accounting systems, as well as the income and equity generated from our
      wholesale banking operations, to fund the expansion of our community banking
      franchise in order to serve the needs of small to medium sized businesses and
      individuals in the Colorado Front Range market. Please see Item 1. “New Business
      Strategy and Name Change” for detailed discussion.





The
      following portions of the MD&A focus in more detail on the results of
      operations for 2005, 2004 and 2003 and on information about the Company’s
      balance sheet, credit quality, liquidity and funding resources, capital,
      critical accounting estimates and other matters.





36


**Comparison
      of Results of Operations for Fiscal Years 2005 and 2004**





***Net
      Income from Continuing Operations.*** The
      Company earned net income of $1.6 million for the fiscal year 2005 compared
      to
      net income of $21.8 million for fiscal year 2004. Income per share from
      continuing operations was $0.22 per basic and diluted share for the fiscal
      year
      2005, as compared to $3.34 per basic share and $3.28 per diluted share for
      the
      fiscal year 2004. Our 2005 income before taxes includes expenses in the fourth
      quarter of 2005 of approximately $7.9 million related to the private placement
      and tender offer discussed above. The costs included severance payments and
      contract buy-outs of our former senior management and certain members of the
      board of directors of approximately $3.4 million, the buy-out of options
      in-the-money and outstanding prior to the private placement of approximately
      $3.8 million, and other compensation and compensation related expenses
      associated with the transaction of approximately $680 thousand. Costs directly
      related to the issuance of the shares under the private placement of
      approximately $10.0 million were charged against the funds raised in equity
      and
      are not reflected as an expense in our financial statements. In addition, our
      2005 other general and administrative expense includes approximately $3.1
      million in settlement of the Adderley litigation matter at Sterling Trust in
      the
      fourth quarter of 2005, discussed in detail in Item 3. “Legal Proceedings”, and
      an approximate $2.3 million charge in the fourth quarter of 2005 to adjust
      our
      single-family loans held for sale portfolio to the current market value. In
      contrast, 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, and a charge of
      approximately $1.4 million in connection with the transfer of our servicing
      platform at Matrix Financial to a third party subservicer.





***Net
      Interest Income*** **.** Net
      interest income before provision for loan and valuation losses increased $4.1
      million to $46.7 million for fiscal year 2005 as compared to $42.6 million
      for
      fiscal year 2004. The increase in net interest income before provision for
      loan
      and valuation losses was attributable to an overall increase in the Company’s
      average balance of interest-earning assets to $1.86 billion for the year ended
      December 31, 2005 as compared to $1.59 billion for the year ended December
      31,
      2004, and an increase in the yield on those interest-earning assets of 17 basis
      points to 4.85% for the year ended December 31, 2005 as compared to 4.68% for
      the year ended December 31, 2004. The impact of the increase in the average
      balance of interest-earning assets and the yield on those assets, as discussed
      above, was offset by a 38 basis point increase in the cost of our
      interest-bearing liabilities to 2.60% for the year ended December 31, 2005
      as
      compared to 2.22% for the year ended December 31, 2004, as well as an increase
      in our average interest-bearing liabilities to $1.67 billion for December 31,
      2005 as compared to $1.43 billion for December 31, 2004. The greater increase
      in
      the cost of our interest-bearing liabilities than the yield on our
      interest-earning assets caused our net interest margin to decrease 16 basis
      points to 2.52% for the year ended December 31, 2005 from 2.68% for the year
      ended December 31, 2004, and caused the interest rate spread to decrease to
      2.25% for the year ended December 31, 2005 from 2.46% for the year ended
      December 31, 2004. The increases in the cost and yield were in response to
      the
      changes in the overall interest rate environment. The compression of our
      interest rate margin is due primarily to the flattening of the yield curve
      in
      2005. In addition, we experienced a lower balance of noninterest bearing
      custodial balances as a result of the overall decrease in our servicing
      portfolio, as well as a significantly high level of prepayments on our
      single-family loan portfolio both of which contributed to the interest margin
      compression. We historically have focused on the acquisition of adjustable
      rate
      loans, primarily single-family residential loans, at a modest premium, and
      investment securities which tend to have lower initial interest rate, and which
      have been financed by short term deposits and FHLBank borrowings. As interest
      rates have increased, the cost of our liabilities has increased, and our assets
      have repaid more rapidly than anticipated at acquisition, reducing the
      anticipated yield as a result of writing-off the associated premium. As a
      result, the Company has been buying more mortgage backed securities than in
      the
      past typically acquired at a discount, to offset some of the prepayment risk
      that exists in our single-family residential loan portfolio. See further
      information on, and a tabular presentation of the changes in net interest income
      due to changes in volume of interest-earning assets and changes in interest
      rates, see “Analysis of Changes in Net Interest Income Due to Changes in
      Interest Rates and Volumes.”





***Provision
      for Loan and Valuation Losses.*** The
      provision for loan and valuation losses decreased $1.6 million, or 49.1%, to
      $1.7 million for fiscal year 2005 as compared to $3.3 million for fiscal year
      2004. This decrease was attributable to lower levels of required reserves at
      Matrix Bank and Matrix Financial as compared to 2004 as nonperforming assets
      continue to decline, coupled with a higher percentage of the Company’s assets
      being invested in mortgage backed securities as opposed to loans. 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.”





37


***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 $5.1 million to $10.1 million for fiscal year
      2005
      as compared to $15.2 million for fiscal year 2004. 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 $2.0 billion for fiscal year 2005 as compared
      to an average balance of $2.7 billion for fiscal year 2004. The decrease was
      also due to a decrease in the average service fee (including all ancillary
      income) to 0.47% for the year ended December 31, 2005 as compared to 0.55%
      for
      the year ended December 31, 2004. Matrix Financial anticipates loan
      administration fees to continue to decrease as its servicing portfolio decreases
      through normal amortization and prepayments.





***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 by $780 thousand, or 7.4%, to $9.8
      million for fiscal year 2005 as compared to $10.6 million for fiscal year 2004.
      This decrease was due to a decrease in revenue generated from the brokerage
      of
      servicing assets which declined to $410 thousand for the year ended December
      31,
      2005 as compared to $2.0 million for the year ended December 31, 2004, as well
      as a decline in the income generated from SBA trading fees to $1.7 million
      for
      the year ended December 31, 2005 as compared to $3.0 million for the year ended
      December 31, 2004, the impact of which was offset by increases in revenues
      generated from whole loan brokerage activities to $6.1 million for fiscal year
      2005 as compared to $3.9 million for fiscal year 2004. These variances are
      due
      to market conditions and changes in market demand year to year, and are not
      unusual or unexpected given the volatility involved in brokerage activities.





***Trust
      Services.*** **** Trust
      service fees decreased $640 thousand, or 8.1%, to $7.2 million for fiscal year
      2005 as compared to $7.8 million for fiscal year 2004. The decrease is due
      to a
      decrease in total trust accounts under administration of 43,491 accounts at
      December 31, 2005 from 60,228 accounts at December 31, 2004, and total fiduciary
      assets under administration which decreased to $3.08 billion at December 31,
      2005 from $18.2 billion at December 31, 2004. The decrease was due to the sale
      of substantially all of the assets of Matrix Bank’s trust department in
      connection with the 2004 sale of our interest in Matrix Settlement and Clearance
      Services, LLC, which sale closed April 30, 2005. The ongoing trust services
      are
      generated through Sterling Trust Company and are anticipated to experience
      growth over the next year based on the marketing efforts at Sterling Trust
      Company.





***Real
      Estate Disposition Services*** .
      Real
      estate disposition services represents fees earned by MTXC Realty Corp.,
      formerly known as Matrix Asset Management Corporation, for real estate brokerage
      services provided on foreclosed properties owned by third party financial
      services companies and financial institutions in the Denver metro area, and
      our
      equity earnings in the new company formed with the 2004 sale of substantially
      all of the assets of Matrix Asset Management Corporation. Real estate
      disposition services revenues decreased to $1.4 million for fiscal year 2005
      as
      compared to $7.8 million for fiscal year 2004. The decrease is because 2004
      includes revenues from the operations of Matrix Asset Management Corporation
      through the date of the sale of substantially all of the assets of Matrix Asset
      Management Corporation. As noted in Item 1. “New Business Strategy and Name
      Change”, we may exercise our put option for our remaining 25% interest in the
      company formed with the sale of the assets of Matrix Asset Management
      Corporation during 2006. The impact of exercising the put will be to decrease
      our real estate disposition services revenue in 2006 due to not having the
      continuing equity pick up in the company formed with the sale. In addition,
      management is evaluating the disposition of the remaining operations of MTXC
      Realty during the first quarter of 2006 and discontinuing our involvement in
      the
      real estate disposition line of business, which will also decrease to nominal
      amounts the levels of real estate disposition services revenues in 2006.





***Gain
      on Sale of Loans and Securities.*** Gain on
      sale of loans and securities decreased $4.6 million, or 69.5%, to $2.0 million
      for fiscal year 2005 as compared to $6.6 million for fiscal year 2004. The
      gains
      include gains on sale of repurchased FHA and VA loans previously sold from
      our
      mortgage servicing rights portfolio of $970 thousand for the year ended December
      31, 2005 as compared to $5.0 million for the year ended December 31, 2004,
      a
      decrease of $4.0 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, coupled with the increase
      in
      short-term interest rates and flat overall interest rates, the gains related
      to
      repurchased FHA and VA loans have decreased and are anticipated to continue
      to
      decrease. The gains on sale of loans and securities also reflects a decrease
      of
      $750 thousand in gains on the sale of originated SBA and multifamily loans
      at
      Matrix Bank, to $540 thousand for the year ended December 31, 2005 as compared
      to $1.3 million for the year ended December 31, 2004. Gains on sale of
      investment securities increased $70 thousand to $490 thousand in 2005 from
      $420
      thousand in 2004. 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.





38


***Gain
      on Sale of Assets.***The gain
      on sale of assets decreased to $300 thousand for the year ended December 31,
      2005 as compared to $31.8 million for the year ended December 31, 2004. The
      2005
      gain reflects the gain on the sale of the assets of the trust operations of
      Matrix Bank, where 2004 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. Gains on the sale
      of
      assets fluctuate significantly from year to year based on the particular assets
      we elect to sell. Items noted in Item 1. “New Business Strategy and Name Change”
are anticipated to impact the level of gains on sale of assets in 2006.




***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 $1.2 million, or 41.1%, to $1.7
      million for fiscal year 2005 as compared to $2.9 million for fiscal year 2004.
      This decrease was primarily due to decreases in the number of 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 and other miscellaneous
      income items, slightly decreased by $130 thousand, or 2.3%, to $5.5 million
      for
      fiscal year 2005 as compared to $5.6 million for fiscal year 2004. The decrease
      was due to a combination of the following items impacting our levels of
      revenues. In fiscal 2005, due to the sale of our 45% interest in the joint
      venture Matrix Settlement and Clearance, LLC, we did not have an equity pick-up
      in which was a decrease of $1.5 million. We also experienced a decrease in
      the
      level of equity pick-up in our investment in the new company formed from the
      sale of substantially all of the assets of Matrix Asset Management Corporation
      of $290 thousand to $150 thousand for 2005. These decreases were offset by
      an
      increase in loan referral fees of approximately $920 thousand to $860 thousand
      for fiscal 2005 due primarily to increases in prepayment and other loan fees,
      as
      well lower levels of losses in the equity earnings in our unconsolidated trust
      preferred securities trusts which in fiscal 2004 had charges for the early
      call
      of debt that exceeded those incurred in 2005 by $350 thousand. 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 $11.7 million, or 12.2%, to $84.0 million for
      fiscal year 2005 as compared to $95.7 million for fiscal year 2004. The decrease
      is primarily due to a decrease in the level of amortization on our mortgage
      servicing rights asset to $7.8 million for fiscal year 2005 as compared to
      $16.1
      million for fiscal year 2004, as well as decreases in occupancy and equipment,
      and other general and administrative expenses related primarily to the
      restructuring and other asset sales which occurred in 2004 and which impacted
      levels of those expenses. Offsetting these decreases was the inclusion in
      compensation and employee benefits expense of approximately $7.9 million
      severance, contract buy-out and option buy-out expenses associated with the
      private placement and tender offer, discussed in Item 1. “Private Placement and
      Tender Offer”. Had these expenses not been incurred, levels of compensation and
      employee benefits expenses would also have declined due to the restructuring
      activities closed in 2004 decreasing the levels of those ongoing costs. In
      addition, these expenses include $3.1 million charge for the settlement of
      the
      Adderley litigation discussed in Item 3. “Legal.”, and a $2.3 million expense to
      adjust our single-family loans held for sale portfolio to the current market
      value. The following table details the major components of noninterest expense
      for the periods indicated






39





**Year
                Ended**
              **December
                31,****2005**
            
            **2004****(Dollars
                in thousands)**Compensation
                and employee benefits
            
            $
            32,371
            
            $
            32,891Amortization
                of mortgage servicing rights
            
            
            7,764
            
            
            16,100Occupancy
                and equipment
            
            
            4,997
            
            
            6,166Postage
                and communication
            
            
            1,355
            
            
            2,001Professional
                fees
            
            
            2,936
            
            
            3,242Mortgage
                servicing rights subservicing fees
            
            
            3,073
            
            
            300Data
                processing
            
            
            963
            
            
            2,705Subaccounting
                fees
            
            
            13,447
            
            
            7,738Recovery
                of mortgage servicing rights
            
            
            (1,180
            )
            
            (444
            )Other
                general and administrative
            
            
            18,303
            
            
            24,967Total
            
            $
            84,029
            
            $
            95,666





Compensation
      and employee benefits decreased $520 thousand, or 1.6%, to $32.4 million for
      fiscal year 2005 as compared to $32.9 million for fiscal year 2004. This
      decrease was despite the inclusion of compensation costs, including severance,
      contract buy-outs and option buy-outs, associated with the private placement
      and
      tender offer of $7.9 million. Absent these expenses, basic compensation and
      employee benefits decreased approximately $8.5 million due to reductions in
      the
      overall number of employees for the year caused by the 2004 sales of our
      majority interest in Matrix Asset Management Corporation, the Matrix Bank
      branches and reductions of employees at Matrix Financial due to the transfer
      of
      servicing to the third party sub-servicer. The Company has 309 employees at
      December 31, 2005. At January 1, 2004, the Company had 509 employees, which
      over
      the course of two years is a decrease of 200 employees, or 39.3%. With the
      implementation of the items discussed at Item 1. “New Business Strategy and Name
      Change”, we anticipate that our number of employees and basic compensation and
      employee benefits expense will increase in 2006, primarily due to additions
      of
      branch personnel at Matrix Bank.





Amortization
      of mortgage servicing rights decreased $8.3 million, or 51.8%, to $7.8 million
      for fiscal year 2005 as compared to $16.1 million for fiscal year 2004.
      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. The decrease was due to a combination
      of the decrease in the average balance in our mortgage servicing rights
      portfolio to $2.01 billion at December 31, 2005 as compared to $2.66 billion
      at
      December 31, 2004, as well as a decrease in the average prepayment speeds on
      our
      servicing portfolio which for fiscal year 2005 was at an average of 23.7% as
      compared to 27.5% during fiscal year 2004. Amortization of mortgage servicing
      rights is included in expenses of our mortgage banking operating segment.





Recovery
      of mortgage servicing rights reflects a recovery of our previously recorded
      impairment charges of $1.2 million for the year ended December 31, 2005 as
      compared to a recovery of $440 thousand for the year ended December 31, 2004.
      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 future cash flows. Due to changes in the interest rate
      environment during the year, among other factors, an impairment recovery against
      the valuation of the asset was recorded. 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 impairment or recovery
      on
      mortgage servicing rights is included in expenses of our mortgage banking
      operating segment.




The
      remainder of noninterest expense, which includes occupancy and equipment
      expense, postage and communication, professional fees, mortgage servicing rights
      subservicing fees, data processing costs, subaccounting fees and other general
      and administrative expenses decreased $2.0 million, or 4.3%, to $45.1 million
      for fiscal year 2005 as compared to $47.1 million for fiscal year 2004. The
      decrease is primarily due to decreases in levels of repurchase reserves,
      foreclosure expense and write-offs of receivables at Matrix Financial which
      decreased $5.7 million, to a total of $2.4 million for fiscal 2005 as compared
      to $8.1 million for fiscal 2004 due to decreases in the levels of loans
      repurchased through representation and warranty provisions related to our
      discontinued mortgage loan origination business, and due to lower levels of
      non-performing receivables as compared to 2004. There were also decreases in
      occupancy and equipment, postage and related general and administrative expenses
      associated with the restructuring undertaken in 2004 including the sale of
      substantially all of the assets of Matrix Asset Management and sale of Matrix
      Bank’s branches in Arizona and New Mexico. Off-setting the decrease is an
      increase as compared to 2004 in subaccounting fees at Matrix Bank of $5.7
      million to $13.4 million for fiscal 2005, 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.
      In addition, there were increases in other general and administrative expenses
      due to inclusion of a $2.3 million charge to adjust the value of our
      single-family residential loans held for sale portfolio to market, and $3.1
      million in litigation settlement costs related to the Adderley matter discussed
      in Item 3. “Legal” above. It should be noted, however, that in 2004, general and
      administrative included litigation settlement amounts of approximately $3.0
      million recorded for litigation settlements at Matrix Financial and at Matrix
      Bank. Finally, it should be noted that the costs associated with the assignment
      of our servicing rights to a sub-servicer which occurred in December of 2004
      are
      reflected in mortgage rights subservicing fees. These costs increased in fiscal
      2005 as compared to fiscal 2004, but there was a decrease in data processing
      costs which is where prior costs associated with servicing the mortgage
      servicing rights portfolio were contained. In total, these costs increased
      $1.0
      million, or 34.3%.





40


***Income
      Taxes.*** Income
      taxes reflect a benefit of $2.4 million for fiscal year 2005 as compared to
      a
      provision of $10.4 million for fiscal year 2004. Our effective tax benefit
      is
      275.3% for fiscal year 2005 as compared to an effective tax rate of 32.3% for
      fiscal year 2004. 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 from continuing operations before income taxes, utilization
      of
      tax credits generated by subsidiaries of Matrix Bank, and by utilization of
      state net operating loss carry-forwards. The net tax exempt interest income
      was
      approximately $2.7 million and $3.3 million for the years ended December 31,
      2005 and 2004, respectively. Tax credits utilized were approximately $730
      thousand and $380 thousand for the years ended December 31, 2005 and 2004,
      respectively.





**Comparison
      of Results of Operations for Fiscal Years 2004 and 2003**





***Net
      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, and a charge of approximately $1.4 million in connection with the
      transfer of our servicing platform to a third party subservicer. 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 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
      are 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.”





41


***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.





***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 brokerage 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 whole loan brokerage
      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 above, the assets and
      operations of the trust department at Matrix Bank were in process of being
      sold
      at December 31, 2004 to the purchaser of our interest in Matrix Settlement
      and
      Clearance Services, LLC.





***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 above, 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 obtained prior to the date of the sale noted
      above.





***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, coupled with the increase
      in
      interest rates, 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.





42


***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.





***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. 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:





**Year
                Ended**
              **December
                31,****2004**
            
            **2003****(Dollars
                in thousands)**Compensation
                and employee benefits
            
            $
            32,891
            
            $
            34,984Amortization
                of mortgage servicing rights
            
            
            16,100
            
            
            32,497Occupancy
                and equipment
            
            
            6,166
            
            
            6,172Postage
                and communication
            
            
            2,001
            
            
            2,435Professional
                fees
            
            
            3,242
            
            
            3,357Mortgage
                servicing rights subservicing fees
            
            
            300
            
            
            -Data
                processing
            
            
            2,705
            
            
            2,860Subaccounting
                fees
            
            
            7,738
            
            
            5,845Recovery
                of mortgage servicing rights
            
            
            (444
            )
            
            (2,950
            )Other
                general and administrative
            
            
            24,967
            
            
            25,768Total
            
            $
            95,666
            
            $
            110,968





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 substantial
      decrease in the average balance of our mortgage servicing rights portfolio
      to
      $2.66 billion for fiscal year 2004 as compared to $4.24 billion for fiscal
      year
      2003.





43


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 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.





