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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No.: 0-21137 R&G FINANCIAL CORPORATION 
  Puerto Rico
    
    66-0532217(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 280 Jesús T. Piñero AvenueHato Rey, San Juan, Puerto Rico
    
    00918(Address of Principal
Executive Offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (787) 758-2424 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredClass B Common Stock
(par value $.01 per share)
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: Series A-D Noncumulative Perpetual Monthly Income Preferred Stock
(liquidation value $25 per share and par value $.01 per share) 
  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 þ No o 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. o Indicate by check mark whether Registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2). Yes þ No o The aggregate value of the
27,780,426 shares of Class B Common Stock of the Registrant issued and
outstanding on June 30, 2004, which excludes 1,762,410 shares held by all directors and officers
of the Registrant as a group, was approximately $918.4 million. This figure is based on the
last known trade price of $33.06 per share of the Registrants Class B Common Stock on June 30,
2004. Number of shares of Class B Common Stock outstanding as of
February 28, 2005: 29,572,120. (Does
not include 21,559,584 shares of Class A Common Stock that are exchangeable into shares of Class
B Common Stock at the option of the holder.) DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents incorporated by reference and the Part of the Form 10-K
into which the document is incorporated:  (1)
    Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 2004 are
incorporated into Parts II and IV.  (2)
    Portions of the definitive proxy statement for the Annual Meeting of Stockholders are
incorporated into Part III.




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TABLE OF CONTENTS  PART IITEM 1: BUSINESSITEM 2: PROPERTIES.ITEM 3: LEGAL PROCEEDINGS.ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.PART IIITEM 5: MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.ITEM 6: SELECTED FINANCIAL DATA.ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.ITEM 9A: CONTROLS AND PROCEDURES.ITEM 9B: OTHER INFORMATION.PART IIIITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.ITEM 11: EXECUTIVE COMPENSATION.ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES.PART IVITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.SIGNATURESEX-3.1.5 THIRD CERTIFICATE OF AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATIONEX-13 2004 ANNUAL REPORT TO STOCKHOLDERSEX-23 CONSENT OF PRICEWATERHOUSECOOPERS LLPEX-31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICEREX-31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICEREX-32 CERTIFICATION PURSUANT TO SECTION 906    Table of Contents  
 PART I Cautionary Statement Regarding Forward-Looking Statements A number of the presentations and disclosures in this Form 10-K, including any statements
preceded by, followed by or which include the words may, could, should, will, would,
hope, might, believe, expect, anticipate, estimate, intend, plan, assume or
similar expressions constitute forward-looking statements as defined
in the Private Securities Litigation Reform Act of 1995. These forward-looking statements, implicitly and explicitly, include the assumptions
underlying the statements and other information with respect to our beliefs, plans, objectives,
goals, expectations, anticipations, estimates, intentions, financial condition, results of
operations, future performance and business, including our expectations and estimates with respect
to our revenues, expenses, earnings, return on equity, return on assets, efficiency ratio, asset
quality and other financial data and capital and performance ratios. Although we believe that the expectations reflected in our forward-looking statements are
reasonable, these statements involve risks and uncertainties that are subject to change based on
various important factors (some of which are beyond our control). The following factors, among
others, could cause our financial performance to differ materially from our goals, plans,
objectives, intentions, expectations and other forward-looking statements:  
    the strength of the United States economy in general and the strength of the
regional and local economies within Puerto Rico and Florida;
    the effects of, and changes in, trade, monetary and fiscal policies and laws,
including interest rate policies of the Board of Governors of the Federal Reserve
System;
    inflation, interest rate, market and monetary fluctuations;
    our timely development of new products and services in a changing environment,
including the features, pricing and quality of our products and services compared to
the products and services of our competitors;
    the willingness of users to substitute competitors products and services for our
products and services;
    the impact of changes in financial services policies, laws and regulations,
including laws, regulations and policies concerning taxes, banking, securities and
insurance, and the application thereof by regulatory bodies;
    technological changes;
    changes in consumer spending and savings habits; and
    regulatory or judicial proceedings. If one or more of the factors affecting our forward-looking information and statements proves
incorrect, then our actual results, performance or achievements could differ materially from those
expressed in, or implied by, forward-looking information and statements contained in this Form
10-K. 2