**Average
      Balance Sheet**





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






44




**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003****Average
                Balance**
            
            **Interest**
            
            **Average**
              **Rate**
            
            **Average**
              **Balance**
            
            **Interest**
            
            **Average
                Rate**
            
            **Average
                Balance**
            
            **Interest**
            
            **Average
                Rate****(Dollars
                in thousands)****Assets**Interest-earning
                assets:Loans
                receivable
            
            $
            1,411,974
            
            $
            68,254
            
            
            4.83
            %
            $
            1,373,246
            
            $
            64,724
            
            
            4.71
            %
            $
            1,376,723
            
            $
            71,202
            
            
            5.17
            %Securities
            
            
            398,957
            
            
            19,896
            
            
            4.99
            
            
            182,674
            
            
            8,639
            
            
            4.73
            
            
            28,437
            
            
            1,465
            
            
            5.15Interest-earning
                deposits
            
            
            13,340
            
            
            420
            
            
            3.15
            
            
            3,694
            
            
            35
            
            
            0.95
            
            
            14,227
            
            
            135
            
            
            0.95FHLBank
                stock
            
            
            33,460
            
            
            1,521
            
            
            4.55
            
            
            30,817
            
            
            1,028
            
            
            3.34
            
            
            30,611
            
            
            905
            
            
            2.96Total
                interest-earning assets
            
            
            1,857,731
            
            
            90,091
            
            
            4.85
            %
            
            1,590,431
            
            
            74,426
            
            
            4.68
            %
            
            1,449,998
            
            
            73,707
            
            
            5.08
            %Noninterest-earning
                assets:Cash
            
            
            35,681
            
            
            
            
            
            
            
            
            51,197
            
            
            
            
            
            
            
            
            46,451Allowance
                for loan and valuation losses
            
            
            (11,137
            )
            
            
            
            
            
            
            
            (10,595
            )
            
            
            
            
            
            
            
            (9,008
            )Premises
                and equipment
            
            
            18,197
            
            
            
            
            
            
            
            
            22,341
            
            
            
            
            
            
            
            
            25,542Other
                assets
            
            
            100,683
            
            
            
            
            
            
            
            
            125,946
            
            
            
            
            
            
            
            
            153,114Total
                noninterest-earning assets
            
            
            143,424
            
            
            
            
            
            
            
            
            188,889
            
            
            
            
            
            
            
            
            216,099Total
                assets
            
            $
            2,001,155
            
            
            
            
            
            
            
            $
            1,779,320
            
            
            
            
            
            
            
            $
            1,666,097**Liabilities
                and Shareholders’ Equity**Interest-bearing
                liabilities:Passbook
                accounts
            
            $
            395
            
            
            6
            
            
            1.27
            %
            $
            3,014
            
            
            38
            
            
            1.26
            %
            $
            5,706
            
            
            74
            
            
            1.30
            %Money
                market and NOW accounts
            
            
            881,219
            
            
            11,789
            
            
            1.34
            
            
            619,835
            
            
            4,764
            
            
            0.77
            
            
            444,468
            
            
            3,928
            
            
            0.88Certificates
                of deposit
            
            
            119,857
            
            
            4,088
            
            
            3.41
            
            
            188,097
            
            
            5,862
            
            
            3.12
            
            
            336,623
            
            
            9,336
            
            
            2.77FHLBank
                borrowings
            
            
            574,982
            
            
            20,305
            
            
            3.53
            
            
            502,740
            
            
            12,391
            
            
            2.46
            
            
            366,627
            
            
            9,379
            
            
            2.56Borrowed
                money and junior subordinated debentures
            
            
            92,055
            
            
            7,180
            
            
            7.80
            
            
            115,905
            
            
            8,744
            
            
            7.54
            
            
            120,471
            
            
            9,282
            
            
            7.70Total
                interest-bearing liabilities
            
            
            1,668,508
            
            
            43,368
            
            
            2.60
            %
            
            1,429,591
            
            
            31,799
            
            
            2.22
            %
            
            1,273,895
            
            
            31,999
            
            
            2.51
            %Noninterest-bearing
                liabilities:Demand
                deposits (including custodial escrow balances)
            
            
            216,131
            
            
            
            
            
            
            
            
            253,605
            
            
            
            
            
            
            
            
            317,693Other
                liabilities
            
            
            16,362
            
            
            
            
            
            
            
            
            19,633
            
            
            
            
            
            
            
            
            5,510Total
                noninterest-bearing liabilities
            
            
            232,493
            
            
            
            
            
            
            
            
            273,238
            
            
            
            
            
            
            
            
            323,203Shareholders’
                equity
            
            
            100,154
            
            
            
            
            
            
            
            
            76,491
            
            
            
            
            
            
            
            
            68,999Total
                liabilities and shareholders’ equity
            
            $
            2,001,155
            
            
            
            
            
            
            
            $
            1,779,320
            
            
            
            
            
            
            
            $
            1,666,097Net
                interest income before provision for loan andvaluation
                losses
            
            
            
            
            $
            46,723
            
            
            
            
            
            
            
            $
            42,627
            
            
            
            
            
            
            
            $
            41,708Interest
                rate spread
            
            
            
            
            
            
            
            
            2.25
            %
            
            
            
            
            
            
            
            2.46
            %
            
            
            
            
            
            
            
            2.57
            %Net
                interest margin
            
            
            
            
            
            
            
            
            2.52
            %
            
            
            
            
            
            
            
            2.68
            %
            
            
            
            
            
            
            
            2.88
            %Ratio
                of average interest-earning assets to averageinterest-bearing
                liabilities
            
            
            
            
            
            
            
            
            111.34
            %
            
            
            
            
            
            
            
            111.25
            %
            
            
            
            
            
            
            
            113.82
            %





**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:





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


·
            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.




**Year
                Ended December 31, 2005 vs. 2004**
              **Increase
                (Decrease) Due to Change in**
            
            **Year
                Ended December 31, 2004 vs. 2003**
              **Increase
                (Decrease) Due to Change in****Volume**
            
            **Rate**
            
            **Total**
            
            **Volume**
            
            **Rate**
            
            **Total****(Dollars
                in thousands)**Interest-earning
                assets:Loans
                receivable
            
            $
            1,879
            
            $
            1,651
            
            $
            3,530
            
            $
            (179
            )
            $
            (6,299
            )
            $
            (6,478
            )Securities
            
            
            10,756
            
            
            501
            
            
            11,257
            
            
            7,303
            
            
            (129
            )
            
            7,174Interest-earning
                deposits
            
            
            204
            
            
            181
            
            
            385
            
            
            (100
            )
            
            -
            
            
            (100
            )FHLBank
                stock
            
            
            94
            
            
            399
            
            
            493
            
            
            6
            
            
            117
            
            
            123Total
                interest-earning assets
            
            
            12,933
            
            
            2,732
            
            
            15,665
            
            
            7,030
            
            
            (6,311
            )
            
            719Interest-bearing
                liabilities:Passbook
                accounts
            
            
            (32
            )
            
            -
            
            
            (32
            )
            
            (34
            )
            
            (2
            )
            
            (36
            )Money
                market and NOW accounts
            
            
            2,542
            
            
            4,483
            
            
            7,025
            
            
            1,377
            
            
            (541
            )
            
            836Certificates
                of deposit
            
            
            (2,285
            )
            
            511
            
            
            (1,774
            )
            
            (4,532
            )
            
            1,058
            
            
            (3,474
            )FHLBank
                borrowings
            
            
            1,975
            
            
            5,939
            
            
            7,914
            
            
            3,389
            
            
            (377
            )
            
            3,012Borrowed
                money and guaranteed preferredbeneficial
                interest
            
            
            (1,852
            )
            
            288
            
            
            (1,564
            )
            
            (347
            )
            
            (191
            )
            
            (538
            )Total
                interest-bearing liabilities
            
            
            348
            
            
            11,221
            
            
            11,569
            
            
            (147
            )
            
            (53
            )
            
            (200
            )Change
                in net interest income before provisionfor
                loan and valuation losses
            
            $
            12,585
            
            $
            (8,489
            )
            $
            4,096
            
            $
            7,177
            
            $
            (6,258
            )
            $
            919





45


**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:





§
            introduction
                of Matrix Bank branches to secure commercial and retail
                deposits;


§
            purchasing
                adjustable rate mortgages;


§
            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;


§
            acquisition
                and sales of guaranteed portions of SBA loans, which are generally
                at
                adjustable rates;


§
            extending
                the maturity of our interest-bearing liabilities by borrowing longer-term
                advances from the FHLBank;


§
            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;


§
            focusing
                on noninterest-bearing custodial escrow balances related to our mortgage
                servicing rights;


§
            using
                Matrix Bank as the settlement bank for settlement and clearing services
                offered by Sterling Trust to generate deposits; and


§
            participation
                in lines of business that are less interest rate sensitive, such
                as
                brokerage activities, consulting services and self-directed trust
                services.





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 over time 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 future 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 interest rate
      environment, our investment in mortgage servicing rights was unprofitable in
      2005 and 2004. In the current interest rate environment, albeit less than the
      past two years, 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 at Matrix Financial,
      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 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.





46


During
      2004, 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 allowed us in 2005 to focus our efforts on generating
      institutional depository alliances.





As
      noted
      in Item 1. “New Business Strategy and Name Change.”, during 2006, our executive
      management team will implement a strategy to increase the community banking
      footprint of Matrix Bank and anticipates increasing the levels of traditional
      loan and deposit products aimed at serving the needs of small to medium sized
      businesses and individuals in the Colorado Front Range market.





***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 premiums, discounts
      and other deferred costs and fees.




**As
                of December 31,****2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002**
            
            
            **2001****Amount**
            
            
            **Percent**
            
            
            **Amount**
            
            
            **Percent**
            
            
            **Amount**
            
            
            **Percent**
            
            
            **Amount**
            
            
            **Percent**
            
            
            **Amount**
            
            
            **Percent****(Dollars
                in thousands)**Residential
            
            $
            885,740
            
            
            65.44
            %
            $
            999,202
            
            
            72.96
            %
            $
            903,186
            
            
            67.19
            %
            $
            1,001,885
            
            
            71.88
            %
            $
            1,055,284
            
            
            78.71
            %Multifamily,commercialreal
                estate andcommercial
            
            
            429,312
            
            
            31.72
            
            
            325,885
            
            
            23.80
            
            
            379,931
            
            
            28.26
            
            
            313,237
            
            
            22.47
            
            
            192,225
            
            
            14.34School
                financing
            
            
            24,038
            
            
            1.78
            
            
            30,402
            
            
            2.22
            
            
            46,765
            
            
            3.48
            
            
            49,560
            
            
            3.56
            
            
            61,969
            
            
            4.62Construction
            
            
            24,049
            
            
            1.78
            
            
            24,644
            
            
            1.80
            
            
            21,201
            
            
            1.58
            
            
            34,160
            
            
            2.45
            
            
            35,158
            
            
            2.62Consumer
            
            
            243
            
            
            .02
            
            
            578
            
            
            0.04
            
            
            2,962
            
            
            0.22
            
            
            4,311
            
            
            0.31
            
            
            5,402
            
            
            0.40Total
                loans
            
            
            1,363,382
            
            
            100.74
            
            
            1,380,711
            
            
            100.82
            
            
            1,354,045
            
            
            100.73
            
            
            1,403,153
            
            
            100.67
            
            
            1,350,038
            
            
            100.70Less
                allowance for loan and valuation losses
            
            
            9,997
            
            
            0.74
            
            
            11,172
            
            
            0.82
            
            
            9,789
            
            
            0.73
            
            
            9,343
            
            
            0.67
            
            
            9,338
            
            
            0.70Loans
                receivable, net
            
            $
            1,353,385
            
            
            100.00
            %
            $
            1,369,539
            
            
            100.00
            %
            $
            1,344,256
            
            
            100.00
            %
            $
            1,393,810
            
            
            100.00
            %
            $
            1,340,700
            
            
            100.00
            %




The
      following table presents the aggregate maturities of loans in each major
      category of our loan portfolio as of December 31, 2005, 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.





**As
                of December 31, 2005****Less
                than**
              **One
                Year**
            
            **One
                to**
              **Five
                Years**
            
            **Over
                Five**
              **Years**
            
            **Total****(Dollars
                in thousands)**Residential
            
            $
            413
            
            $
            6,794
            
            $
            878,533
            
            $
            885,740Multifamily,
                commercial real estate and commercial
            
            
            11,651
            
            
            18,095
            
            
            399,566
            
            
            429,312School
                financing
            
            
            4,011
            
            
            2,214
            
            
            17,813
            
            
            24,038Construction
            
            
            21,844
            
            
            2,205
            
            
            -
            
            
            24,049Consumer
            
            
            103
            
            
            26
            
            
            114
            
            
            243Total
                loans
            
            $
            38,022
            
            $
            29,334
            
            $
            1,296,026
            
            $
            1,363,382




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:




******As
                of December 31, 2005****Less
                than**
              **One
                Year**
            
            
            **One
                  to**
                **Five
                  Years**
            
            
            **Over
                Five**
              **Years**
            
            
            **Total****(Dollars
                in
                thousands)**Fixed
            
            $
            4,395
            
            $
            4,075
            
            $
            46,887
            
            $
            55,357Adjustable
            
            
            42
            
            
            3,241
            
            
            873,991
            
            
            877,274Total
                loans
            
            $
            4,437
            
            $
            7,316
            
            $
            920,878
            
            $
            932,631




47




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:




**As
                of December 31, 2005****Less
                than**
              **One
                Year**
            
            
            **One
                to**
              **Five
                Years**
            
            
            **Over
                Five**
              **Years**
            
            
            **Total****(Dollars
                in thousands)**Fixed
            
            $
            1,505
            
            $
            7,935
            
            $
            110,988
            
            $
            120,428Adjustable
            
            
            32,080
            
            
            14,083
            
            
            264,160
            
            
            310,323Total
                loans
            
            $
            33,585
            
            $
            22,018
            
            $
            375,148
            
            $
            430,751





***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:




**As
                of December 31,****2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002**
            
            
            **2001****(Dollars
                in
                thousands)**Nonaccrual
                residential mortgage loans
            
            $
            8,903
            
            $
            12,157
            
            $
            19,599
            
            $
            15,123
            
            $
            19,039Nonaccrual
                commercial real estate, commercial loansand
                school financing
            
            
            7,991
            
            
            19,148
            
            
            11,851
            
            
            15,649
            
            
            18,172Nonaccrual
                consumer loans
            
            
            -
            
            
            40
            
            
            -
            
            
            46
            
            
            40Total
                nonperforming loans
            
            
            16,894
            
            
            31,345
            
            
            31,450
            
            
            30,818
            
            
            37,251Foreclosed
                real estate
            
            
            4,526
            
            
            2,955
            
            
            8,538
            
            
            8,343
            
            
            8,355Total
                nonperforming assets
            
            $
            21,420
            
            $
            34,300
            
            $
            39,988
            
            $
            39,161
            
            $
            45,606Total
                nonperforming loans to total loans
            
            
            1.24
            %
            
            2.27
            %
            
            2.32
            %
            
            2.20
            %
            
            2.76
            %Total
                nonperforming assets to total assets
            
            
            1.03
            %
            
            1.82
            %
            
            2.32
            %
            
            2.30
            %
            
            2.77
            %Ratio
                of allowance for loan and valuation lossesto
                total nonperforming loans
            
            
            59.17
            %
            
            35.64
            %
            
            31.13
            %
            
            30.32
            %
            
            25.07
            %Interest
                on nonperforming loans not included ininterest
                income
            
            $
            529
            
            $
            652
            
            $
            1,084
            
            $
            916
            
            $
            1,773





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 $11.0 million, $18.1 million and $12.2 million at December 31, 2005,
      2004 and 2003, respectively. These accruing loans are not included in the
      balances of nonaccrual loans above.





Nonaccrual
      residential mortgage loans as a percentage of total loans were 0.7% at December
      31, 2005, 0.9% at December 31, 2004, 1.4% at December 31, 2003, 1.1% at December
      31, 2002 and 1.4% at December 31, 2001. The nonaccrual residential mortgage
      loans have decreased at December 31, 2005 as compared to December 31, 2004.
      The
      decrease is due to higher levels of payoffs and the sale of under-performing
      loans by Matrix Financial in 2005.





The
      nonaccrual commercial loans and school financing at December 31, 2005
      substantially decreased as compared to December 31, 2004.





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. The balance
      of
      these loans on nonaccrual status decreased $5.3 million as compared to December
      31, 2004 to $250 thousand at December 31, 2005. Based on current information,
      we
      believe that reserves are sufficient for any potential losses. However, no
      assurances can be made that further reserves will not be necessary. The decrease
      was due to a combination of disposition and pay-off of certain of the previously
      held nonaccrual loans, reclassification of certain previously held nonaccrual
      loan back into accrual status based on the performance of the loans during
      2005.





With
      regard to the nonaccrual commercial loans, the balance of these loans in
      nonaccrual status decreased to $7.7 million at December 31, 2005 as compared
      to
      $13.6 million at December 31, 2004. Based on current information, we believe
      that there are sufficient reserves for any potential loss. However, no
      assurances can be made that further reserves will not be necessary. The decrease
      is due to repayments, reinstatements and foreclosures primarily in the SBA
      portfolio during the year ended December 31, 2005 resulting in an overall
      improvement in our non-performing ratios.





48


***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.




**As
                of and for the Year Ended December
                31,****2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002**
            
            
            **2001****(Dollars
                in thousands)**Allowance
                for Loan and valuation losses, beginning of year
            
            $
            11,172
            
            $
            9,789
            
            $
            9,343
            
            $
            9,338
            
            $
            8,581Charge-offs:Real
                estate – mortgage
            
            
            2,053
            
            
            1,099
            
            
            1,998
            
            
            1,239
            
            
            872Real
                estate – construction
            
            
            244
            
            
            -
            
            
            74
            
            
            -
            
            
            31Commercial
                loans and school financing
            
            
            691
            
            
            870
            
            
            1,319
            
            
            1,482
            
            
            746Consumer
            
            
            64
            
            
            80
            
            
            139
            
            
            276
            
            
            659Total
                charge-offs
            
            
            3,052
            
            
            2,049
            
            
            3,530
            
            
            2,997
            
            
            2,308Recoveries:Real
                estate – mortgage
            
            
            112
            
            
            109
            
            
            101
            
            
            97
            
            
            4Commercial
                loans and school financing
            
            
            92
            
            
            40
            
            
            110
            
            
            17
            
            
            -Consumer
            
            
            8
            
            
            14
            
            
            124
            
            
            67
            
            
            81Total
                recoveries
            
            
            212
            
            
            163
            
            
            335
            
            
            181
            
            
            85Net
                charge-offs
            
            
            2,840
            
            
            1,886
            
            
            3,195
            
            
            2,816
            
            
            2,223Provision
                for loan and valuation losses charged to operations
            
            
            1,665
            
            
            3,269
            
            
            3,641
            
            
            2,821
            
            
            2,980Balance
                at end of year
            
            $
            9,997
            
            $
            11,172
            
            $
            9,789
            
            $
            9,343
            
            $
            9,338Ratio
                of net charge-offs to average loans
            
            
            0.20
            %
            
            0.14
            %
            
            0.23
            %
            
            0.21
            %
            
            0.17
            %Average
                loans outstanding during the year
            
            $
            1,411,974
            
            $
            1,373,246
            
            $
            1,376,723
            
            $
            1,333,390
            
            $
            1,338,613





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:





§
            qualitative
                evaluations of individual classified assets and loans measured for
                impairment;


§
            geographic
                and other portfolio concentrations;


§
            new
                products or markets;


§
            evaluations
                of the changes in the historical loss experience component;
                and


§
            projections
                of this component into the current and future periods based on current
                knowledge and conditions.





These
      loss factors on unclassified assets range from 0% for guaranteed portions of
      SBA
      loans to 12.0% 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 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.
      Please see additional disclosure at “Critical Accounting Policies –
Allowance for Loan and Valuation Losses”. These factors include:




49





§
            general
                economic conditions;


§
            recognition
                of specific regional geographic
                concerns;


§
            loan
                type and the assessed risk inherent in each loan category;
                and


§
            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:




**As
                of December 31,****2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002**
            
            
            **2001**Amount
            
            
            Percentage
                of Loans in each Category to
              Total
                Loans
            
            
            Amount
            
            
            Percentage
                of Loans in each Category to
              Total
                Loans
            
            
            Amount
            
            
            Percentage
                of Loans in each Category to
              Total
                Loans
            
            
            Amount
            
            
            Percentage
                of Loans in each Category to
              Total
                Loans
            
            
            Amount
            
            
            Percentage
                of Loans in each Category to
              Total
                Loans(Dollars
                in thousands)Residential
            
            $
            3,589
            
            
            65.76
            %
            $
            4,547
            
            
            72.63
            %
            $
            4,018
            
            
            66.70
            %
            $
            3,199
            
            
            71.40
            %
            $
            3,918
            
            
            78.30
            %Multifamily,
                commercial real estate and  commercial
            
            
            4,427
            
            
            30.70
            
            
            4,487
            
            
            23.47
            
            
            3,653
            
            
            28.06
            
            
            2,768
            
            
            22.32
            
            
            2,400
            
            
            14.15School
                financing
            
            
            1,791
            
            
            1.76
            
            
            1,792
            
            
            2.09
            
            
            1,766
            
            
            3.45
            
            
            2,810
            
            
            3.53
            
            
            2,527
            
            
            4.56Construction
            
            
            179
            
            
            1.76
            
            
            331
            
            
            1.77
            
            
            326
            
            
            1.57
            
            
            542
            
            
            2.44
            
            
            445
            
            
            2.59Consumer
            
            
            11
            
            
            0.02
            
            
            15
            
            
            0.04
            
            
            26
            
            
            0.22
            
            
            24
            
            
            0.31
            
            
            48
            
            
            0.40$
            9,997
            
            
            100.00
            %
            $
            11,172
            
            
            100.00
            %
            $
            9,789
            
            
            100.00
            %
            $
            9,343
            
            
            100.00
            %
            $
            9,338
            
            
            100.00
            %




The
      ratio
      of the allowance for loan and valuation losses to total loans was 0.73% at
      December 31, 2005, 0.81% at December 31, 2004, 0.73% at December 31, 2003,
      0.67%
      at December 31, 2002 and 0.70% at December 31, 2001. The allowance for loan
      and
      valuation losses is reduced by loans charged off, net of recoveries. The balance
      of the allowance for loan and valuation losses allocated to residential has
      decreased, primarily due to a decrease in the balance of these loans in
      nonaccrual status as well as a decrease in the principal balance of these type
      loans as a percentage of total outstanding loan principal balance at December
      31, 2005, a portion of which decrease was due to the $2.3 million charge to
      bring the balance of the single-family residential loans held for sale portfolio
      to its market value. 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
      outstanding as a percentage of total outstanding loan principal balance at
      December 31, 2005, and despite a decrease in the outstanding loan principal
      balances in these categories. As of December 31, 2005, we believe that the
      allowance, when taken as a whole, is adequate to absorb estimated probable
      current losses inherent in the loan portfolio. However, no assurances can be
      made that further reserves will not be necessary.




***Risk
      Sensitive Assets and Liabilities.*** As
      discussed in “Asset and Liability Management 3⁄4 General”
      a significant portion of our operations and ultimate success is partially
      dependent upon our ability to manage our interest rate risk. Interest rate
      risk
      can be defined as the exposure of our net interest income to adverse movements
      in interest rates. Although we manage other risks, such as credit, operational
      and liquidity risk in the normal course of business, we consider interest rate
      risk to be a significant market risk which could potentially have the largest
      material effect on our financial condition and results of operations. The
      majority of our market risk related to interest rates exists within the
      operations of Matrix Bank. However, Matrix Financial also has interest rate
      risk
      related to its 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.





50


We
      currently classify our SBA pooled securities as trading or available for sale.
      Because the securities are all prime rate based, and have historically traded
      in
      very high trading ranges even in a changing interest rate environment, the
      securities have in the past and prospectively 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 these models as well as our own 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 mortgage backed securities, 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.





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; and Sterling Trust’s operations,
      which administer deposits with relatively low costs.





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 interest-bearing
      liabilities, Matrix Bank has acquired short option agreements and longer-term
      fixed rate advances from the FHLBank (1 to 10 years) totaling $306.0 million
      at
      December 31, 2005, which have interest rates ranging from 2.90% to 5.63%. Many
      of these liabilities were acquired several years ago; however, Matrix Bank
      acquired $140.0 million of such liabilities during 2005 (generally 10 years)
      at
      rates from 2.90% to 3.74%. It is anticipated that our interest margin will
      generally benefit in the long-term if interest rates continue to 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.”





51




The
      following table sets forth a summary of our short-term borrowings during 2005,
      2004 and 2003 and as of the end of each such period:




**Amount**
              **Outstanding**
              **at**
              **Year-End**
            
            **Average**
              **Amount**
              **Outstanding**
              **During
                the Year(1)**
            
            **Maximum**
              **Outstanding**
              **at
                any**
              **Month-End**
            
            **Weighted**
              **Average
                Interest**
              **Rate
                During**
              **the
                Year**
            
            **Weighted**
              **Average
                Interest**
              **Rate
                at**
              **Year-End****(Dollars
                in thousands)**At
                or for the year ended December 31, 2005:FHLBank
                borrowings(2)
            
            $
            615,028
            
            $
            574,982
            
            $
            650,066
            
            
            3.53
            %
            
            4.12
            %Revolving
                lines of credit
            
            
            -
            
            
            33
            
            
            -
            
            
            6.86
            
            
            -School
                financing
            
            
            16,364
            
            
            14,844
            
            
            17,032
            
            
            6.06
            
            
            6.27At
                or for the year ended December 31, 2004:FHLBank
                borrowings(3)
            
            
            506,118
            
            
            502,740
            
            
            601,147
            
            
            2.46
            
            
            2.95Revolving
                lines of credit
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -School
                financing
            
            
            15,572
            
            
            24,835
            
            
            30,350
            
            
            4.14
            
            
            5.70At
                or for the year ended December 31, 2003:FHLBank
                borrowings(4)
            
            
            458,204
            
            
            366,627
            
            
            592,211
            
            
            2.56
            
            
            2.17Revolving
                lines of credit
            
            
            -
            
            
            5,883
            
            
            18,362
            
            
            4.88
            
            
            -School
                financing
            
            
            30,439
            
            
            31,586
            
            
            32,367
            
            
            4.03
            
            
            3.96


__________





(1)
            Calculations
                are based on daily averages where available and monthly averages
                otherwise.


(2)
            A
                total of $286.0 million of the FHLBank borrowings outstanding at
                December
                31, 2005 were borrowed under short option advance agreements with
                the
                FHLBank. The interest rates on the short option advance borrowings
                ranged
                from 3.62% to5.63% at December 31, 2005 and their possible call dates
                varied from January 2006 to August 2007. A total of $20.0 million
                of the
                FHLBank borrowings outstanding at December 31, 2005 were borrowed
                under fixed rate advance agreements with the FHLBank. The interest
                rates
                on the advances ranged from 3.28% to 3.92% at December 31, 2005,
                and their
                maturity dates ranged from November 2006 to May 2008. Additionally,
                $1.0
                million of the FHLBank borrowings outstanding at December 31, 2005
                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 $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.


(4)
            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.





**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:





§
            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, Matrix Bancorp Capital Trust
                VI in
                2004 and Matrix Bancorp Capital Trust VIII in
                2005;


§
            the
                issuance of subordinated debt offering in February
                2004;


§
            secured
                senior debt provided by unaffiliated financial institutions;


§
            a
                bank stock loan; and


§
            our
                initial public offering.




52


In
      December 2005, as noted in Item 1. “Private Placement and Tender Offer”, the
      Company raised funding through the private placement of our common stock and
      utilized the proceeds to conduct the issuer tender offer to purchase shares
      of
      our common stock, which tender offer was completed January 23, 2006.





As
      of
      December 31, 2005, Matrix Bancorp had $74.6 million in indebtedness outstanding.
      The borrowed funds have been used historically as capital injections to Matrix
      Bank, Matrix Financial, Matrix Bancorp Trading and ABS, and more recently to
      fund redemption of higher rate debt.





In
      March
      2005, 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, 2005, the balance
      of the term loan was $3.2 million and the balance of the revolving line of
      credit was $0. The amended bank stock loan requires Matrix Bancorp to maintain
      total shareholders’ equity of $60.0 million. Matrix Bank is required to maintain
      classified assets of less than 3% of total assets, and must also earn in excess
      of $7.5 million over the previous four quarters. The covenants must be met
      quarterly. As of December 31, 2005, we were in compliance with all covenants.
      The term loan has a maturity date of December 31, 2007. The revolving line
      of
      credit is annually renewed and currently has a maturity date of March 31, 2006.
      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 seven trusts, Matrix Bancorp Capital Trusts I through
      VI,
      and Matrix Bancorp Capital Trust VIII, 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
      June
      2005, Matrix Bancorp Capital Trust VIII (“Trust VIII”), a Delaware business
      trust formed by Matrix Bancorp, completed the sale of $7.5 million of 5.86%
      preferred securities. Trust VIII also issued common securities to the Company,
      and used the net proceeds from the offering to purchase $7.7 million in
      principal amount of 5.86% junior subordinated debentures of Matrix Bancorp
      due
      July 7, 2035. The interest rate is fixed through July 2010, at which time it
      will reset to a variable rate of three-month LIBOR plus 1.69%. The preferred
      securities accrue and pay distributions quarterly at an annual rate of 5.86%
      of
      the stated liquidation amount of $1 thousand per preferred security. The Company
      has fully and unconditionally guaranteed all of the obligations of Trust VIII
      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 VIII. 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 7, 2010, 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.




On
      July
      20, 2005, 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 $8.2 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 July 20, 2005.




The
      trend
      of net cash used by our operating activities experienced over the reported
      periods results in 2005 primarily from expenses associated with the private
      placement and tender offer, and otherwise 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 and mortgage backed
      securities. In the future, it is anticipated that Matrix Bank will grow
      incrementally through the community banking initiative strategy discussed in
      Item. 1, “New Business Strategy and Name Change.” If successful, we expect that
      there would be a use of cash funded by existing liability strategy and new
      commercial and retail deposits.




53




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 2004 sale of our majority interest in Matrix
      Asset Management Corporation and our interest in Matrix Settlement and Clearance
      Services LLC, 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 2005 or in 2004, and payment of dividends by Matrix Bank is not
      expected in 2006. 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 2006, as was
      experienced in 2005 and 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
      2006.




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




§
            FHLBank
                borrowings;


§
            commercial
                and retail deposits;


§
            custodial
                escrow balances;


§
            other
                institutional wholesale and retail
                deposits;


§
            brokered
                deposits;


§
            proceeds
                from principal and interest payments on loans and investment securities;
                and


§
            sales
                of loan portfolios 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,
      2005, Matrix Bank had overnight and term borrowings from the FHLBank of $615.0
      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 40% 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 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, prior to their sale in 2004, which
      included approximately $178.5 million of retail deposits. On a continuing basis,
      as discussed in Item 1. “New Business Strategy and Name Change”, Matrix Bank
      will focus on generating traditional deposits from its expansion of community
      banking services through opening branches in the Colorado Front Range market.
      These deposits are anticipated to fund a significant portion of our liquidity
      needs for our community banking strategy.





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 institutional sources, as well as expand its
      efforts to attract deposits from Colorado Front Range commercial and retail
      sources 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:




54




**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003****Average**
              **Balance**
            
            **Weighted**
              **Average**
              **Rate**
            
            **Average**
              **Balance**
            
            **Weighted**
              **Average**
              **Rate**
            
            **Average**
              **Balance**
            
            **Weighted**
              **Average**
              **Rate****(Dollars
                in thousands)**Passbook
                accounts
            
            $
            395
            
            
            1.27
            %
            $
            3,014
            
            
            1.26
            %
            $
            5,706
            
            
            1.30
            %NOW
                and Demand accounts
            
            
            324,721
            
            
            0.36
            
            
            166,608
            
            
            0.16
            
            
            159,140
            
            
            0.21Money
                market accounts
            
            
            721,489
            
            
            1.47
            
            
            619,835
            
            
            0.73
            
            
            444,468
            
            
            0.81Time
                deposits
            
            
            4,139
            
            
            3.87
            
            
            77,188
            
            
            3.35
            
            
            114,175
            
            
            1.92Brokered
                deposits
            
            
            115,718
            
            
            3.39
            
            
            110,909
            
            
            2.95
            
            
            222,448
            
            
            2.28Total
                deposits
            
            $
            1,166,462
            
            
            1.36
            %
            $
            977,554
            
            
            1.09
            %
            $
            945,937
            
            
            1.41
            %




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, 2005:




**Amount**
            
            **Weighted
                Average**
              **Rate
                Paid****(Dollars
                in thousands)**Three
                months or less
            
            $
            438
            
            
            3.17
            %Over
                three months through six months
            
            
            -
            
            
            -Over
                six months through twelve months
            
            
            -
            
            
            -Over
                twelve months
            
            
            789
            
            
            4.29Total
            
            $
            1,227
            
            
            3.89
            %





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
      the
      growth in the community banking deposits, 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. One of our facilities
      maintained at a third party institution matured in September 2005. The facility
      was replaced with a new partnership trust at that time. The trust facility
      outstanding has a balance of approximately $16.4 million at December 31, 2005
      and matures in September 2008. We do not anticipate significantly increasing
      our
      current school financing loan portfolio.





Under
      a
      purchase and sale agreement, in 2004 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
      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 $5.5 million at December 31, 2005.





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.





55


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.





***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.





56


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
      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 has classified 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 than long-term fixed rate loans.





57


***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 2005 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, 2005, 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.




**As
                of December 31, 2005****Note
                Reference**
            
            
            **1
                Year****or
                Less**
            
            
            **1
                to 3 Years**
            
            
            **3
                to 5****Years**
            
            
            **Over
                5 Years**
            
            
            **Total***(Dollars
                in thousands)***Contractual
                Obligations**Deposits
                (passbook, NOW and money market)
            
            
            12
            
            $
            1,077,369
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            1,077,369Certificate
                accounts
            
            
            12
            
            
            17,791
            
            
            26,896
            
            
            1,988
            
            
            -
            
            
            46,675FHLBank
                borrowings
            
            
            15
            
            
            574,000
            
            
            40,000
            
            
            -
            
            
            1,028
            
            
            615,028Borrowed
                money
            
            
            13
            
            
            1,428
            
            
            18,153
            
            
            -
            
            
            10,000
            
            
            29,581Junior
                subordinated debentures owed to unconsolidated subsidiary
                trusts
            
            
            14
            
            
            -
            
            
            -
            
            
            -
            
            
            61,372
            
            
            61,372Operating
                leases
            
            
            19
            
            
            951
            
            
            1,034
            
            
            800
            
            
            350
            
            
            3,135





The
      following table presents, as of December 31, 2005, the Company’s schedule of
      significant commitments.





**As
                of December 31, 2005****Commitments**
            
            
            *(Dollars
                in thousands)*Commitments
                to extend credit:Loans
                secured by mortgages
            
            $
            49,732Construction
                loans
            
            
            48,860Commercial
                lines of credit
            
            
            854Commercial
                loans
            
            
            1,569Consumer
                loans
            
            
            278Standby
                letters of credit
            
            
            429Commitments
                to purchase USDA and SBA loans
            
            
            39,660







58


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 19 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
      the
      risk factors in Item 1A. “Risk Factors.” hereto, other risks discussed in this
      report and the uncertainties set forth from time to time in the Company’s
      periodic reports, filings and other public statements.





**Item
      7A. Quantitative and Qualitative Disclosures About Market
      Risk**





See
      Item
      1A. “Risk Factors.”, 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, 2005,
      an evaluation was performed under the supervision and with the participation
      of
      the Company’s management, including the 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, 2005 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, 2005 that have significantly affected, or are likely to
      materially affect, the Company’s internal controls over financial reporting.





**Item
      9B. Other Information**





None.




59





**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,
      2005.




**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.








(c)
      Exhibits




See
      Exhibit Index, beginning on page II-1.





(d)
      Financial Statement Schedules





None.





60


**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 15 th day of
      March, 2006.





**MATRIX BANCORP,
              INC.**Dated:
            March
                15, 2006
            
            
            /s/
                Scot T. WetzelScot
                T. Wetzel
              President
                and Chief Executive Officer
              (Principal
                Executive Officer)Dated:
            March
                15, 2006
            
            
            /s/
                David W. KloosDavid
              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.





Signatures
              Title
              
              Date/s/ Scot
                T.
                Wetzel
              President,
                Chief
                Executive
              
              March
                15,
                2006Scot
                T. Wetzel
              Officer
                  and
                  a Director
                (Principal
                  Executive Officer)/s/ Guy A. Gibson
              Chairman of the Board
              
              March 15, 2006Guy
                A. Gibson/s/ Robert T. Slezak
              Director
              
              March 15, 2006Robert
                T. Slezak/s/ Lester Ravitz
              Director
              
              March 15, 2006Lester
                Ravitz/s/ Dr. James Bullock
              Director
              
              March 15, 2006Dr.
                James Bullock






61




**INDEX
          TO FINANCIAL STATEMENTS**
 
 
 **Consolidated
          Financial Statements of Matrix Bancorp, Inc. and
          Subsidiaries**
 
 
 Report
                    of Independent Registered Public Accounting Firm, December 31,
                    2005
                F-2Report
                    of Independent Registered Public Accounting Firm, December 31,
                    2004 and
                    2003
                F-3Consolidated
                    Balance Sheets—December 31, 2005 and 2004
                F-4Consolidated
                    Statements of Income—for the years ended December
                    31, 2005, 2004 and 2003
                F-5Consolidated
                    Statements of Shareholders’ Equity and Comprehensive Income for
                    the years ended December 31, 2005, 2004 and 2003
                F-7Consolidated
                    Statements of Cash Flows—for the years ended December
                    31, 2005, 2004 and 2003
                F-8Notes
                    to Consolidated Financial Statements
                F-10
  
 F-1





**Report
      of Independent Registered Public Accounting Firm**











The
      Board
      of Directors and Shareholders


Matrix
      Bancorp, Inc.


Denver,
      Colorado





We
      have
      audited the consolidated balance sheet of Matrix Bancorp, Inc. and
      subsidiaries as of December 31, 2005, and the related consolidated
      statement of income, statement of shareholders’ equity and comprehensive income
      and cash flows for the year ended December 31, 2005. These financial statements
      are the responsibility of the Company’s management. Our responsibility is to
      express an opinion on these consolidated financial statements based on our
      audit.





We
      conducted our audit in accordance with the standards of the Public Company
      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 audit provided 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, 2005, and the results of their operations
      and their cash flows for the year ended December 31, 2005, in conformity with
      U.S. generally accepted accounting principles.








**McGLADREY
      & PULLEN, LLP**








Denver,
      Colorado


March
      15,
      2006




F-2





**Report
      of Independent Registered Public Accounting Firm**











The
      Board
      of Directors and Shareholders


Matrix
      Bancorp, Inc.:





We
      have
      audited accompanying consolidated balance sheet of Matrix Bancorp, Inc. and
      subsidiaries (the Company) as of December 31, 2004, and the related
      consolidated statements of income, shareholders’ equity and comprehensive
      income, and cash flows for each of the years in the two-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
      Company 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 the results of their operations
      and their cash flows for each of the years in the two-year period ended December
      31, 2004, in conformity with U.S. generally accepted accounting
      principles.







**KPMG
      LLP**








March
      14,
      2005


Denver,
      Colorado






F-3





Matrix
      Bancorp, Inc. and Subsidiaries


Consolidated
      Balance Sheets





*(Dollars
      in thousands, except share information)*





December 31,2005
            
            2004**Assets**Cash
                and cash equivalents
            
            $
            15,877
            
            $
            40,471Interest-earning
                deposits and federal funds sold
            
            
            18,355
            
            
            2,398Investment
                securities
            
            
            540,194
            
            
            316,367Loans
                held for sale, net
            
            
            927,442
            
            
            989,822Loans
                held for investment, net
            
            
            425,943
            
            
            379,717Mortgage
                servicing rights, net
            
            
            20,708
            
            
            26,574Other
                receivables
            
            
            29,139
            
            
            35,139FHLBank
                stock, at cost
            
            
            34,002
            
            
            33,481Premises
                and equipment, net
            
            
            17,154
            
            
            19,037Bank
                owned life insurance
            
            
            22,454
            
            
            21,569Other
                assets, net
            
            
            19,898
            
            
            21,330Income
                taxes receivable and deferred income tax asset
            
            
            3,696
            
            
            -Foreclosed
                real estate, net
            
            
            4,526
            
            
            2,955**Total
                assets**
            
            $
            2,079,388
            
            $
            1,888,860**Liabilities
                and shareholders’ equity**Liabilities:Deposits
            
            $
            1,124,044
            
            $
            1,119,159Custodial
                escrow balances
            
            
            49,385
            
            
            51,598FHLBank
                borrowings
            
            
            615,028
            
            
            506,118Borrowed
                money
            
            
            29,581
            
            
            31,573Junior
                subordinated debentures owed to unconsolidated subsidiary
                trusts
            
            
            61,372
            
            
            61,835Other
                liabilities
            
            
            19,250
            
            
            23,955Income
                taxes payable and deferred income tax liability
            
            
            -
            
            
            2,307Total
                liabilities
            
            
            1,898,660
            
            
            1,796,545Commitments
                and contingencies (Note 19)Shareholders’
                equity:Preferred
                stock, par value $0.0001; authorized5,000,000
                shares; no shares outstanding
            
            
            **-**
            
            
            **-**Common
                stock, par value $0.0001; authorized 50,000,000 shares; issued and
                outstanding 11,740,850 and 6,620,850 shares at December 31, 2005 and
                2004, respectively
            
            
            1
            
            
            1Additional
                paid-in capital
            
            
            108,395
            
            
            21,432Retained
                earnings
            
            
            72,314
            
            
            70,756Accumulated
                other comprehensive income
            
            
            18
            
            
            126Total
                shareholders’ equity
            
            
            180,728
            
            
            92,315**Total
                liabilities and shareholders’ equity**
            
            $
            2,079,388
            
            $
            1,888,860





*See
      accompanying notes to consolidated financial statements.*







F-4


Matrix
      Bancorp, Inc. and Subsidiaries


Consolidated
      Statements of Income





*(Dollars
      in thousands, except share information)*





Years
                Ended December 31,2005
            
            2004
            
            2003Interest
                and dividend income:Loans
                and securities
            
            $
            88,150
            
            $
            73,363
            
            $
            72,667Interest-earning
                deposits and federal funds sold
            
            
            1,941
            
            
            1,063
            
            
            1,040Total
                interest and dividend income
            
            
            90,091
            
            
            74,426
            
            
            73,707Interest
                expense:Savings
                and time deposits
            
            
            4,094
            
            
            5,900
            
            
            9,410Demand
                and money market deposits
            
            
            11,789
            
            
            4,765
            
            
            3,928FHLBank
                borrowings
            
            
            20,305
            
            
            12,391
            
            
            9,379Borrowed
                money and junior subordinated debentures
            
            
            7,180
            
            
            8,743
            
            
            9,282Total
                interest expense
            
            
            43,368
            
            
            31,799
            
            
            31,999Net
                interest income before provision for loan and valuation
                losses
            
            
            46,723
            
            
            42,627
            
            
            41,708Provision
                for loan and valuation losses
            
            
            1,665
            
            
            3,269
            
            
            3,641Net
                interest income after provision for loan and valuation
                losses
            
            
            45,058
            
            
            39,358
            
            
            38,067Noninterest
                income:Loan
                administration
            
            
            10,103
            
            
            15,253
            
            
            21,668Brokerage
            
            
            9,846
            
            
            10,629
            
            
            10,873Trust
                services
            
            
            7,217
            
            
            7,853
            
            
            6,781Real
                estate disposition services
            
            
            1,391
            
            
            7,786
            
            
            6,624Gain
                on sale of loans and securities
            
            
            2,017
            
            
            6,618
            
            
            14,267Gain
                on sale of assets
            
            
            300
            
            
            31,767
            
            
            -School
                services
            
            
            1,690
            
            
            2,871
            
            
            2,420Other
            
            
            5,518
            
            
            5,650
            
            
            6,696Total
                noninterest income
            
            
            38,082
            
            
            88,427
            
            
            69,329Noninterest
                expense:Compensation
                and employee benefits
            
            
            32,371
            
            
            32,891
            
            
            34,984Amortization
                of mortgage servicing rights
            
            
            7,764
            
            
            16,100
            
            
            32,497Occupancy
                and equipment
            
            
            4,997
            
            
            6,166
            
            
            6,172Postage
                and communication
            
            
            1,355
            
            
            2,001
            
            
            2,435Professional
                fees
            
            
            2,936
            
            
            3,242
            
            
            3,357Mortgage
                servicing rights subservicing fees
            
            
            3,073
            
            
            300
            
            
            -Data
                processing
            
            
            963
            
            
            2,705
            
            
            2,860Subaccounting
                fees
            
            
            13,447
            
            
            7,738
            
            
            5,845Recovery
                of impairment on mortgage servicing rights
            
            
            (1,180
            )
            
            (444
            )
            
            (2,950
            )Other
                general and administrative
            
            
            18,303
            
            
            24,967
            
            
            25,768Total
                noninterest expense
            
            
            84,029
            
            
            95,666
            
            
            110,968(Loss)
                income from continuing operations before income taxes
            
            
            (889
            )
            
            32,119
            
            
            (3,572
            )Income
                tax (benefit) expense
            
            
            (2,447
            )
            
            10,359
            
            
            (2,575
            )Income
                (loss) from continuing operations
            
            
            1,558
            
            
            21,760
            
            
            (997
            )Discontinued
                operations:Income
                from discontinued operations, net of income tax provision of $0,
                $89 and
                $2,149, respectively
            
            
            -
            
            
            137
            
            
            3,322**Net
                income**
            
            $
            1,558
            
            $
            21,897
            
            $
            2,325







F-5





Matrix
      Bancorp, Inc. and Subsidiaries


Consolidated
      Statements of Income





*(Dollars
      in thousands, except share information)*





Years
                Ended December 31,2005
            
            2004
            
            2003Income
                (loss) from continuing operations per share - basic
            
            $
            0.22
            
            $
            3.34
            
            $
            (0.15
            )Income
                (loss) from continuing operations per share - assuming
                dilution
            
            $
            0.22
            
            $
            3.28
            
            $
            (0.15
            )Income
                from discontinued operations per share - basic
            
            
            -
            
            $
            0.02
            
            $
            0.51Income
                from discontinued operations per share - assuming dilution
            
            
            -
            
            $
            0.02
            
            $
            0.51Net
                income per share - basic
            
            $
            0.22
            
            $
            3.36
            
            $
            0.36Net
                income per share - assuming dilution
            
            $
            0.22
            
            $
            3.30
            
            $
            0.36Weighted
                average shares - basic
            
            
            6,943,480
            
            
            6,520,239
            
            
            6,494,803Weighted
                average shares - assuming dilution
            
            
            7,036,128
            
            
            6,630,006
            
            
            6,539,195




*See
      accompanying notes to consolidated financial statements.*





F-6


Matrix
      Bancorp, Inc. and Subsidiaries


Consolidated
      Statements of Shareholders’ Equity and Comprehensive Income





*(Dollars
      in thousands)*


Common
                Stock
            
            Additional
              Paid-In
            
            Retained
            
            Accumulated
              Other
              Comprehensive
            
            
            
            ComprehensiveShares
            
            Amount
            
            Capital
            
            Earnings
            
            Income
            
            Total
            
            IncomeBalance
                at December 31, 2002
            
            
            6,489,543
            
            $
            1
            
            $
            20,375
            
            $
            46,534
            
            $
            26
            
            $
            66,936Issuance
                of stock related to employee stock purchase plan and
                options
            
            
            29,438
            
            
            -
            
            
            240
            
            
            -
            
            
            -
            
            
            240Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            2,325
            
            
            -
            
            
            2,325
            
            $
            2,325Net
                unrealized holding gains, net of income tax
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            183
            
            
            183
            
            
            183Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            2,508Balance
                at December 31, 2003
            
            
            6,518,981
            
            $
            1
            
            $
            20,615
            
            $
            48,859
            
            $
            209
            
            $
            69,684Issuance
                of stock related to employee stock purchaseplan
                and options
            
            
            101,869
            
            
            -
            
            
            817
            
            
            -
            
            
            -
            
            
            817Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            21,897
            
            
            -
            
            
            21,897
            
            $
            21,897Net
                unrealized holding loses, net of income tax (2)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (83
            )
            
            (83
            )
            
            (83
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            21,814Balance
                at December 31, 2004
            
            
            6,620,850
            
            $
            1
            
            $
            21,432
            
            $
            70,756
            
            $
            126
            
            $
            92,315Issuance
                of stock related to private placement offering
            
            
            5,120,000
            
            
            -
            
            
            86,963
            
            
            -
            
            
            -
            
            
            86,963Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            1,558
            
            
            -
            
            
            1,558
            
            $
            1,558Net
                unrealized holding losses, net of income tax (1)(2)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (108
            )
            
            (108
            )
            
            (108
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            1,450Balance
                at December 31, 2005
            
            
            11,740,850
            
            $
            1
            
            $
            108,395
            
            $
            72,314
            
            $
            18
            
            $
            180,728(1)
                Disclosure of reclassification amountUnrealized
                holding loss arising during the year ended December 31,
                2005
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (143
            )Less:
                reclassification adjustment of gains included in net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            35Net
                unrealized holding loss on securities, net of income tax
                (2)
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (108
            )(2)
                Net of income tax (benefit) of $(56) and $(63) for 2004 and 2005,
                respectively




*See
      accompanying notes to consolidated financial
      statements.*


F-7


Matrix
      Bancorp, Inc. and Subsidiaries


Consolidated
      Statements of Cash Flows





*(Dollars
      in thousands)*





Years
                Ended December 31,2005
            
            2004
            
            2003Revised,
              See
                Note 2
            
            Revised,
              See
                Note 2**Cash
                flows of continuing operating activities**Net
                income
            
            $
            1,558
            
            $
            21,897
            
            $
            2,325Income
                from discontinued operations, net of income tax provision
            
            
            -
            
            
            (137
            )
            
            (3,322
            )Adjustments
                to reconcile income to net cash used in continuing operating
                activities:Depreciation
                and amortization
            
            
            3,261
            
            
            4,409
            
            
            3,652Provision
                for loan and valuation losses
            
            
            1,665
            
            
            3,269
            
            
            3,641Amortization
                of mortgage servicing rights
            
            
            7,764
            
            
            16,100
            
            
            32,497Recovery
                on mortgage servicing rights
            
            
            (1,180
            )
            
            (444
            )
            
            (2,950
            )Gain
                on sale of loans and securities
            
            
            (2,017
            )
            
            (6,618
            )
            
            (14,267
            )Gain
                on sale of other assets
            
            
            (300
            )
            
            (31,767
            )
            
            -Loss
                on sale of building and equipment
            
            
            320
            
            
            25
            
            
            -(Gain)
                loss on sale of foreclosed real estate
            
            
            (63
            )
            
            51
            
            
            (925
            )Tax
                benefits on stock options exercised
            
            
            -
            
            
            (234
            )
            
            -Changes
                in assets and liabilities:Proceeds
                from the sale of trading securities
            
            
            489,822
            
            
            179,174
            
            
            -Loans
                originated for sale, net of loans sold
            
            
            (29,621
            )
            
            12,324
            
            
            (16,216
            )Loans
                purchased for sale
            
            
            (1,168,453
            )
            
            (1,738,181
            )
            
            (1,636,986
            )Principal
                payments on, and proceeds from sale of loans held for sale
            
            
            700,481
            
            
            632,879
            
            
            743,713Originated
                mortgage servicing rights, net
            
            
            (788
            )
            
            (615
            )
            
            (5,717
            )Decrease
                in other receivables, other assets, income taxes receivable and deferred
                income tax asset
            
            
            2,373
            
            
            18,344
            
            
            18,508Decrease
                in payable for purchase of mortgage servicing rights
            
            
            -
            
            
            (199
            )
            
            (581
            )(Decrease)
                increase in other liabilities, income taxes payable and deferred
                income
                tax liability
            
            
            (7,012
            )
            
            4,445
            
            
            (5,191
            )Net
                cash used in continuing operating activities
            
            
            (2,190
            )
            
            (885,278
            )
            
            (881,819
            )**Cash
                flows of continuing investing activities**Loans
                originated and purchased for investment
            
            
            (212,032
            )
            
            (129,714
            )
            
            (236,055
            )Principal
                repayments on loans held for investment
            
            
            163,508
            
            
            154,869
            
            
            130,302Loans
                sold in the sale of Matrix Bank branches
            
            
            -
            
            
            22,837
            
            
            -Purchase
                of available for sale securities
            
            
            (16,979
            )
            
            (103,615
            )
            
            (29,397
            )Proceeds
                from sale of available for sale securities
            
            
            97,038
            
            
            779,350
            
            
            653,744Proceeds
                from maturity and prepayment of available for sale
                securities
            
            
            28,425
            
            
            30,825
            
            
            1,348Purchase
                of held to maturity securities
            
            
            (324,365
            )
            
            (42,594
            )
            
            (40,440
            )Proceeds
                from the maturity and prepayment of held to maturity
                securities
            
            
            59,427
            
            
            11,145
            
            
            -Purchase
                of FHLBank stock, net
            
            
            (521
            )
            
            (2,799
            )
            
            (303
            )Purchase
                of bank owned life insurance
            
            
            -
            
            
            -
            
            
            (20,000
            )Purchases
                of premises and equipment
            
            
            (1,592
            )
            
            (576
            )
            
            (4,121
            )Proceeds
                from the sale of Matrix Bank branches premises and
                equipment
            
            
            -
            
            
            4,788
            
            
            -Proceeds
                from the sale of other assets
            
            
            18
            
            
            20,302
            
            
            -Acquisition
                of mortgage servicing rights
            
            
            -
            
            
            (871
            )
            
            (374
            )Proceeds
                from the sale of building and equipment
            
            
            -
            
            
            -
            
            
            -Proceeds
                from sale of foreclosed real estate
            
            
            4,698
            
            
            11,011
            
            
            12,306Proceeds
                from sale of mortgage servicing rights
            
            
            70
            
            
            -
            
            
            -Net
                cash (used in) provided by continuing investing activities
            
            
            (202,305
            )
            
            754,958
            
            
            467,010






F-8
 
 Matrix
        Bancorp, Inc. and Subsidiaries
 Consolidated
        Statements of Cash Flows (continued)


*(Dollars
      in thousands)*





Years
                Ended December 31,2005
            
            2004
            
            2003Revised,
              See
                Note 2
            
            Revised,
              See
                Note 2**Cash
                flows of continuing financing activities**Net
                increase in deposits
            
            $
            4,885
            
            $
            319,034
            
            $
            40,102Net
                deposits sold with sale of Matrix Bank branches
            
            
            -
            
            
            (173,934
            )
            
            -Net
                decrease in custodial escrow balances
            
            
            (2,213
            )
            
            (33,868
            )
            
            (66,324
            )Increase
                in FHLBank borrowings, net
            
            
            108,910
            
            
            47,914
            
            
            72,419Borrowed
                money - repayment of notes payable with banks
              and
                revolving lines, net
            
            
            (2,784
            )
            
            (1,985
            )
            
            (11,515
            )Borrowed
                money - repayment of senior notes
            
            
            -
            
            
            (9,545
            )
            
            -Borrowed
                money - proceeds from school financing arrangements
            
            
            22,817
            
            
            -
            
            
            -Borrowed
                money - repayment of school financing arrangements
            
            
            (22,025
            )
            
            (14,867
            )
            
            (1,889
            )Payment
                of financing arrangements
            
            
            -
            
            
            -
            
            
            (29
            )Borrowed
                money - proceeds from issuance of subordinated debt
                securities
            
            
            -
            
            
            9,760
            
            
            -Proceeds
                from issuance of capital securities of subsidiary trusts
            
            
            7,500
            
            
            10,000
            
            
            -Redemption
                of capital securities of subsidiary trusts
            
            
            (8,195
            )
            
            (14,550
            )
            
            -Proceeds
                from issuance of private placement common stock shares,
                net
            
            
            86,963
            
            
            -
            
            
            -Proceeds
                from issuance of common stock related to employee stock purchase
                plan and
                options
            
            
            -
            
            
            583
            
            
            240Net
                cash provided by continuing financing activities
            
            
            195,858
            
            
            138,542
            
            
            33,004**Cash
                flows of discontinued operations**Operating
                cash flows
            
            
            -
            
            
            (89
            )
            
            343,139Investing
                cash flows
            
            
            -
            
            
            226
            
            
            10,764Financing
                cash flows
            
            
            -
            
            
            -
            
            
            -Net
                cash provided by discontinued operations
            
            
            -
            
            
            137
            
            
            353,903(Decrease)
                increase in cash and cash equivalents
            
            
            (8,637
            )
            
            8,359
            
            
            (27,902
            )Cash
                and cash equivalents at beginning of the year
            
            
            42,869
            
            
            34,510
            
            
            62,412Cash
                and cash equivalents at end of the year
            
            $
            34,232
            
            $
            42,869
            
            $
            34,510**Supplemental
                disclosure of non-cash activity**Loans
                transferred to foreclosed real estate and other assets
            
            $
            7,605
            
            $
            14,094
            
            $
            12,572Loans
                securitized and transferred to securities available for
                sale
            
            $
            90,054
            
            $
            761,384
            
            $
            708,507Loans
                securitized and transferred to trading securities
            
            $
            468,169
            
            $
            251,336
            
            $
            -Securities
                available for sale transferred to trading securities
            
            $
            -
            
            $
            54,163
            
            $
            -Securities
                available for sale transferred to held to maturity
                securities
            
            $
            85,337
            
            $
            -
            
            $
            -Loans
                held for sale transferred to loans held for investment
            
            $
            5,856
            
            $
            88,778
            
            $
            -Loans
                held for investment transferred to loans held for sale
            
            $
            4,600
            
            $
            -
            
            $
            -**Supplemental
                disclosure of cash flow information**Cash
                paid for interest
            
            $
            43,665
            
            $
            31,487
            
            $
            32,592Cash
                paid for income taxes
            
            $
            3,563
            
            $
            11,649
            
            $
            2,879




*See
      accompanying notes to consolidated financial statements.*





F-9


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements**





**1.
      Organization**





Matrix
      Bancorp, Inc. (the “Company”), 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”), Sterling Trust Company (“Sterling”), First Matrix
      Investment Services Corp. (“First Matrix”), Matrix Bancorp Trading, Inc.
      (“Matrix Bancorp Trading”), ABS School Services, L.L.C. (“ABS”) and MTXC Realty
      Corp. (“MTXC Realty”), all of which are wholly owned subsidiaries of the
      Company.





***Private
      Placement and Tender Offer***





On
      December 9, 2005, the Company completed a private offering of 5,120,000 shares
      of common stock, $0.0001 par value per share. The shares of our common stock
      were sold at a per share price of $19.00, except shares sold to an affiliate
      of
      our placement agent, which purchased shares at the offering price less the
      placement agent fee, or $17.67 per share. In the private offering, we raised
      an
      aggregate of $96,987,000, less a placement agent fee and certain other costs
      of
      the offering that were directly charged against the proceeds which totaled
      $10,023,000, resulting in net proceeds of $86,963,000. The net funds raised
      in
      the private placement were used to conduct an issuer tender offer to purchase
      shares of our common stock at $19.00 per share. On January 23, 2006, the Company
      completed the tender offer, where 4,184,277 common shares were tendered at
      the
      offering price of $19.00, or $79,501,000. Subsequent to the completion of the
      issuer tender offer, we have 7,556,573 shares of common stock outstanding.
      The
      purpose of the issuer tender offer was to reduce the insider ownership and
      ultimately increase the market float of our common stock. In addition to the
      costs of the offering noted, we also incurred expenses for severance, option
      buy-outs and other compensation related costs totaling approximately $7,943,000,
      included in compensation and benefits expense for the year ended December 31,
      2005.





Concurrently
      with the closing of the private offering, the former Co-CEO’s of the Company
      resigned, and a new executive management team was appointed by the Board of
      Directors.





***Subsidiaries***





Matrix
      Bank, a federally chartered savings and loan association, currently 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, and to a lesser extent, personal and
      business depository services. During 2004, Matrix Bank sold its two retail
      branches in Las Cruces and its retail branch in Sun City, Arizona, as discussed
      more fully in Note 5 below.





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
      then
      transferred to a third party sub-servicer effective December 1, 2004.





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-10


**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.





Matrix
      Bancorp Trading 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.





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





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. Effective September 1, 2004, the Company
      sold substantially all of the assets related to Matrix Asset Management
      Corporation, retaining a 25% interest in the new company created by the
      purchaser, as discussed more fully in Note 3 below. We also 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.





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





**2.
      Significant Accounting Policies**





***Basis
      of Presentation***





The
      consolidated financial statements include the accounts of the Company and its
      majority-owned and controlled subsidiaries. All significant intercompany
      accounts and transactions have been eliminated in consolidation. Ownership
      interests of 20% or more in non-controlled affiliates are accounted for by
      the
      equity method. Other investments are recorded at cost. The Company follows
      the
      accounting guidance in Financial Accounting Standards Board Interpretation
      No.
      46 (“FIN 46”), “Consolidation of Variable Interest Entities”, and the revised
      FIN 46R for accounting for the Company’s seven variable interest entities, 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, discussed
      more
      fully in Note 14.





***Critical
      Accounting 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 estimates. 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.




F-11





**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





The
      Company views the allowance for loan and valuation losses as a significant
      accounting estimate 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 a significant accounting estimate 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
      significant accounting estimate. 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.





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.




In
      2005, the Company revised the 2004 and 2003
      presentation of the statement of cash flows due to discontinued operations.
      The
      revisions include starting the cash flows statement with net income, and then
      adjusting the net income for discontinued operations net income. Additionally,
      operating, investing and financing portions of the cash flows attributable
      to
      its discontinued operations are separately disclosed. In prior periods, these
      amounts were reported on a combined basis and the cash flows statement started
      with income from continuing operations. See further discussion of discontinued
      operations in Note 6.





F-12


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**




***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 and did not have
      any such hedging activity in the year ended December 31, 2005. 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, 2005 and 2004, the Company has no derivative that meets the hedge
      accounting provisions provided under SFAS 133, and at December 31, 2005, 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 years ended
      December 31, 2005 and 2004, the change in the fair value of the derivative
      instruments associated with contracts and commitments that meet the definition
      of a derivative are 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 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.





F-13


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





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. Classes of 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. At December 31, 2005, the Company has an approximate $2.3 million
      valuation allowance to reduce the carrying value of loans held for sale to
      market value. 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-14


**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
      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.





***Loans
      Held for Investment***





Loans
      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.




F-15


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





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.





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 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
      recorded 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 96 PSA (Public Securities
      Association prepayment speed measurement) to 1,149 PSA; discount rates ranging
      from 10.00% to 18.00%; and default rates ranging from 0% to 100%. At December
      31, 2005, the Company’s servicing portfolio consists of seasoned loans with an
      approximate 8.2 year average age, an average balance of $52,000 and a weighted
      average note rate of 7.36%. As such, management believes there is relatively
      modest valuation volatility to our portfolio.




F-16


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**




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 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 a credit 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, 2005 and 2004, a valuation allowance of $2,226,000 and $3,406,000,
      respectively, was required, and the fair value of the aggregate MSRs was
      approximately $20,708,000 and $26,574,000, 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.





***FHLBank
      Stock***





FHLBank
      stock is a required investment for institutions that are members of the Federal
      Home Loan Bank system, including Matrix Bank. The Company carries FHLBank stock
      at cost, which is equal to its redemption value. Dividends are credited to
      interest and dividend income when declared by the FHLBank.





***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.





F-17


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





***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 income.





***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 undiscounted
      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
      consolidated effective tax rate is affected by the level of tax-exempt interest
      income in proportion to the level of net income, as well as utilization of
      New
      Market Tax Credits.





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





***Loan
      Administration Income***





Loan
      administration income represents service fees and other income earned from
      servicing loans for various investors. 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 were not 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 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.




F-18


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





***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. Real estate disposition services income also includes
      our earnings in our equity method investment in the company from the sale of
      substantially all of our assets related to our real estate disposition services
      subsidiary in 2004 as discussed further in Note 3.





***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 institutional deposits.





***Stock-Based
      Compensation***





At
      December 31, 2005, the Company has one stock-based employee compensation plan,
      which is described more fully in Note 18. Through December 31, 2005, we applied
      the intrinsic 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 adopted SFAS 123(R) January 1, 2006 using the modified
      prospective method. As a result, the Company will record compensation expense
      for non-vested options and on all new options issued.





Concurrently
      with the private placement transaction discussed in Note 1 above, the Company
      conducted a buy-out of outstanding options under the stock-based employee
      compensation plan. The total amount of options purchased, which were purchased
      for the difference between the price of stock offered in the private placement
      and the strike price of each option, was $3,865,000. As of December 31, 2005,
      there are 2,000 options remaining outstanding under the stock-based employee
      compensation plan, all of which expired January 9, 2006, and all of which are
      at
      a strike price that exceeds the private placement price and market price of
      the
      shares. No compensation expense is recorded for these options. Under the new
      business strategy adopted by the Company subsequent to the private placement
      and
      tender offer transaction discussed in Note 1 above, the Board of Directors
      anticipates issuing options under the stock-based employee compensation plan
      beginning in January 2006. Those options will be accounted for under the
      provisions of SFAS 123(R).




F-19


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





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





Year
                ended December 31,2005
            
            2004
            
            2003*(Dollars
                in thousands, except share data)*Net
                incomeNet
                income as reported
            
            $
            1,558
            
            $
            21,897
            
            $
            2,325Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for awards, net of related tax effects
            
            
            -
            
            
            (236
            )
            
            (262
            )Pro
                forma
            
            $
            1,558
            
            $
            21,661
            
            $
            2,063Income
                per share:Basic,
                as reported
            
            $
            0.22
            
            $
            3.36
            
            $
            0.36Basic,
                pro forma
            
            $
            0.22
            
            $
            3.32
            
            $
            0.32Diluted,
                as reported
            
            $
            0.22
            
            $
            3.30
            
            $
            0.36Diluted,
                pro forma
            
            $
            0.22
            
            $
            3.27
            
            $
            0.32





***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
      Per Common Share***





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





***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 $1,368,000 related to write-offs for furniture,
      fixtures, leasehold improvements and retention packages. In 2005, additional
      charges related to final office relocation of approximately $399,000 were taken.
      These charges are included in noninterest expense for the respective years.




F-20


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





***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
      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
      consolidated financial statements above, is no longer an alternative. The
      Company is required to adopt SFAS 123(R) for the fiscal year beginning January
      1, 2006, and anticipates doing so under the modified prospective method. See
      further discussion in Note 2 to the consolidated financial statements. We are
      currently evaluating the impact the adoption of SFAS 123(R) will have, including
      giving consideration to changes made with the buy-out of outstanding options
      concurrently with the private placement discussed in Note 1 above, and 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 and income per share in this Note. In
      addition, in November 2005, the FASB issued final FASB Staff Position (“FSP”)
      FAS No. 123(R)-3, (“FSP 123(R)-3”) “Transition Election Related to Accounting
      for the Tax Effects of Share-Based Payment Awards.” FSP 123(R)-3 provides an
      alternative method of calculating excess tax benefits from the method defined
      in
      SFAS 123(R) for share-based payments. A one-time election to adopt the
      transition method in the FSP is available to those entities adopting SFAS 123(R)
      using either the modified retrospective or modified prospective method. Up
      to
      one year from the initial adoption of SFAS 123(R) is provided to make this
      one-time election. The Company is currently evaluating the potential impact
      of
      calculating the tax benefits with this alternative method and has not determined
      which method we will adopt, nor the expected impact on our consolidated
      financial statements.





In
      November 2005, the FASB issued FSP 115-1, “The Meaning of Other-Than-Temporary
      Impairment and Its Application to Certain Investments” (“FSP 115-1”). This FSP
      provides additional guidance on when an investment in a debt or equity security
      should be considered impaired and when that impairment should be considered
      other-than-temporary and recognized as a loss in earnings. Specifically, the
      guidance clarifies that an investor should recognize an impairment loss no
      later
      than when the impairment is deemed other-than-temporary, even if a decision
      to
      sell has not been made. The FSP also requires certain disclosures about
      unrealized losses that have not been recognized as other-than-temporary
      impairments. See Note 8 to the consolidated financial statements herein for
      required disclosures under FSP 115-1.





In
      May
      2005, the FASB issued SFAS No 154, “Accounting Changes and Error Corrections - A
      Replacement of APB Opinion No. 20 and FASB Statement No. 3”, (“SFAS No. 154”).
      SFAS No. 154 applies to all voluntary changes in accounting principle, and
      applies to changes required by an accounting pronouncement, in the unusual
      instance that the pronouncement does not include specific transition provisions.
      SFAS No. 154 replaces APB 20 cumulative effect accounting with retroactive
      restatement of comparative financial statements, and defines “retrospective
      application” to differentiate it from “restatement” due to incorrect accounting.
      The Company will be required to adopt SFAS No. 154 for the fiscal year beginning
      January 1, 2006. The adoption of this standard is not expected to have a
      significant impact on the consolidated financial statements.




F-21


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





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





On
      September 10, 2004, the Company, through its subsidiary Matrix Asset Management
      Corporation (“MAMC”), sold substantially all of its assets related to its real
      estate management and disposition business. After the sale, the Company 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, operating 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, payable in quarterly
      principal and interest payments over three years. The balance of the note
      receivable of $2,917,000 is included in other receivables at December 31, 2005.
      The 25% ownership is accounted for using the equity method of accounting. We
      continue to reflect the operations of MTXC Realty, including the equity earnings
      in MAM, LLC, as continuing operations. At
      December 31, 2005, the investment in MAMC included in other assets in the
      consolidated balance sheet is $602,000.





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 the Operating
      Agreement for MAM, LLC.





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.





**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
      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, the Company recorded a pre-tax gain on sale of approximately $8,242,000,
      included in the gain on sale of other assets for the year ended December 31,
      2004. In consideration of the sale of the assets of the trust operations of
      Matrix Bank, the Company has received additional common stock of approximately
      2% of the outstanding common stock of MGCH. This portion of the transaction
      closed April 30, 2005. As a result of the sale of the trust assets, the Company
      recorded a pre-tax gain on sale of $302,000, which is included in the gain
      on
      sale of other assets for the year ended December 31, 2005. The approximate
      7%
      total ownership interest retained is accounted for using the cost basis of
      accounting. At December 31, 2005, the investment in MGCH included in other
      assets is $750,000.




F-22


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





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 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.





**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 a New Mexico banking company. 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 the
      same
      New Mexico banking company. 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.





**6. 
      Discontinued Operations**




On
      September 2, 2003, the Company announced the final closing, and substantial
      completion of the sale by Matrix Financial 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. The final closing
      was approximately six months after the signing of the agreement in order to
      allow the Buyer to obtain licensing to engage in mortgage banking activities
      under various state and federal laws. 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” and is included in the results from
      discontinued operations.




F-23


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





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 income. The operating income of the discontinued
      production platform is reflected in discontinued operations beginning in the
      first quarter of 2003. Operating results of the discontinued operations,
      previously included in our mortgage banking segment, were as
      follows:




Years
                Ended December 31,2004
            
            
            2003Net
                interest income after provision for loan and valuation
                losses
            
            $
            -
            
            $
            3,477Noninterest
                income
            
            
            226
            
            
            38,309Noninterest
                expense
            
            
            -
            
            
            31,717Operating
                income before taxes from discontinued operations
            
            
            226
            
            
            10,069Income
                tax provision
            
            
            89
            
            
            3,955Operating
                income from discontinued operations
            
            
            137
            
            
            6,114Loss
                on sale of production platform, net of income taxbenefit
                of $1,806
            
            
            -
            
            
            (2,792
            )Income
                from discontinued operations, net of income taxes
            
            $
            137
            
            $
            3,322Income
                from discontinued operations per share - basic
            
            $
            0.02
            
            $
            0.51Income
                from discontinued operations per share - diluted
            
            $
            0.02
            
            $
            0.51





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 Per Share**





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





F-24


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





Years
                Ended December 31,2005
            
            2004
            
            2003*(Dollars
                in thousands)*Numerator:Income
                (loss) from continuing operations, net of tax effects
            
            $
            1,558
            
            $
            21,760
            
            $
            (997
            )Income
                from discontinued operations, net of tax effects
            
            $
            -
            
            $
            137
            
            $
            3,322Net
                income
            
            $
            1,558
            
            $
            21,897
            
            $
            2,325Denominator:Weighted
                average shares outstanding
            
            
            6,943,480
            
            
            6,520,239
            
            
            6,494,803Effect
                of dilutive securities:Common
                stock options
            
            
            92,648
            
            
            109,767
            
            
            44,392Denominator
                for net income (loss) per share, assuming dilution
            
            
            7,036,128
            
            
            6,630,006
            
            
            6,539,195





**8.
      Investment Securities**





Investment
      securities available for sale were as follows:




December
                31, 2005
            
            
            December
                31, 2004Amortized
              Cost
            
            
            Gross
                Unrealized Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
                Fair
              Value
            
            
            Amortized
                Cost
            
            
            Gross
                Unrealized Gains
            
            
            Gross
                Unrealized Losses
            
            
            Estimated
                Fair
              Value*(Dollars
                in
                thousands)*Mortgage
                backedsecurities
            
            $
            13,714
            
            $
            39
            
            $
            (47
            )
            $
            13,706
            
            $
            117,316
            
            $
            339
            
            $
            (145
            )
            $
            117,510SBA
                securities
            
            
            757
            
            
            -
            
            
            (1
            )
            
            756
            
            
            930
            
            
            -
            
            
            (3
            )
            
            927Total
            
            $
            14,471
            
            $
            39
            
            $
            (48
            )
            $
            14,462
            
            $
            118,246
            
            $
            339
            
            $
            (148
            )
            $
            118,437





Realized
      (losses) gains on the sale of securities available for sale, as determined
      by
      specific identification, were approximately $(122,000), $430,000 and $564,000
      for the years ended December 31, 2005, 2004 and 2003, respectively.





Investment
      securities held to maturity were as follows:




December
                31, 2005
            
            
            December
                31, 2004Amortized
              Cost
            
            
            Gross
                Unrealized Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
                Fair Value
            
            
            Amortized
                Cost
            
            
            Gross
                Unrealized Gains
            
            
            Gross
                Unrealized Losses
            
            
            Estimated
                Fair Value*(Dollars
                in thousands)*Mortgage
                backedsecurities
            
            $
            421,010
            
            $
            183
            
            $
            (4,274
            )
            $
            416,919
            
            $
            71,555
            
            $
            34
            
            $
            (174
            )
            $
            71,415Total
            
            $
            421,010
            
            $
            183
            
            $
            (4,274
            )
            $
            416,919
            
            $
            71,555
            
            $
            34
            
            $
            (174
            )
            $
            71,415





F-25


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





The
      amortized cost and estimated fair value of investment securities by contractual
      maturity at December 31, 2005 are as follows:




Available
                for Sale
            
            
            Held
                to MaturityAmortized
                Cost
            
            
            Estimated
                  Fair Value
            
            
            Amortized
                Cost
            
            
            Estimated
                Fair Value*(Dollars
                in thousands)*Within
                1 year
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Over
                1 year through 5 years
            
            
            -
            
            
            -
            
            
            -
            
            
            -After
                5 years through 10 years
            
            
            -
            
            
            -
            
            
            -
            
            
            -Over
                10 years
            
            
            757
            
            
            756
            
            
            -
            
            
            -SBA
                securities
            
            
            757
            
            
            756
            
            
            -
            
            
            -Mortgage
                backed securities
            
            
            13,714
            
            
            13,706
            
            
            421,010
            
            
            416,919Total
            
            $
            14,471
            
            $
            14,462
            
            $
            421,010
            
            $
            416,919




Trading
      securities were as follows:





December
                31, 2005
            
            December
                31, 2004Estimated
                Fair Value
            
            Estimated
                Fair Value*(Dollars
                in thousands)*SBA
                securities
            
            $
            104,722
            
            $
            126,375Total
            
            $
            104,722
            
            $
            126,375





The
      net
      gain on trading securities was approximately $613,000, $50,000 and $0 for the
      years ended December 31, 2005, 2004 and 2003, respectively.





The
      following table presents information pertaining to securities with gross
      unrealized losses aggregated by investment category and length of time that
      individual securities have been in continuous loss position as
      follows:





December
                31, 2005
            
            December
                31, 2004Less
                than 12 Months
            
            12
                Months or More
            
            Less
                than 12 Months
            
            12
                Months or MoreEstimated
                Fair Value
            
            Unrealized
                Losses
            
            Estimated
                Fair Value
            
            Unrealized
                Losses
            
            Estimated
                Fair Value
            
            Unrealized
                Losses
            
            Estimated
                Fair Value
            
            Unrealized
                Losses(Dollars
                in thousands)Mortgage
                backed securities, available for sale
            
            $
            6,181
            
            $
            (38
            )
            $
            328
            
            $
            (9
            )
            $
            117,510
            
            $
            (145
            )
            $
            -
            
            $
            -Mortgage
                backed securities, held to maturity
            
            
            331,170
            
            
            (4,014
            )
            
            10,802
            
            
            (260
            )
            
            71,415
            
            
            (174
            )
            
            -
            
            
            -SBA
                Securities
            
            
            -
            
            
            -
            
            
            476
            
            
            (1
            )
            
            -
            
            
            -
            
            
            927
            
            
            (3
            )Total
            
            $
            337,351
            
            $
            (4,052
            )
            $
            11,606
            
            $
            (270
            )
            $
            188,925
            
            $
            (319
            )
            $
            927
            
            $
            (3
            )





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.




F-26


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





At
      December 31, 2005, 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 Company has both the intent
      and
      ability to hold these securities for the time necessary to recover the amortized
      cost.




The
        Company expects to receive payments on investment securities over periods
        that
        are considerably shorter than the contractual maturities of the securities,
        which range up to 30 years, due to prepayments.




At
      December 31, 2005 and 2004, investment securities with a carrying value of
      $0
      and $3,571,000, respectively, were pledged to secure public deposits and for
      other purposes required or permitted by law.





At
      December 31, 2005, approximately 23% of the available for sale securities
      portfolio and approximately 13% of the held to maturity securities portfolio
      were comprised of securities of a single issuer, other than U.S. Treasury and
      federal agency debentures and other U.S. Government sponsored agency securities.





**9.
      Loans Held for Sale and Investment**





***Loans
      Held for Sale***





Loans
      held for sale consist of the following:




December 31,2005
            
            2004*(Dollars
                in thousands)*Residential
                loans
            
            $
            631,773
            
            $
            758,543SBA
                guaranteed commercial loans, school financing and other
            
            
            280,882
            
            
            218,231Purchase
                premiums, unearned fees and fair value adjustment, net
            
            
            19,976
            
            
            18,246932,631
            
            
            995,020Less:
                Allowance for loan and valuation losses
            
            
            5,189
            
            
            5,198Loans
                held for sale, net
            
            $
            927,442
            
            $
            989,822





Activity
      in the allowance for loan and valuation losses on loans held for sale is
      summarized as follows:





Years
                Ended December 31,2005
            
            2004
            
            2003*(Dollars
                in thousands)*Balance
                at beginning of year
            
            $
            5,198
            
            $
            4,803
            
            $
            5,899Provision
                for loan losses
            
            
            774
            
            
            1,180
            
            
            1,393Charge-offs
                and transfers
            
            
            (803
            )
            
            (785
            )
            
            (2,515
            )Recoveries
            
            
            20
            
            
            -
            
            
            26Balance
                at end of year
            
            $
            5,189
            
            $
            5,198
            
            $
            4,803







F-27


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





***Loans
      Held for Investment***





Loans
      held for investment consist of the following:


December 31,2005
            
            2004*(Dollars
                in thousands)*Residential
                loans
            
            $
            250,793
            
            $
            227,609Multi-family,
                commercial real estate, SBA commercial
            
            
            157,537
            
            
            134,782Construction
                loans
            
            
            24,049
            
            
            24,753Consumer
                loans and other
            
            
            244
            
            
            581Discounts,
                net
            
            
            (843
            )
            
            (1,194
            )Unearned
                fees
            
            
            (1,029
            )
            
            (840
            )430,751
            
            
            385,691Less:
                Allowance for loan and valuation losses
            
            
            4,808
            
            
            5,974Loans
                held for investment, net
            
            $
            425,943
            
            $
            379,717





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





Years
                Ended December 31,2005
            
            2004
            
            2003*(Dollars
                in thousands)*Balance
                at beginning of year
            
            $
            5,974
            
            $
            4,986
            
            $
            3,444Provision
                for loan and valuation losses
            
            
            891
            
            
            2,089
            
            
            2,248Charge-offs
                and transfers
            
            
            (2,249
            )
            
            (1,264
            )
            
            (1,035
            )Recoveries
            
            
            192
            
            
            163
            
            
            329Balance
                at end of year
            
            $
            4,808
            
            $
            5,974
            
            $
            4,986





Matrix
      Bank’s single-family loans are located throughout 50 states with concentrations
      above 5.0% at December 31, 2005 in California, Georgia, Illinois and
      Florida of approximately 31.9%, 9.6%, 8.4% and 5.4%, respectively, based on
      aggregate outstanding unpaid principal balances of the loans.





The
      following lists information related to nonperforming loans held for investment
      and held for sale:





December 31,2005
            
            2004*(Dollars
                in thousands)*Loans
                on nonaccrual status in the held for investment portfolio
            
            $
            9,601
            
            $
            16,558Loans
                on nonaccrual status in the held for sale portfolio
            
            
            7,293
            
            
            14,787Total
                nonperforming loans
            
            $
            16,894
            
            $
            31,345Interest
                income that would have been recognized at original contract
                terms
            
            $
            529
            
            $
            652





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 $10,986,000 and
      $18,097,000 as of December 31, 2005 and 2004, respectively.




F-28


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





Interest
      income that would have been recorded for all nonaccrual loans was approximately
      $529,000, $652,000 and $1,084,000 for the years ended December 31, 2005, 2004
      and 2003, respectively.





Included
      in nonaccrual loans were impaired loans, as defined under SFAS No. 114,
“Accounting by Creditors for Impairment of a Loan,” totaling $3,517,000 and
      $8,662,000 at December 31, 2005 and 2004, 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 2005
      and 2004 was $1,401,000 and $2,419,000, respectively. There was no interest
      recognized in 2005 or 2004 on loans while they were considered impaired.





**10.
      Premises and Equipment**





Premises
      and equipment consist of the following:




December 31,2005
            
            2004*(Dollars
                in thousands)*Land
            
            $
            3,106
            
            $
            3,106Buildings
            
            
            10,854
            
            
            10,598Leasehold
                improvements
            
            
            4,005
            
            
            4,330Office
                furniture and equipment
            
            
            10,661
            
            
            12,89028,626
            
            
            30,924Less
                accumulated depreciation
            
            
            11,472
            
            
            11,887Premises
                and equipment, net
            
            $
            17,154
            
            $
            19,037





Included
      in occupancy and equipment expense is depreciation expense of premises and
      equipment of approximately $2,757,000, $3,572,000 and $3,552,000 for the years
      ended December 31, 2005, 2004 and 2003, respectively.






**11.
      Mortgage Servicing Rights**





The
      activity in the MSRs is summarized as follows:


Years
                Ended December 31,2005
            
            2004
            
            2003*(Dollars
                in thousands)*Mortgage
                servicing rightsBalance
                at beginning of year
            
            $
            29,980
            
            $
            47,194
            
            $
            79,234Purchases
            
            
            -
            
            
            871
            
            
            375Originations
            
            
            788
            
            
            615
            
            
            5,082Amortization
            
            
            (7,764
            )
            
            (16,100
            )
            
            (32,497
            )Sales
            
            
            (70
            )
            
            -
            
            
            -Application
                of valuation allowance to write down permanently impaired
                MSRs
            
            
            -
            
            
            (2,600
            )
            
            (5,000
            )Balance
                before valuation allowance at end of year
            
            
            22,934
            
            
            29,980
            
            
            47,194Valuation
                allowance for impairment of mortgage servicing rightsBalance
                at beginning of year
            
            
            (3,406
            )
            
            (6,450
            )
            
            (14,400
            )Additions
            
            
            (230
            )
            
            (1,656
            )
            
            (2,400
            )Application
                of valuation allowance to write down permanently impaired
                MSRs
            
            
            -
            
            
            2,600
            
            
            5,000Recovery
            
            
            1,410
            
            
            2,100
            
            
            5,350Balance
                at end of year
            
            
            (2,226
            )
            
            (3,406
            )
            
            (6,450
            )Valuation
                allowance for foreclosure costs
            
            
            -
            
            
            -
            
            
            (1,000
            )Mortgage
                servicing rights, net
            
            $
            20,708
            
            $
            26,574
            
            $
            39,744






F-29


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


The
      Company’s servicing activity is diversified throughout 50 states with
      concentrations above 10.0% at December 31, 2005, in California, Texas, Missouri
      and New Mexico of approximately 15.5%, 13.7%, 13.4% and 11.5%, respectively,
      based on aggregate outstanding unpaid principal balances of the mortgage loans
      serviced. As of December 31, 2005, 2004 and 2003, the Company subserviced loans
      for others of approximately $11,373,000, $14,026,000 and $176,921,000,
      respectively.





The
      Company’s servicing portfolio (excluding subserviced loans) is comprised of the
      following:





December
                31, 2005
            
            December
                31, 2004Number
              of
                Loans
            
            Principal
              Balance
              Outstanding
            
            Number
              of
                Loans
            
            Principal
              Balance
                Outstanding*(Dollars
                in thousands)*Freddie
                Mac
            
            
            3,673
            
            $
            130,386
            
            
            4,783
            
            $
            196,637Fannie
                Mae
            
            
            10,400
            
            
            542,782
            
            
            13,390
            
            
            722,749Ginnie
                Mae
            
            
            8,913
            
            
            514,900
            
            
            11,098
            
            
            675,067VA,
                FHA, conventional and other loans
            
            
            6,491
            
            
            529,930
            
            
            8,687
            
            
            664,387Total
                servicing portfolio
            
            
            29,477
            
            $
            1,717,998
            
            
            37,958
            
            $
            2,258,840





The
      Company’s custodial escrow balances shown in the accompanying consolidated
      balance sheets at December 31, 2005 and 2004, 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, 2006, 2007, 2008, 2009 and 2010 is $3,630,000, $2,943,000,
      $2,401,000, $1,954,000 and $1,613,000, respectively. The estimated amortization
      is based on several assumptions as of December 31, 2005 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.





F-30


**Matrix
      Bancorp, Inc. and Subsidiaries**


**Notes
        to Consolidated Financial Statements (continued)**


**12.
      Deposits**


Deposit
      account balances are summarized as follows:




December
                31, 2005
            
            December
                31, 2004Amount
            
            Percent
                of Total Deposits
            
            Weighted
                Average Rate
            
            Amount
            
            Percent
                of Total Deposits
            
            Weighted
                Average Rate*(Dollars
                in thousands)*Passbook
                accounts
            
            $
            405
            
            
            0.04
            %
            
            1.26
            %
            $
            455
            
            
            0.04
            %
            
            1.26
            %NOW
                accounts
            
            
            495,260
            
            
            44.06
            
            
            0.49
            
            
            189,671
            
            
            16.95
            
            
            0.11Money
                market accounts
            
            
            581,704
            
            
            51.75
            
            
            1.69
            
            
            676,848
            
            
            60.48
            
            
            0.91Subtotal
            
            
            1,077,369
            
            
            95.85
            
            
            1.18
            
            
            866,974
            
            
            77.47
            
            
            0.71Certificate
                accounts
            
            
            46,675
            
            
            4.15
            
            
            3.66
            
            
            252,185
            
            
            22.53
            
            
            2.48Total
                Deposits
            
            $
            1,124,044
            
            
            100.00
            %
            
            1.27
            %
            $
            1,119,159
            
            
            100.00
            %
            
            1.09
            %





Included
      in NOW accounts are noninterest-bearing DDA accounts of $182,549,000 and
      $156,478,000 at December 31, 2005 and 2004, respectively.





Contractual
      maturities of certificate accounts as of December 31, 2005 are as
      follows:





Under
                12 months
            
            12
                to 36 months
            
            36
                to 60 months
            
            Total*(Dollars
                in thousands)*1.00-1.99%
            
            $
            30
            
            $
            -
            
            $
            -
            
            $
            302.00-2.99%
            
            
            2,690
            
            
            -
            
            
            -
            
            
            2,6903.00-3.99%
            
            
            1,163
            
            
            26,896
            
            
            46
            
            
            28,1054.00-4.99%
            
            
            13,908
            
            
            -
            
            
            1,942
            
            
            15,850$
            17,791
            
            $
            26,896
            
            $
            1,988
            
            $
            46,675





Approximately
      $288,622,000 and $236,007,000 of fiduciary assets under administration by
      Sterling are included in NOW and money market accounts as of December 31, 2005
      and 2004, respectively. Approximately $173,222,000 and $118,129,000 of MSCS
      customer assets under administration are included in NOW and money market
      accounts as of December 31, 2005 and 2004, respectively. Approximately
      $26,024,000 and $25,142,000 of deposits of the majority owner of MAM, LLC are
      included in NOW and money market accounts as of December 31, 2005 and 2004,
      respectively. Approximately $543,885,000 and $449,515,000 of deposits represent
      funds from four significant institutional relationships maintained by Matrix
      Bank as of December 31, 2005 and 2004, respectively. Included in certificate
      accounts are $42,504,000 and $247,868,000 of brokered deposits as of December
      31, 2005 and 2004, respectively.





F-31


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





Interest
      expense on deposits is summarized as follows:




Years
                Ended December 31,2005
            
            2004
            
            2003*(Dollars
                in thousands)*Passbook
                accounts
            
            $
            5
            
            $
            38
            
            $
            74NOW
                accounts
            
            
            1,169
            
            
            261
            
            
            327Money
                market
            
            
            10,621
            
            
            4,504
            
            
            3,602Certificates
                of deposit
            
            
            4,088
            
            
            5,862
            
            
            9,335Interest
                expense on deposits
            
            $
            15,883
            
            $
            10,665
            
            $
            13,338





The
      aggregate amount of certificate of deposit accounts with a balance greater
      than
      $100,000 (excluding brokered deposits) was approximately $1,227,000 and $855,000
      at December 31, 2005 and 2004, respectively.





**13.
      Borrowed Money**





Borrowed
      money is summarized as follows:


December 31,2005
            
            2004*(Dollars
                in thousands)***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, 2007, collateralized by the common stock of Matrix Bank;
                interest at 30 day LIBOR plus 2.65% (7.05% at December 31,
                2005)
            
            $
            3,217
            
            $
            4,288$12,000,000
                revolving line of credit to a third party financial institution,
                through
                March 31, 2006, renewable annually, collateralized by the common
                stock of
                Matrix Bank; interest at 30 day LIBOR plus 2.65% (7.05% at December
                31,
                2005); $12,000,000 available at December 31, 2005
            
            
            -
            
            
            -Note
                payable with a bank, secured by real estate, interest at Prime plus
                1.50%,
                paid in full September 23, 2005
            
            
            -
            
            
            1,713$10,000,000
                subordinated debt securities, interest payments due quarterly at
                three-month LIBOR plus 2.75% (7.29% at December 31, 2005), maturing
                February 13, 2014
            
            
            10,000
            
            
            10,000School
                financing agreements, maturing September 1, 2008, collateralized by
                school obligations; interest rate variable based on the BMA mini-swap
                index.
            
            
            16,364
            
            
            15,572Total
            
            $
            29,581
            
            $
            31,573





As
      of
      December 31, 2005, the maturities of borrowed money are as
      follows:




*(Dollars
                In thousands)*2006
            
            $
            1,4282007
            
            
            1,4282008
            
            
            16,7252009
            
            
            -2010
            
            
            -Thereafter
            
            
            10,000$
            29,581







F-32


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





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,
      2005, 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 $16,364,000 and $14,783,000 at December 31, 2005
      and
      2004, respectively, in tax-exempt financing it originated to charter schools
      into a grantor trust (“Trust”). The partnership trust expired September 30, 2005
      and was replaced with a new partnership trust at that time which expires
      September 1, 2008. Both Trust’s issued Class “A” Certificates and Class “B”
Certificates, with the Class “A” Certificates being sold to various third party
      investors under a private placement at a price of par.





The
“A”
      Certificates under the grantor trust are 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, 2005 and 2004 was 3.21% and 2.20%, respectively.
      The interest that the Company receives through its ownership of the “B”
Certificates is tax-exempt.





Although
      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 $5,499,000 and $7,355,000 at December 31, 2005 and 2004,
      respectively.





**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**





F-33


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





The
      Company has sponsored seven 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, Matrix Bancorp Capital Trust
      VI and Matrix Bancorp Capital Trust VIII, 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.





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:


December 31,2005
            
            2004*(Dollars
                in thousands)***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
            
            $
            5,156
            
            $
            13,351Junior
                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
            
            
            12,400Junior
                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
            
            
            15,464Junior
                subordinated debentures owed to Matrix Bancorp Capital Trust IV,
                six-month
                LIBOR plus 3.75% (8.46% at December 31, 2005) junior subordinated
                debentures payable semi-annually, unsecured and maturing December
                8,
                2031
            
            
            5,155
            
            
            5,155Junior
                subordinated debentures owed to Matrix Bancorp Capital Trust V, six-month
                LIBOR plus 3.625% (8.335% at December 31, 2005) junior subordinated
                debentures payable semi-annually, unsecured and maturing July 25,
                2032
            
            
            5,155
            
            
            5,155Junior
                subordinated debentures owed to Matrix Bancorp Capital Trust VI,
                interest
                fixed at 6.425% through October 2009, then three-month LIBOR plus
                2.50%,
                junior subordinated debentures payable semi-annually, unsecured and
                maturing October 18, 2034
            
            
            10,310
            
            
            10,310Junior
                subordinated debentures owed to Matrix Bancorp Capital Trust VIII,
                interest fixed at 5.86% through July 2010, then three-month LIBOR
                plus
                1.69%, junior subordinated debentures payable semi-annually, unsecured
                and
                maturing July 7, 2035
            
            
            7,732
            
            
            -Total
            
            $
            61,372
            
            $
            61,835





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, and redeemed $8,195,000 in trust preferred
      and
      common securities on July 20, 2005.




F-34


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





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 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-35


**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.





On
      June
      30, 2005, Matrix Bancorp Capital Trust VIII (“Trust VIII”), a Delaware business
      trust formed by the Company, completed the sale of $7,500,000 of fixed rate
      of
      5.86% through the interest payment date in July 2010, then a floating rate
      of
      three-month LIBOR plus 1.69% preferred securities. Trust VIII also issued common
      securities to the Company and used the net proceeds from the offering to
      purchase $7,732,000 in principal amount of fixed rate of 5.86% through the
      interest payment date in July 2010, then a floating rate of three-month LIBOR
      plus 1.69% junior subordinated debentures of the Company due July 7, 2035.
      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 VIII 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 VIII. 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 7, 2010, 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, 2005.




**15.
      FHLBank Borrowings**





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. Prior to Matrix Bank’s change of domicile in 2002, advances
      were obtained from FHLBank of Dallas. Certain long-term advances that existed
      at
      that time with FHLBank of Dallas are still outstanding under their original
      terms.


F-36
 Matrix
        Bancorp, Inc. and
        Subsidiaries
  **Notes
        to Consolidated Financial Statements (continued)**





The
      balances of FHLBank borrowings are as follows:




December 31,2005
            
            2004*(Dollars
                in thousands)*FHLBank
                of Topeka borrowings
            
            $
            508,000
            
            $
            359,000FHLBank
                of Dallas borrowings
            
            
            107,028
            
            
            147,118$
            615,028
            
            $
            506,118





Advances
      of $286,000,000 and $176,000,000 at December 31, 2005 and 2004, 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, 2005, the interest rates on the CA and SOA borrowings
      ranged from 2.90% to 5.63%, and their possible call dates varied from
      January 11, 2006 to August 23, 2007. Advances of $20,000,000 and
      $40,000,000 at December 31, 2005 and 2004, respectively, were borrowed under
      fixed rate advance agreements with FHLBank. These fixed borrowings have a term
      of one to four-years, carry interest rates from 3.28% to 3.92% and mature
      November 9, 2006 to May 2, 2008. Community investment advances of $1,028,000
      and
      $1,118,000 at December 31, 2005 and 2004, respectively, were borrowed under
      a
      fixed term and rate. At December 31, 2005, the advances are at a rate of 5.84%
      and mature June 2, 2014. All advances are secured by first lien mortgage
      loans, investment securities and SBA pooled securities of Matrix Bank and all
      of
      its FHLBank stock. Advances of $308,000,000 and $289,000,000 at December 31,
      2005 and 2004, respectively, were borrowed under weekly or overnight borrowings
      with the FHLBank.





As
      of
      December 31, 2005, the maturities of FHLBank borrowings are as
      follows:




*(Dollars
                In thousands)*2006
            
            $
            574,0002007
            
            
            30,0002008
            
            
            10,0002009
            
            
            -2010
            
            
            -Thereafter
            
            
            1,028$
            615,028




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, 2005, first lien mortgages of $167,554,000 and
      securities of $9,273,000 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, 2005, first lien mortgages of $647,292,000
      were pledged for the FHLBank of Topeka advances. At December 31, 2005, mortgage
      backed and SBA pooled securities in the custody of FHLBank of Topeka with a
      balance of $471,353,000 were also pledged for advances. As of December 31,
      2005,
      Matrix Bank had available unused borrowings from the FHLBank of Topeka for
      advances of approximately $282,482,000.




F-37


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





**16.
      Income Taxes**





The
      income tax (benefit) provision consists of the following:


Years
                ended December 31,2005
            
            2004
            
            2003*(Dollars
                in thousands)*Current:Federal
            
            $
            (1,538
            )
            $
            10,819
            
            $
            2,586State
            
            
            (177
            )
            
            1,708
            
            
            366Deferred:Federal
            
            
            (670
            )
            
            (1,810
            )
            
            (2,941
            )State
            
            
            (62
            )
            
            (269
            )
            
            (437
            )(Benefit)
                provision
            
            $
            (2,447
            )
            $
            10,448
            
            $
            (426
            )





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




Years
                ended December 31,2005
            
            2004
            
            2003*(Dollars
                in thousands)*Expected
                income tax (benefit) provision
            
            $
            (302
            )
            $
            11,320
            
            $
            646State
                income tax (benefit) provision, netof
                federal benefit
            
            
            (29
            )
            
            1,682
            
            
            100Tax-exempt
                interest income
            
            
            (1,030
            )
            
            (1,345
            )
            
            (1,447
            )New
                Market Tax Credits
            
            
            (729
            )
            
            (378
            )
            
            -Utilization
                of State net operating losscarry-forwards
            
            
            (140
            )
            
            (509
            )
            
            -Other
            
            
            (217
            )
            
            (322
            )
            
            275(Benefit)
                provision for income taxes
            
            $
            (2,447
            )
            $
            10,448
            
            $
            (426
            )





The
      actual tax (benefit) provision differs from the expected tax expense (computed
      by applying the applicable United States Federal corporate tax rate of 34%
      and
      the composite state tax rates, which range from 4.5% to 8.0%) to the income
      before taxes for the years ended 2005, 2004 and 2003. 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 funded qualifying loans and the Company will
      receive Federal income tax credits that will be recognized over seven years
      with
      2004 being the first year for this allocation. In 2004, the Company received
      an
      additional $50,000,000 award of new market tax credits. In the fourth quarter
      of
      2005, we utilized $11,000,000 of this award. An additional $14,000,000 of the
      award was allocated to unaffiliated third party investors. The tax credit
      recognized under the allocations was $729,000 and $378,000 for the years ended
      December 31, 2005 and 2004, respectively. The Company is reviewing options
      related to the $25,000,000 remaining allocation to determine the best method
      for
      utilization.




F-38


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





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





December 31,2005
            
            2004*(Dollars
                in thousands)*Deferred
                tax assets:Allowance
                for loan and valuation losses
            
            $
            5,210
            
            $
            6,326Deferred
                fees
            
            
            2,211
            
            
            1,547State
                operating loss carry-forwards
            
            
            653
            
            
            7932005
                operating loss carry-forward
            
            
            1,059
            
            
            -Other
            
            
            285
            
            
            974Subtotal
            
            
            9,418
            
            
            9,640Valuation
                allowances
            
            
            (653
            )
            
            (793
            )Total
                deferred tax assets
            
            
            8,765
            
            
            8,847Deferred
                tax liabilities:Mortgage
                servicing rights
            
            $
            (3,878
            )
            $
            (3,709
            )Gain
                on sale of building
            
            
            (1,187
            )
            
            (1,283
            )Installment
                gain on sale of interest in subsidiary
            
            
            (952
            )
            
            (1,809
            )Other
            
            
            (2,496
            )
            
            (2,526
            )Total
                deferred tax liabilities
            
            
            (8,513
            )
            
            (9,327
            )Net
                deferred tax asset (liability)
            
            $
            252
            
            $
            (480
            )





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 carry-forwards 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,
      2005
      or 2004. 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 asset at December 31, 2005 is recorded in the accompanying
      consolidated balance sheets in income taxes receivable and deferred income
      tax
      asset. The net deferred tax liability at December 31, 2004 is recorded in the
      accompanying consolidated balance sheets in income taxes payable and deferred
      income tax liability. The current and other income tax receivable of $3,444,000
      as of December 31, 2005 is recorded in income taxes receivable and deferred
      income tax asset, and the current and other income tax payable of $1,827,000
      as
      of December 31, 2004 is recorded in income taxes payable and deferred income
      tax
      liability.







F-39


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





**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 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, 2005 and 2004, that Matrix Bank met all applicable
      capital adequacy requirements.





As
      of
      December 31, 2005, 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.





Actual
            
            For
                Capital
              Adequacy
                Purposes
            
            To
                Be Well Capitalized Under Prompt Corrective Action
                ProvisionsAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio*(Dollars
                in thousands)*As
                of December 31, 2005Total
                Capital
              (to
                Risk Weighted Assets)
            
            $
            131,018
            
            
            14.3
            %
            $
            73,098
            
            
            8.0
            %
            $
            91,373
            
            
            10.0
            %Core
                Capital
              (to
                Adjusted Tangible Assets)
            
            
            127,053
            
            
            6.3
            
            
            80,987
            
            
            4.0
            
            
            101,234
            
            
            5.0Tier
                I Capital
              (to
                Risk Weighted Assets)
            
            
            127,053
            
            
            13.8
            
            
            N/A
            
            
            N/A
            
            
            54,824
            
            
            6.0As
                of December 31, 2004Total
                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
            
            
            5.0Tier
                I Capital
              (to
                Risk Weighted Assets)
            
            
            115,076
            
            
            12.2
            
            
            N/A
            
            
            N/A
            
            
            56,592
            
            
            6.0







F-40


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





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 $2,689,000 and $24,111,000
      at December 31, 2005 and 2004, 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 $1,328,000 at December 31, 2005 and
      $1,699,000 at December 31, 2004. At December 31, 2005 and 2004, 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, 2005, First Matrix had net capital of
      $1,334,000, which was $1,327,000 in excess of its required net capital of
      $7,000. First Matrix’s aggregate indebtedness to net capital ratio was 0.07 to
      1.





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,
      2005,
      Sterling was in compliance with capital requirements under Texas law.





**18.
      Shareholders’ Equity**





*Stock
      Option Plan*





Through
      December 31, 2005, 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 2006 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.




F-41


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


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 and income per share is required by SFAS 123
      and SFAS 148 and is included in Note 2. The fair value for these options for
      2005, 2004 and 2003 was estimated at the date of grant using a Black-Scholes
      option pricing model with the following weighted-average assumptions for 2005,
      2004 and 2003, respectively: risk-free interest rate of 4.3%, 4.2% and 4.2%;
      a
      dividend yield of zero percent; volatility factors of the expected market price
      of the Company’s common stock of 0.24, 0.46 and 0.49; 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:





Years
                ended December 31,2005
            
            2004
            
            2003Options
            
            Weighted
              Average
              Exercise
              Price
            
            Options
            
            Weighted
              Average
              Exercise
              Price
            
            Options
            
            Weighted
              Average
              Exercise
              PriceOutstanding,
                beginning of year
            
            
            440,550
            
            $
            10.94
            
            
            609,750
            
            $
            10.10
            
            
            678,125
            
            $
            10.11Granted
            
            
            53,000
            
            
            12.87
            
            
            65,000
            
            
            10.03
            
            
            35,000
            
            
            9.29Exercised
            
            
            -
            
            
            -
            
            
            (81,950
            )
            
            5.25
            
            
            (9,000
            )
            
            9.00Forfeited
                or cancelled
            
            
            (491,550
            )
            
            11.08
            
            
            (152,250
            )
            
            10.25
            
            
            (94,375
            )
            
            10.07Outstanding,
                end of year
            
            
            2,000
            
            $
            26.50
            
            
            440,550
            
            
            10.94
            
            
            609,750
            
            
            10.10Exercisable
                end of year
            
            
            2,000
            
            $
            26.50
            
            
            312,050
            
            $
            11.42
            
            
            436,900
            
            $
            10.24Weighted
                average fair value of options granted during the year
            
            $
            4.25
            
            
            
            
            $
            4.96
            
            
            
            
            $
            2.72







F-42


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





Due
      to
      the buy-out of outstanding options concurrent with the private placement
      transaction discussed in Note 1 above, there are only 2,000 options remaining
      outstanding at December 31, 2005 which were not included in the buy-out as
      the options exercise price exceed the price of stock offered in the private
      placement. The 2,000 shares have an exercise price of $26.50 per share, and
      will
      expire on January 9, 2006.





Under
      the
      new business strategy discussed in Note 1 above, the Board of Directors
      anticipates issuing options under the stock-based employee compensation plan
      beginning in January 2006. Those options will be accounted for under the
      provisions of SFAS 123(R).





*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, 2005, there were 39,947 ESPP Shares available for future issuance. The
      Purchase Plan was 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 is
      currently re-evaluating the Purchase Plan and is considering re-implementing
      the
      plan during 2006 or 2007.





**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, 2005 are approximately as follows:





*(Dollars
                in thousands)*2006
            
            $
            9512007
            
            
            5932008
            
            
            4412009
            
            
            4002010
            
            
            400Thereafter
            
            
            350$
            3,135





Total
      rent expense aggregated approximately $736,000, $1,134,000 and $1,050,000 for
      the years ended December 31, 2005, 2004 and 2003, 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, 2005 are approximately:




F-43


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





*(Dollars
                in thousands)*2006
            
            $
            1,9022007
            
            
            1,4322008
            
            
            5342009
            
            
            2262010
            
            
            66Thereafter
            
            
            -$
            4,160





Included
      in the expected future office rents are the following amounts under an operating
      lease with MGCH of $219,000 and $182,000 for 2006 and 2007, respectively.





Total
      rental income for the years ended December 31, 2005, 2004 and 2003 aggregated
      approximately $2,105,000, $2,150,000 and $2,050,000, respectively.





*Off-Balance
      Sheet Risk and Concentration of Commitments*





A
      summary
      of the contractual amount of significant commitments follows:


December 31,2005
            
            2004*(Dollars
                in thousands)*Commitments
                to extend credit:Loans
                secured by mortgages
            
            $
            49,732
            
            $
            32,499Construction
                loans
            
            
            48,860
            
            
            37,522Commercial
                lines of credit
            
            
            854
            
            
            337Commercial
                loans
            
            
            1,569
            
            
            2,468Consumer
                loans
            
            
            278
            
            
            323Standby
                letters of credit
            
            
            429
            
            
            3,078Commitments
                to purchase single family mortgage loans
            
            
            -
            
            
            60,120Commitments
                to purchase USDA and SBA loans
            
            
            39,660
            
            
            37,905Commitments
                to sell USDA and SBA loans and SBA securities
            
            
            -
            
            
            16,042




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.




F-44


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





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.





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
      generally 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.





*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 or Matrix Financial 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 and Matrix
      Financial generally repurchase or provide indemnification on certain loans,
      as
      appropriate.





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, 2005, 2004 and 2003 were $2,019,000, $14,337,000
      and $30,565,000, respectively. Loans indemnified that remain outstanding at
      December 31, 2005 totaled $13,651,000, of which $5,007,000 are guaranteed
      as to principal by FHA. Losses charged against the liability for estimated
      losses on repurchase and indemnification were $2,140,000, $3,660,000, and
      $1,915,000 for 2005, 2004 and 2003, respectively. At December 31, 2005 and
      2004
      the liability for estimated losses on repurchase and indemnification was
      $2,365,000 and $2,505,000, respectively, and was included in other liabilities
      on the consolidated balance sheets.


F-45


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





*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, 2005 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.





Matrix
      Bancorp, The Vintage Group, Inc., Vintage Delaware Holdings, Inc., Matrix Bank,
      and Guy A. Gibson, currently Chairman of the Board and formerly President and
      CEO of Matrix Bancorp, Richard V. Schmitz, formerly the Co-Chief Executive
      Officer and Chairman of the Board of Matrix Bancorp, and D. Mark Spencer,
      formerly the President, Co-Chief Executive Officer and a director of Matrix
      Bancorp, were 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 (“Adderley II”), seeking to impose joint and several
      liability on these defendants for the judgment against Sterling Trust in
      Roderick Adderley, et al. v. Advance Financial Services, Inc., et al. (“Adderley
      I”). This case has settled and is now closed. See “--Sterling Trust” below.





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.”





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 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. In the fourth quarter of 2005, Matrix Bank agreed to settle its claims
      against State Bank in return for payment by State Bank to Matrix Bank of
      $475,000, and this adversary proceeding is now closed with respect to Matrix
      Bank.




F-46


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





Sterling
      Trust was 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. As previously
      disclosed, on December 22, 2005, Sterling Trust entered into a Final Compromise
      Settlement Agreement and Release in connection with Adderley I. Under the
      settlement agreement, Sterling Trust paid an aggregate of $3,150,000 to the
      plaintiffs in final settlement of all of the plaintiffs claims against all
      of
      the defendants in the Adderley I action and the related action described below,
      including a full release from each plaintiff in favor of each defendant in
      both
      actions. A related action, Adderley II, had been abated by agreement of the
      parties pending final outcome of the Adderley I case, and was also dismissed
      pursuant to the settlement agreement. The Agreement was also made for the
      benefit of Matrix Bancorp, Inc. and Matrix Capital Bank, each of which is a
      signatory to the Agreement and each of which had been named a defendant in
      the
      related action. Although not signatories to the Agreement, the Agreement was
      also made for the benefit of The Vintage Group, Inc. and Vintage Delaware
      Holdings, Inc., two subsidiaries named as defendants in the related action;
      and
      Guy A. Gibson, current Chairman of the Board of Matrix Bancorp and former
      President and CEO of Matrix Bancorp, D. Mark Spencer, former President, Co-CEO
      and director of Matrix Bancorp, and Richard V. Schmitz, former President, Co-CEO
      and director of Matrix Bancorp, individuals named as defendants in the related
      action.





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 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 the fourth quarter of 2005, Sterling Trust was
      granted summary judgment as to all claims against it by the plaintiffs. Once
      the
      summary judgment order is entered by the court, the plaintiffs will have a
      certain number of days to appeal the decision. There can be no assurances that
      such decision in favor of Sterling Trust will not be appealed by the plaintiffs
      or, if so appealed, that the decision in favor of Sterling Trust will not be
      overturned. In the event such decision in favor of Sterling Trust were
      overturned by the appellate courts, the Company continues to believe it has
      meritorious defenses and will continue to defend 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.




F-47


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**








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. In January 2006, Plaintiff withdrew her Motion for Class
      Certification, but has indicated she will pursue her claim individually.
      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.





*Related
      Party Transactions*





Associated
      with the private placement and tender offer discussed in Note 1, the Company
      paid a total of $1,859,000 to G2 Holding Corp. for recruitment fees and expense
      reimbursements, which were directly charged against the proceeds raised from
      the
      private placement and tender offer. Guy A. Gibson, the Chairman of Matrix
      Bancorp, Inc., is the Chairman of G2 Holding Corp., and Michael J. McCloskey,
      Chief Operating Officer of Matrix Bancorp, Inc., was the Executive Vice
      President of G2 Holding Corp prior to accepting his position with Matrix
      Bancorp, Inc.. In addition, associated with the private placement, the Company
      paid a $300,000 financial advisory services fee to Milestone Advisors, LLC,
      an
      affiliate of Milestone Merchant Partners, LLC. Michael J. McCloskey is a
      managing director of Milestone Merchant Partners, LLC.





In
      June
      of 2002, the Company accepted the resignation of Guy A. Gibson as the President
      and Chief Executive Officer of the Company, until Mr. Gibson returned to the
      Company as Chairman of the Board as noted above. Mr. Gibson served on the Board
      of Directors of the Company and provided certain consulting services for the
      Company from June 2002 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 income.





**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 $14,000 in 2005. 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 $427,000, $507,000 and $643,000
      during the years ended December 31, 2005 2004 and 2003, respectively, which
      and
      was recorded in compensation and employee benefits expense in the consolidated
      statements of income.





**21.
      Fair Value of Financial Instruments**





Fair
      value estimates are made as of December 31, for the periods presented below,
      are
      based on the characteristics of the financial instruments and relevant market
      information. Where available, quoted market prices are used. In other cases,
      fair values are based on estimates using discounted cash flow models or other
      valuation techniques. These techniques are significantly affected by the
      assumptions used, including discount rates, estimates of future cash flows,
      and
      spreads to other financial instruments (i.e. treasury securities). As such,
      the
      derived fair value estimates may not be realizable in an immediate sale of
      the
      instruments. The carrying amounts and estimated fair value of financial
      instruments are as follows:




F-48


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





December 31,2005
            
            2004Carrying
              Amount
            
            Estimated
                Fair
              Value
            
            Carrying
              Amount
            
            Estimated
                Fair
              Value*(Dollars
                in thousands)*Financial
                assets:Cash
                and cash equivalents
            
            $
            34,232
            
            $
            34,232
            
            $
            42,869
            
            $
            42,869Investment
                securities - available for sale
            
            
            14,462
            
            
            14,462
            
            
            118,437
            
            
            118,437Investment
                securities - held to maturity
            
            
            421,010
            
            
            416,919
            
            
            71,555
            
            
            71,415Investment
                securities - trading
            
            
            104,722
            
            
            104,722
            
            
            126,375
            
            
            126,375Loans
                held for sale, net
            
            
            927,442
            
            
            928,255
            
            
            989,822
            
            
            996,016Loans
                held for investment, net
            
            
            425,943
            
            
            425,561
            
            
            379,717
            
            
            379,456FHLBank
                stock
            
            
            34,002
            
            
            34,002
            
            
            33,481
            
            
            33,481Derivative
                assets
            
            
            198
            
            
            198
            
            
            221
            
            
            221Financial
                liabilities:Deposits
            
            $
            1,124,044
            
            $
            1,123,190
            
            $
            1,119,159
            
            $
            1,118,488Custodial
                escrow balances
            
            
            49,385
            
            
            49,385
            
            
            51,598
            
            
            51,598FHLBank
                borrowings
            
            
            615,028
            
            
            603,389
            
            
            506,118
            
            
            509,036Borrowed
                money and junior subordinated debentures
            
            
            90,953
            
            
            91,802
            
            
            93,408
            
            
            94,494Derivative
                liabilities
            
            
            -
            
            
            -
            
            
            -
            
            
            -





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). 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, 2005 and 2004, and is not considered in the fair
      value amount.





F-49


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





**22.
      Parent Company Condensed Financial Information**





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





December 31,2005
            
            2004*(Dollars
                in thousands)*Condensed
                Balance SheetsAssets:Cash
            
            $
            93,827
            
            $
            12,124Other
                receivables
            
            
            127
            
            
            197Premises
                and equipment, net
            
            
            425
            
            
            583Other
                assets
            
            
            4,536
            
            
            3,768Investment
                in and advances to subsidiaries
            
            
            160,450
            
            
            168,906Total
                assets
            
            $
            259,365
            
            $
            185,578Liabilities
                and shareholders’ equity:Borrowed
                money and junior subordinated debentures owed to unconsolidated subsidiary
                trusts
            
            $
            74,589
            
            $
            76,123Other
                liabilities
            
            
            4,048
            
            
            17,140Total
                liabilities
            
            
            78,637
            
            
            93,263Shareholders’
                equity:Common
                stock
            
            
            1
            
            
            1Additional
                paid-in capital
            
            
            108,395
            
            
            21,432Retained
                earnings
            
            
            72,314
            
            
            70,756Accumulated
                other comprehensive income
            
            
            18
            
            
            126Total
                shareholders’ equity
            
            
            180,728
            
            
            92,315Total
                liabilities and shareholders’ equity
            
            $
            259,365
            
            $
            185,578





(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.





Years
                ended December 31,2005
            
            2004
            
            2003Condensed
                Statements of Income
            
            *(Dollars
                in thousands)*Income
                (loss):Interest
                income
            
            $
            232
            
            $
            41
            
            $
            52Other
            
            
            (250
            )
            
            (515
            )
            
            46Total
                (loss) income
            
            
            (18
            )
            
            (474
            )
            
            98


Expenses:Compensation
                and employee benefits
            
            
            11,372
            
            
            4,255
            
            
            4,468Occupancy
                and equipment
            
            
            599
            
            
            606
            
            
            745Interest
                on borrowed money
            
            
            6,151
            
            
            7,526
            
            
            7,628Professional
                fees
            
            
            441
            
            
            367
            
            
            947Other
                general and administrative
            
            
            (537
            )
            
            (314
            )
            
            731Total
                expenses
            
            
            18,026
            
            
            12,440
            
            
            14,519Loss
                before income taxes and equityincome
                of subsidiaries
            
            
            (18,044
            )
            
            (12,914
            )
            
            (14,421
            )Income
                taxes (b)
            
            
            -
            
            
            -
            
            
            -Loss
                before equity income of subsidiaries
            
            
            (18,044
            )
            
            (12,914
            )
            
            (14,421
            )Equity
                income of subsidiaries
            
            
            19,602
            
            
            34,811
            
            
            16,746Net
                income
            
            $
            1,558
            
            $
            21,897
            
            $
            2,325




(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.


F-50


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





Years
                ended December 31,2005
            
            2004
            
            2003Condensed
                Statements of Cash Flows
            
            *(Dollars
                in thousands)*Operating
                activities:Net
                income
            
            $
            1,558
            
            $
            21,897
            
            $
            2,325Adjustments
                to reconcile net income to net cash (used in) provided by operating
                activities:Equity
                income of subsidiaries
            
            
            (19,602
            )
            
            (34,811
            )
            
            (16,746
            )Dividends
                from subsidiaries
            
            
            2,066
            
            
            14,249
            
            
            6,593Depreciation
                and amortization
            
            
            770
            
            
            432
            
            
            566Unrealized
                (loss) gain on securities available for sale
            
            
            (108
            )
            
            (83
            )
            
            183Changes
                in assets and liabilities:(Decrease)
                increase in other liabilities
            
            
            (959
            )
            
            2,622
            
            
            2,284(Increase)
                decrease in other receivablesand
                other assets
            
            
            (885
            )
            
            1,426
            
            
            2,527Net
                cash (used in) provided by operating activities
            
            
            (17,160
            )
            
            5,732
            
            
            (2,268
            )Investing
                activities:Purchases
                of premises and equipment
            
            
            (193
            )
            
            (299
            )
            
            (193
            )Return
                on investment in and advances to subsidiaries, net
            
            
            13,859
            
            
            8,802
            
            
            5,987Net
                cash provided by investing activities
            
            
            13,666
            
            
            8,503
            
            
            5,794Financing
                activities:Repayments
                of notes payable and revolving line of credit
            
            
            (13,071
            )
            
            (11,330
            )
            
            (11,778
            )Proceeds
                from notes payable and revolving line of credit
            
            
            12,000
            
            
            9,760
            
            
            10,350Repayments
                from capital securities of subsidiary trusts, net
            
            
            (695
            )
            
            (4,550
            )
            
            -Proceeds
                from issuance of common stock, net
            
            
            86,963
            
            
            817
            
            
            240Net
                cash provided by (used in) financing activities
            
            
            85,197
            
            
            (5,303
            )
            
            (1,188
            )Increase
                in cash
            
            
            81,703
            
            
            8,932
            
            
            2,338Cash
                at beginning of year
            
            
            12,124
            
            
            3,192
            
            
            854Cash
                at end of year
            
            $
            93,827
            
            $
            12,124
            
            $
            3,192






F-51


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




Parent
      Company Debt is set forth below:


December
                31,2005
            
            2004*(Dollars
                in thousands)*Subordinated
                debt
            
            $
            10,000
            
            $
            10,000Bank
                stock loan
            
            
            3,217
            
            
            4,288Total
                term notes
            
            
            13,217
            
            
            14,288Junior
                subordinated debentures owed to unconsolidated subsidiary
                trusts
            
            
            61,372
            
            
            61,835Total
                debt
            
            $
            74,589
            
            $
            76,123








As
      of
      December 31, 2005, the maturities of debt are as follows:


*(Dollars
                in thousands)*2006
            
            $
            1,4282007
            
            
            1,4282008
            
            
            3612009
            
            
            -2010
            
            
            -Thereafter
            
            
            71,372$
            74,589








F-52


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





**23.
      Quarterly Financial Data (Unaudited)**





Fourth
              Quarter
            
            Third
              Quarter
            
            Second
              Quarter
            
            First
              Quarter*(Dollars
                in thousands, except share data)***2005**Operations:Net
                interest income before provision for loan and valuation
                losses
            
            $
            12,342
            
            $
            11,524
            
            $
            11,368
            
            $
            11,489Provision
                for loan and valuation losses
            
            
            430
            
            
            50
            
            
            352
            
            
            833Noninterest
                income
            
            
            8,288
            
            
            9,967
            
            
            8,601
            
            
            11,226Noninterest
                expense
            
            
            31,547
            
            
            17,404
            
            
            17,414
            
            
            17,664(Loss)
                income from continuing operations before income taxes
            
            
            (11,347
            )
            
            4,037
            
            
            2,203
            
            
            4,218Income
                tax (benefit) provision
            
            
            (5,340
            )
            
            1,102
            
            
            493
            
            
            1,298Net
                (loss) income
            
            $
            (6,007
            )
            $
            2,935
            
            $
            1,710
            
            $
            2,920Net
                (loss) income per share data:Basic
            
            $
            (0.76
            )
            $
            0.44
            
            $
            0.26
            
            $
            0.44Diluted
            
            $
            (0.76
            )
            $
            0.44
            
            $
            0.26
            
            $
            0.44Balance
                Sheet:Total
                assets
            
            $
            2,079,388
            
            $
            2,027,955
            
            $
            1,974,978
            
            $
            1,865,243Total
                loans, net
            
            
            1,353,385
            
            
            1,370,296
            
            
            1,422,619
            
            
            1,344,963Shareholders’
                equity
            
            
            180,728
            
            
            99,760
            
            
            97,192
            
            
            94,597**2004**Operations:Net
                interest income before provision for loan and valuation
                losses
            
            $
            11,406
            
            $
            10,586
            
            $
            10,285
            
            $
            10,350Provision
                for loan and valuation losses
            
            
            981
            
            
            543
            
            
            445
            
            
            1,300Noninterest
                income
            
            
            26,202
            
            
            26,333
            
            
            18,482
            
            
            17,410Noninterest
                expense
            
            
            23,067
            
            
            24,993
            
            
            22,472
            
            
            25,134Income
                from continuing operations before income taxes
            
            
            13,560
            
            
            11,383
            
            
            5,850
            
            
            1,326Income
                tax benefit
            
            
            3,941
            
            
            4,271
            
            
            1,988
            
            
            159Income
                from continuing operations
            
            
            9,619
            
            
            7,112
            
            
            3,862
            
            
            1,167Discontinued
                operations:Income
                from discontinued operations, net of income taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            137Net
                income
            
            $
            9,619
            
            $
            7,112
            
            $
            3,862
            
            $
            1,304Net
                income per share data:Basic
            
            $
            1.48
            
            $
            1.09
            
            $
            0.59
            
            $
            0.20Diluted
            
            $
            1.45
            
            $
            1.07
            
            $
            0.58
            
            $
            0.20Balance
                Sheet:Total
                assets
            
            $
            1,888,860
            
            $
            1,877,336
            
            $
            1,736,805
            
            $
            1,753,823Total
                loans, net
            
            
            1,369,539
            
            
            1,421,131
            
            
            1,307,214
            
            
            1,281,280Shareholders’
                equity
            
            
            92,315
            
            
            82,058
            
            
            74,197
            
            
            71,269







F-53


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**





**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 trust 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 and fixed income activities, and SBA loans and securities.
      The trust services subsidiary provides services for only self-directed IRA,
      pension, profit sharing accounts and escrow arrangements. The remaining
      subsidiaries are included in the “all other” category for purposes of Statement
      No. 131 disclosures and consist primarily of the Company’s school services
      subsidiary, real estate disposition services subsidiary 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:


Traditional
                Banking
            
            Mortgage
                Banking
            
            Servicing
                Brokerage and Consulting
            
            Trust
              Services
            
            All
                Others
            
            Total*(Dollars
                in thousands)***2005**Revenues
                from external customers:Interest
                income
            
            $
            84,084
            
            $
            1,238
            
            $
            29
            
            $
            -
            
            $
            4,740
            
            $
            90,091Noninterest
                income
            
            
            6,756
            
            
            9,841
            
            
            9,521
            
            
            6,147
            
            
            5,817
            
            
            38,082Intersegment
                revenues
            
            
            1,395
            
            
            1,773
            
            
            2,238
            
            
            1,451
            
            
            (208
            )
            
            6,649Interest
                expense
            
            
            36,187
            
            
            25
            
            
            -
            
            
            -
            
            
            7,156
            
            
            43,368Depreciation/amortization
            
            
            583
            
            
            7,695
            
            
            92
            
            
            239
            
            
            2,023
            
            
            10,632Segment
                income (loss) from continuing operations before income
                taxes
            
            
            20,082
            
            
            (5,017
            )
            
            2,272
            
            
            (2,690
            )
            
            (15,536
            )
            
            (889
            )Segment
                assets (a)
            
            
            2,066,720
            
            
            50,344
            
            
            7,956
            
            
            3,994
            
            
            292,034
            
            
            2,421,048




F-54


**Matrix
      Bancorp, Inc. and Subsidiaries**





**Notes
      to Consolidated Financial Statements (continued)**




Traditional
                Banking
            
            
            Mortgage
                Banking
            
            
            Servicing
              Brokerage and Consulting
            
            
            Trust
              Services
            
            
            All
                Others
            
            
            Total*(Dollars
                in thousands)***2004**Revenues
                from external customers:Interest
                income
            
            $
            66,433
            
            $
            3,479
            
            $
            135
            
            $
            (3
            )
            $
            4,382
            
            $
            74,426Noninterest
                income
            
            
            7,639
            
            
            28,915
            
            
            10,419
            
            
            5,393
            
            
            36,061
            
            
            88,427Intersegment
                revenues
            
            
            2,510
            
            
            1,038
            
            
            2,474
            
            
            1,241
            
            
            658
            
            
            7,921Interest
                expense
            
            
            23,105
            
            
            2,567
            
            
            -
            
            
            -
            
            
            6,127
            
            
            31,799Depreciation/amortization
            
            
            677
            
            
            16,449
            
            
            112
            
            
            205
            
            
            2,465
            
            
            19,908Segment
                income (loss) from continuing operations before income
                taxes
            
            
            33,381
            
            
            (15,925
            )
            
            2,425
            
            
            (89
            )
            
            12,327
            
            
            32,119Segment
                assets (a)
            
            
            1,850,868
            
            
            73,610
            
            
            7,791
            
            
            3,396
            
            
            212,443
            
            
            2,148,108**2003**Revenues
                from external customers:Interest
                income
            
            $
            62,286
            
            $
            5,132
            
            $
            285
            
            $
            -
            
            $
            6,004
            
            $
            73,707Noninterest
                income
            
            
            8,345
            
            
            32,538
            
            
            10,707
            
            
            5,770
            
            
            11,969
            
            
            69,329Intersegment
                revenues
            
            
            3,059
            
            
            3,236
            
            
            2,028
            
            
            1,096
            
            
            729
            
            
            10,148Interest
                expense
            
            
            22,773
            
            
            3,082
            
            
            47
            
            
            -
            
            
            6,097
            
            
            31,999Depreciation/amortization
            
            
            702
            
            
            32,758
            
            
            123
            
            
            229
            
            
            2,171
            
            
            35,983Segment
                income (loss) from continuing operations before income
                taxes
            
            
            23,355
            
            
            (12,608
            )
            
            4,028
            
            
            222
            
            
            (18,569
            )
            
            (3,572
            )Segment
                assets (a)
            
            
            1,647,833
            
            
            114,743
            
            
            9,244
            
            
            3,376
            
            
            242,317
            
            
            2,017,513





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






F-55


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


2005
              
              2004
              
              2003*(Dollars
                  in thousands)*Revenues
                  for year ended December 31:Interest
                  income for reportable segments
              
              $
              85,351
              
              $
              70,044
              
              $
              67,703Noninterest
                  income for reportable segments
              
              
              32,265
              
              
              52,366
              
              
              57,360Intersegment
                  revenues for reportable segments
              
              
              6,857
              
              
              7,263
              
              
              9,419Other
                  revenues
              
              
              10,349
              
              
              41,101
              
              
              18,702Elimination
                  of intersegment revenues
              
              
              (6,649
              )
              
              (7,921
              )
              
              (10,148
              )Total
                  consolidated revenues
              
              $
              128,173
              
              $
              162,853
              
              $
              143,036(Loss)
                  income for year ended December 31:Total
                  income for reportable segments
              
              $
              14,647
              
              $
              19,792
              
              $
              14,997Other
                  (loss) income
              
              
              (16,566
              )
              
              12,817
              
              
              (17,955
              )Elimination
                  of intersegment profit (loss)
              
              
              1,030
              
              
              (490
              )
              
              (614
              )(Loss)
                  income before income taxes
              
              $
              (889
              )
              $
              32,119
              
              $
              (3,572
              )Assets
                  as of December 31:Total
                  assets for reportable segments
              
              $
              2,129,014
              
              $
              1,935,665
              
              $
              1,775,196Other
                  assets
              
              
              292,034
              
              
              212,443
              
              
              242,317Elimination
                  of intersegment receivables
              
              
              (232,535
              )
              
              (236,040
              )
              
              (282,574
              )Other
                  intersegment eliminations
              
              
              (109,125
              )
              
              (23,208
              )
              
              (11,015
              )Total
                  consolidated assets
              
              $
              2,079,388
              
              $
              1,888,860
              
              $
              1,723,924Other
                  Significant Items for the year endedDecember
                  31:Depreciation/amortization
                  expense:Segment
                  totals
              
              $
              8,609
              
              $
              17,443
              
              $
              33,812Other
                  and intersegment adjustments
              
              
              2,023
              
              
              2,465
              
              
              2,171Consolidated
                  totals
              
              $
              10,632
              
              $
              19,908
              
              $
              35,983Interest
                  expense:Segment
                  totals
              
              $
              37,114
              
              $
              25,672
              
              $
              25,902Other
                  and intersegment adjustments
              
              
              6,254
              
              
              6,127
              
              
              6,097Consolidated
                  totals
              
              $
              43,368
              
              $
              31,799
              
              $
              31,999


F-56




**INDEX
      TO EXHIBITS**





3.1
            Articles
                of Amendment to the Articles of Incorporation, filed as Exhibit 3.1
                to
                Registrant’s annual report on Form 10-K for the fiscal year ended December
                31, 2002 filed by the Registrant with the Commission.3.2
            Bylaws,
                as amended, of the Registrant, filed as Exhibit 3.2 to Registrant’s
                registration statement on Form S-1 (No. 333-10223), filed by the
                Registrant with the Commission on August 15, 1996.4.1
            Specimen
                Certificate for Common Stock of the Registrant, filed as Exhibit
                4.1 to
                Registrant’s registration statement on Form S-1 (No. 333-10223), filed by
                the Registrant with the Commission on August 15, 1996.4.2
            Amended
                and Restated 1996 Stock Option Plan, filed as Exhibit 4.2 to Registrant’s
                registration statement on Form S-1 (No. 333-10223), filed by the
                Registrant with the Commission on August 15, 1996.·4.3
            Amendment
                No. 1 to the 1996 Amended and Restated Employee Stock Option Plan
                of the
                Registrant, filed as Exhibit 4.1 to Registrant’s quarterly report on Form
                10-Q for the quarter ended September 30, 2001 filed by the Registrant
                with
                the Commission. ·4.4
            Amendment
                No. 2 to the 1996 Amended and Restated Employee Stock Option Plan
                of the
                Registrant, filed as Exhibit 4.2 to Registrant’s quarterly report on Form
                10-Q for the quarter ended September 30, 2001 filed by the Registrant
                with
                the Commission. ·4.5
            Form
                of Non-Qualified Stock Option Agreement, filed as Exhibit 99.1 to
                Registrant’s report on Form 8-K filed by the Registrant with the
                Commission on February 16, 2005.·4.6
            Form
                of Director Non-Qualified Stock Option Agreement, filed as Exhibit
                99.2 to
                Registrant’s report on Form 8-K filed by the Registrant with the
                Commission on February 16, 2005.·4.7
            Employee
                Stock Purchase Plan filed as Exhibit 4.1 to Registrant’s quarterly report
                on Form 10-Q for the quarter ended September 30, 1996 filed by the
                Registrant with the Commission.4.8
            Amendment
                No. 2 to Employee Stock Purchase Plan filed as Exhibit 4.4 to Registrant’s
                annual report on Form 10-K for the fiscal year ended December 31,
                1997,
                filed by the Registrant with the Commission.·4.9
            Indenture
                by and among the Registrant and State Street Bank and Trust Company,
                as
                trustee, relating to the 10% Junior Subordinated Debentures due 2029,
                filed as Exhibit 4.7 to Registrant’s registration statement on Form S-1
                (No. 333-79731), filed by the Registrant with the Commission on June
                1,
                1999.4.10
            Form
                of Junior Subordinated Debentures, filed as Exhibit 4.8 to Registrant’s
                registration statement on Form S-1 (No. 333-79731), filed by the
                Registrant with the Commission on June 1, 1999.4.11
            Certificate
                of Trust of Matrix Bancorp Capital Trust I, filed as Exhibit 4.9
                to
                Registrant’s registration statement on Form S-1 (No. 333-79731), filed by
                the Registrant with the Commission on June 1, 1999.4.12
            Amended
                and Restated Trust Agreement of Matrix Bancorp Capital Trust I, filed
                as
                Exhibit 4.10 to Registrant’s registration statement on Form S-1 (No.
                333-79731), filed by the Registrant with the Commission on June 1,
                1999.4.13
            Preferred
                Security Certificate for Matrix Bancorp Capital Trust I, filed as
                Exhibit
                4.11 to Registrant’s registration statement on Form S-1 (No. 333-79731),
                filed by the Registrant with the Commission on June 1,
                1999.4.14
            Preferred
                Securities Guarantee Agreement of the Company relating to the Preferred
                Securities, filed as Exhibit 4.12 to Registrant’s registration statement
                on Form S-1 (No. 333-79731), filed by the Registrant with the Commission
                on June 1, 1999.4.15
            Agreement
                as to the Expenses and Liabilities, filed as Exhibit 4.13 to Registrant’s
                registration statement on Form S-1 (No. 333-79731), filed by the
                Registrant with the Commission on June 1, 1999.4.16
            Amended
                and Restated Trust Agreement, dated May 11, 2001, between Matrix
                Bancorp,
                Inc. and Matrix Bancorp, Inc., as Trustee, filed as Exhibit 4.2 to
                Registrant’s registration statement on Form S-8 (No. 333-75000), filed by
                the Registrant with the Commission on December 12,
                2001.4.17
            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, filed as Exhibit
                10.5 to
                Registrant’s quarterly report on Form 10-Q for the quarter ended March 31,
                2001, filed by the Registrant with the Commission.4.18
            Amended
                and Restated Declaration of Trust of Matrix Bancorp Capital Trust
                II,
                dated as of March 28, 2001, filed as Exhibit 10.6 to Registrant’s
                quarterly report on Form 10-Q for the quarter ended March 31, 2001,
                filed
                by the Registrant with the Commission.4.19
            Common
                Securities Guarantee Agreement of the Registrant, dated as of March
                28,
                2001, filed as Exhibit 10.7 to Registrant’s quarterly report on Form 10-Q
                for the quarter ended March 31, 2001, filed by the Registrant with
                the
                Commission.4.20
            Capital
                Securities Guarantee Agreement of the Registrant, dated as of March
                28,
                2001, filed as Exhibit 10.8 to Registrant’s quarterly report on Form 10-Q
                for the quarter ended March 31, 2001, filed by the Registrant with
                the
                Commission.






II-1




4.21
            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, filed as Exhibit
                10.3 to
                Registrant’s quarterly report on Form 10-Q for the quarter ended June 30,
                2001, filed by the Registrant with the Commission.4.22
            Amended
                and Restated Declaration of Trust of Matrix Bancorp Capital Trust
                III,
                dated as of July 16, 2001, filed as Exhibit 10.4 to Registrant’s quarterly
                report on Form 10-Q for the quarter ended June 30, 2001, filed by
                the
                Registrant with the Commission.4.23
            Common
                Securities Subscription Agreement of the Registrant, dated as of
                July 16,
                2001, filed as Exhibit 10.5 to Registrant’s quarterly report on Form 10-Q
                for the quarter ended June 30, 2001, filed by the Registrant with
                the
                Commission.4.24
            Capital
                Securities Agreement of the Registrant, dated as of June 28, 2001,
                filed
                as Exhibit 10.6 to Registrant’s quarterly report on Form 10-Q for the
                quarter ended June 30, 2001, filed by the Registrant with the
                Commission.4.25
            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, filed as Exhibit 4.26 to Registrant’s annual report
                on Form 10-K for the fiscal year ended December 31, 2001, filed by
                the
                Registrant with the Commission.4.26
            Amended
                and Restated Declaration of Trust of Matrix Bancorp Capital Trust
                IV,
                dated as of November 28, 2001, filed as Exhibit 4.27 to Registrant’s
                annual report on Form 10-K for the fiscal year ended December 31,
                2001,
                filed by the Registrant with the Commission.4.27
            Guarantee
                Agreement of the Registrant, dated as of November 28, 2001, filed
                as
                Exhibit 4.28 to Registrant’s annual report on Form 10-K for the fiscal
                year ended December 31, 2001, filed by the Registrant with the
                Commission.4.28
            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, filed as Exhibit 4.1 to Registrant’s
                quarterly report on Form 10-Q for the quarter ended September 30,
                2002,
                filed by the Registrant with the Commission.4.29
            Amended
                and Restated Trust Agreement of Matrix Bancorp Capital Trust V, dated
                as
                of July 25, 2002, filed as Exhibit 4.2 to Registrant’s quarterly report on
                Form 10-Q for the quarter ended September 30, 2002, filed by the
                Registrant with the Commission.4.30
            Guarantee
                Agreement of Matrix Bancorp Capital Trust V, dated as of July 25,
                2002,
                filed as Exhibit 4.3 to Registrant’s quarterly report on Form 10-Q for the
                quarter ended September 30, 2002, filed by the Registrant with the
                Commission.4.31
            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, filed as Exhibit 10.3 to Registrant’s
                quarterly report on Form 10-Q for the quarter ended September 30,
                2004,
                filed by the Registrant with the Commission.4.32
            Amended
                and Restated Trust Agreement of Matrix Bancorp Capital Trust VI,
                dated as
                of August 30, 2004, filed as Exhibit 10.1 to Registrant’s quarterly report
                on Form 10-Q for the quarter ended September 30, 2004, filed by the
                Registrant with the Commission.4.33
            Guarantee
                Agreement of Matrix Bancorp Capital Trust VI, dated as of August
                30, 2004,
                filed as Exhibit 10.2 to Registrant’s quarterly report on Form 10-Q for
                the quarter ended September 30, 2004, filed by the Registrant with
                the
                Commission.4.34
            Indenture
                between the Registrant and Wells Fargo Bank, National Association,
                as
                debenture trustee, dated as of June 30, 2005, filed as Exhibit 10.1
                to
                Registrant’s quarterly report on Form 10-Q for the quarter ended June 30,
                2005, filed by the Registrant with the Commission.4.35
            Amended
                and Restated Declaration of Trust Agreement of Matrix Bancorp Capital
                Trust VIII, dated as of June 30, 2005, filed as Exhibit 10.2 to
                Registrant’s quarterly report on Form 10-Q for the quarter ended June 30,
                2005, filed by the Registrant with the Commission.4.36
            Guarantee
                Agreement of Matrix Bancorp Capital Trust VIII, dated as of June
                30, 2005,
                filed as Exhibit 10.3 to Registrant’s quarterly report on Form 10-Q for
                the quarter ended June 30, 2005, filed by the Registrant with the
                Commission.4.37
            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, filed as Exhibit 4.1 to Registrant’s report on Form
                8-K filed by the Registrant with the Commission on November 6,
                2002.






II-2




4.38
            Indenture,
                dated February 13, 2004, between Registrant and Wells Fargo Bank,
                as
                Trustee, relating to Floating Rate Subordinated Debt Security due
                2014,
                filed as Exhibit 4.32 to Registrant’s annual report on Form 10-K for the
                fiscal year ended December 31, 2003, filed by the Registrant with
                the
                Commission.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.,
                filed as Exhibit 10.30 to Registrant’s registration statement on Form S-1
                (No. 333-10223), filed by the Registrant with the Commission on August
                15,
                1996.10.2
            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. filed with Registrant’s annual report on Form 10-K
                for the fiscal year ended December 31, 2002, filed by the Registrant
                with
                the Commission.10.3
            Development
                Management Agreement, dated as of June 28, 1996, by and among Matrix
                Funding Corp. and Nicholson Enterprises, Inc., filed as Exhibit 10.31
                to
                Registrant’s registration statement on Form S-1 (No. 333-10223), filed by
                the Registrant with the Commission on August 15, 1996.10.4
            Coyote
                Creek Planned Unit Development Agreement, dated as of July 1, 1998,
                by and
                among Fort Lupton, L.L.C. and Matrix Funding Corp., filed as Exhibit
                10.12
                to Registrant’s annual report on Form 10-K for the fiscal year ended
                December 31, 1998, filed by the Registrant with the
                Commission.10.5
            Fort
                Lupton Golf Course Residential and Planned Unit Development Agreement,
                dated as of November 28, 1995, filed as Exhibit 10.36 to Registrant’s
                registration statement on Form S-1 (No. 333-10223), filed by the
                Registrant with the Commission on August 15, 1996.10.6
            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, filed as Exhibit 10.15 to Registrant’s annual report
                on Form 10-K for the fiscal year ended December 31, 2000, filed by
                the
                Registrant with the Commission.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, filed as Exhibit 10.3 to Registrant’s
                quarterly report on Form 10-Q for the quarter ended March 31, 2001,
                filed
                by the Registrant with the Commission.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, filed as Exhibit 10.2 to Registrant’s
                quarterly report on Form 10-Q for the quarter ended June 30, 2001,
                filed
                by the Registrant with the Commission.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, filed as Exhibit 10.19 to
                Registrant’s annual report on Form 10-K for the fiscal year ended December
                31, 2001, filed by the Registrant with the Commission.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, filed as Exhibit 10.2 to Registrant’s
                quarterly report on Form 10-Q for the quarter ended March 31, 2002,
                filed
                by the Registrant with the Commission.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, filed as Exhibit 10.1 to Registrant’s
                quarterly report on Form 10-Q for the quarter ended March 31, 2003,
                filed
                by the Registrant with the Commission.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, filed as Exhibit 10.1 to Registrant’s
                quarterly report on Form 10-Q for the quarter ended March 31, 2004,
                filed
                by the Registrant with the Commission.10.13
            Seventh
                Amendment to Credit Agreement, dated as of March 31, 2005, by and
                between
                Registrant, as borrower, and U.S. Bank National Association, as agent,
                and
                certain lenders, as lenders, filed as Exhibit 10.1 to Registrant’s
                quarterly report on Form 10-Q for the quarter ended March 31, 2005,
                filed
                by the Registrant with the Commission.10.14
            Lease
                dated as of September 1, 1999, by and between Matrix Financial Services
                Corporation and Suncor Development Company, filed as Exhibit 10.22
                to
                Registrant’s annual report on Form 10-K for the fiscal year ended December
                31, 2000, filed by the Registrant with the Commission.10.15
            Matrix
                Bancorp, Inc. Executive Incentive Plan, filed as Exhibit 10.27 to
                Registrant’s annual report on Form 10-K for the fiscal year ended December
                31, 2000, filed by the Registrant with the Commission.·10.16
            Matrix
                Bancorp, Inc. (f/k/a Matrix Capital Corporation) 401(k) Profit Sharing
                Plan, filed as Exhibit 10.29 to Registrant’s annual report on Form 10-K
                for the fiscal year ended December 31, 2001, filed by the Registrant
                with
                the Commission.·10.17
            Amendment
                No. 1, effective as of January 1, 1994, to the Registrant’s 401(k) Profit
                Sharing Plan, filed as Exhibit 10.30 to Registrant’s annual report on Form
                10-K for the fiscal year ended December 31, 2001, filed by the Registrant
                with the Commission.·






II-3




10.18
            Amendment
                No. 2, effective as of May 20, 1996, to the Registrant’s 401(k) Profit
                Sharing Plan, filed as Exhibit 10.31 to Registrant’s annual report on Form
                10-K for the fiscal year ended December 31, 2001, filed by the Registrant
                with the Commission.·10.19
            Amendment
                No. 3, effective as of April 1, 1997, to the Registrant’s 401(k) Profit
                Sharing Plan, filed as Exhibit 10.32 to Registrant’s annual report on Form
                10-K for the fiscal year ended December 31, 2001, filed by the Registrant
                with the Commission.·10.20
            Amendment
                No. 4, effective as of December 30, 2001, to the Registrant’s 401(k)
                Profit Sharing Plan, filed as Exhibit 10.33 to Registrant’s annual report
                on Form 10-K for the fiscal year ended December 31, 2001, filed by
                the
                Registrant with the Commission.·10.21
            Consulting
                Agreement, dated as of June 5, 2002, by and between Guy A. Gibson
                and
                Matrix Bancorp, Inc., filed as Exhibit 10.1 to Registrant’s report on Form
                8-K filed by the Registrant with the Commission on June 6,
                2002.·10.22
            Purchase
                and Assumption Agreement, dated as of February 28, 2003, by Matrix
                Financial Services Corporation, as seller, and AmPro Mortgage Corporation,
                as purchaser, filed as Exhibit 10.1 to Registrant’s report on Form 8-K
                filed by the Registrant with the Commission on March 4,
                2003.10.23
            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, filed as Exhibit 10.2 to Registrant’s quarterly report on Form
                10-Q for the quarter ended March 31, 2003, filed by the Registrant
                with
                the Commission.10.24
            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,
                filed as Exhibit 10.1 to Registrant’s quarterly report on Form 10-Q for
                the quarter ended June 30, 2003, filed by the Registrant with the
                Commission.10.25
            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, filed as Exhibit 10 to Registrant’s report on Form 8-K filed by
                the Registrant with the Commission on September 15,
                2003.10.26
            Change
                of Control Agreement, dated as of October 28, 2003 by and between
                Matrix
                Bancorp, Inc. and David W. Kloos, filed as Exhibit 10.39 to Registrant’s
                annual report on Form 10-K for the fiscal year ended December 31,
                2003,
                filed by the Registrant with the Commission.·10.27
            Change
                of Control Agreement, dated as of October 28, 2003 by and between
                Matrix
                Bancorp, Inc. and T. Allen McConnell, filed as Exhibit 10.40 to
                Registrant’s annual report on Form 10-K for the fiscal year ended December
                31, 2003, filed by the Registrant with the Commission.·10.28
            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, filed as Exhibit 10.1 to Registrant’s report on Form 8-K
                filed by the Registrant with the Commission on February 16, 2005.·10.29
            Branch
                Purchase and Deposit Assumption Agreement, dated as of January 30,
                2004 by
                and between Matrix Capital Bank and FirstBank, filed as Exhibit 10.41
                to
                Registrant’s annual report on Form 10-K for the fiscal year ended December
                31, 2003, filed by the Registrant with the Commission.10.30
            Branch
                Purchase and Deposit Assumption Agreement, dated as of July 7, 2004
                by and
                between Matrix Capital Bank and AccessBank, filed as Exhibit 10.4
                to
                Registrant’s quarterly report on Form 10-Q for the quarter ended September
                30, 2004, filed by the Registrant with the Commission.10.31
            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, filed as Exhibit 10.1 to Registrant’s report on
                Form 8-K filed by the Registrant with the Commission on September
                15,
                2004.10.32
            Operating
                Agreement of Matrix Asset Management LLC, dated as of September 10,
                2004,
                filed as Exhibit 10.5 to Registrant’s quarterly report on Form 10-Q for
                the quarter ended September 30, 2004, filed by the Registrant with
                the
                Commission.10.33
            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., filed as Exhibit 10.1 to Registrant’s report on Form 8-K
                filed by the Registrant with the Commission on December 6,
                2004.10.34
            Amendment
                No. 1 to Contribution and Sale Agreement, dated as of March 23, 2005
                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., filed as Exhibit 10.1 to Registrant’s
                report on Form 8-K filed by the Registrant with the Commission on
                March
                28, 2005.






II-4




10.35
            Amended
                and Restated Tendering Stockholders Agreement, dated as of December
                2,
                2005 by and between Matrix Bancorp, Inc. and Columbia Management
                Advisors,
                LLC, filed as Exhibit 10.1 to Registrant’s report on Form 8-K filed by the
                Registrant with the Commission on December 13, 2005.·10.36
            Amended
                and Restated Tendering Stockholders Agreement, dated as of December
                2,
                2005 by and between Matrix Bancorp, Inc. and David W. Kloos, filed
                as
                Exhibit 10.2 to Registrant’s report on Form 8-K filed by the Registrant
                with the Commission on December 13, 2005.·10.37
            Amended
                and Restated Tendering Stockholders Agreement, dated as of December
                2,
                2005 by and between Matrix Bancorp, Inc. and T. Allen McConnell,
                filed as
                Exhibit 10.3 to Registrant’s report on Form 8-K filed by the Registrant
                with the Commission on December 13, 2005.·10.38
            Amended
                and Restated Tendering Stockholders Agreement, dated as of December
                2,
                2005 by and between Matrix Bancorp, Inc. and Richard V. Schmitz,
                filed as
                Exhibit 10.4 to Registrant’s report on Form 8-K filed by the Registrant
                with the Commission on December 13, 2005.·10.39
            Amended
                and Restated Tendering Stockholders Agreement, dated as of December
                2,
                2005 by and between Matrix Bancorp, Inc. and D. Mark Spencer, filed
                as
                Exhibit 10.5 to Registrant’s report on Form 8-K filed by the Registrant
                with the Commission on December 13, 2005.·10.40
            The
                Registration Rights Agreement, dated as of December 9, 2005, by and
                between Matrix Bancorp, Inc., Friedman, Billings, Ramsey & Co., Inc.
                and the other parties thereto, filed as Exhibit 4.1 to Registrant’s report
                on Form 8-K filed by the Registrant with the Commission on December
                13,
                2005.10.41
            Final
                Compromise Settlement Agreement and Release, dated as of December
                22,
                2005, filed as Exhibit 10.1 to Registrant’s report on Form 8-K filed by
                the Registrant with the Commission on December 27,
                2005.10.42*
            Retention,
                Separation and Release Agreement, dated as of November 7, 2005, by
                and
                between Matrix Bancorp, Inc., Matrix Bancorp Trading, Inc., First
                Matrix
                Investment Services Corp., First Matrix, LLC, ABS School Services,
                LLC,
                Matrix Tower Holdings, LLC, Matrix Funding Corp., MTXC Realty Corp.,
                EquiMor Holdings, Inc., MSCS Ventures, Inc., and Community Development
                Funding I, LLC and T. Allen McConnell.10.43*
            Retention,
                Separation and Release Agreement, dated as of November 7, 2005, by
                and
                between Matrix Bancorp, Inc., Matrix Capital Bank, Matrix Bancorp
                Trading,
                Inc., First Matrix Investment Services Corp., First Matrix, LLC,
                ABS
                School Services, LLC, Matrix Financial Services Corporation, Matrix
                Funding Corp., MTXC Realty Corp., Sterling Trust Company, The Vintage
                Group, Inc., Vintage Delaware Holdings, Inc., EquiMor Holdings, Inc.,
                MSCS
                Ventures, Inc., Charter Facilities Funding, LLC, Charter Facilities
                Funding III, LLC, and Community Development Funding I, LLC and David
                W.
                Kloos10.44*
            Severance,
                Separation and Release Agreement, dated as of November 7, 2005, by
                and
                between Matrix Bancorp, Inc., Matrix Capital Bank, Matrix Bancorp
                Trading,
                Inc., First Matrix Investment Services Corp., Matrix Financial Services
                Corporation, MTXC Realty Corp., The Vintage Group, Inc., Sterling
                Trust
                Company and Matrix Funding Corp. and Richard V. Schmitz.10.45*
            Severance,
                Separation and Release Agreement, dated as of November 7, 2005, by
                and
                between Matrix Bancorp, Inc., Matrix Capital Bank, Matrix Bancorp
                Trading,
                Inc., First Matrix Investment Services Corp., ABS School Services,
                LLC,
                Matrix Financial Services Corporation, Matrix Insurance Services
                Corporation, MTXC Realty Corp., Matrix Tower Holdings, LLC, The Vintage
                Group, Inc., and EquiMor Holdings, Inc. and D. Mark Spencer.10.46*
            Severance,
                Separation and Release Agreement, dated as of November 7, 2005, by
                and
                between Matrix Bancorp, Inc. and David Frank.·12
            Statement
                Re: Computations of Ratios21
            Subsidiaries
                of the Registrant23.1
            Consent
                of McGladrey & Pullen LLP23.2
            Consent
                of KPMG LLP31.1
            Certification
                by Scot T. Wetzel pursuant to 18 U.S.C. Section 1350, as adopted
                pursuant
                to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
            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
            Certification
                by D. Scot T. Wetzel pursuant to 18 U.S.C. Section 1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2
            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.





_____________________________


· Compensation
      Agreement


*
      Filed
      herewith




II-5