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Therefore, we caution you not to place undue reliance on our forward-looking information and
statements. We do not intend to update our forward-looking information and statements, whether written or
oral, to reflect change. All forward-looking statements attributable to us are expressly qualified
by these cautionary statements. 
 ITEM 1: BUSINESS General The Company R&G
Financial Corporation, or the Company, is a Puerto Rico chartered, financial holding company that operates R-G Premier
Bank of Puerto Rico, or Premier Bank, a Puerto Rico
commercial bank, and R-G Crown Bank, or Crown Bank, a Florida
domiciled federal savings bank. The Company
also operates R&G Mortgage Corp, or R&G Mortgage, the second largest mortgage company in Puerto Rico, The Mortgage
Store of Puerto Rico, Inc., or the Mortgage Store, a subsidiary of R&G Mortgage, and Continental
Capital Corp., or Continental, a mortgage
banking subsidiary of Crown Bank which does business in the
continental United States. The Company also
conducts an insurance agency business and offers broker dealer services in Puerto Rico through Home &
Property Insurance Corp. and R-G Investments Corporation, respectively. The
Company is currently in its 33rd year of
operations and operates its business through
its subsidiaries. The Company provides a full range of banking
services through its banking subsidiaries, Premier Bank with
33 branches in Puerto Rico and Crown Bank with 15 branches
in Florida. Banking services include commercial banking
services, corporate real estate and business lending, residential construction lending, consumer
lending and credit cards, offers a diversified range of deposit products and, to a lesser extent,
trust and investment services through its private banking department
and our broker-dealer. The Company also
provides a range of real estate secured lending activities, including the origination, servicing,
purchase and sale of mortgages on single-family residences, the securitization and sale of various
mortgage-backed and related securities, the holding and financing of mortgage loans and
mortgage-backed and related securities for sale or investment and the purchase and sale of
servicing rights associated with such mortgage loans. The Company,
through its mortgage banking subsidiary R-G Mortgage, is the second
largest mortgage loan originator and servicer of mortgages on
single-family residences in Puerto Rico. In
June 2002, the Company acquired Crown Bank, which operates in the Tampa  St. Petersburg  Clearwater
and Orlando metropolitan areas. At the time of acquisition, the
Company operated 15 full-service offices.
According to the Metro Orlando Economic Development Commission, the Orlando market is one of the
fastest growing markets in Florida, both generally and for Hispanics in particular (mainly Puerto
Rican). Management believes that owning and operating Crown Bank is a cost effective way to access
the Hispanic markets in the United States, while providing a strong platform for further expansion
in Florida. On October 11, 2004, the Company and Crown Bank entered into a purchase and assumption
agreement with SouthTrust Bank to acquire 18 SouthTrust branches located in three banking markets
in Florida and one banking market in Georgia. The acquisition was completed on February 18, 2005.
In the transaction, Crown Bank assumed deposits and other liabilities
of approximately $628.0 million and acquired approximately $502.6 million of primarily commercial real estate, commercial
business and consumer loans, as well as cash and other assets. Crown Bank will now operate through
33 full service branches. The transaction permits Crown Bank to expand its Central Florida
footprint into nearby Lakeland, Florida and obtain a foothold in the Jacksonville, Florida and
Augusta, Georgia markets. The
Company has generally sought to achieve long-term financial strength and profitability by
increasing the amount and stability of its net interest income and
non-interest income. The Company has sought to implement this
strategy by (i) expanding its retail banking franchise in order to achieve
increased market presence and to increase core deposits;
(ii) enhancing its net interest income by
increasing its loans held for investment, particularly real estate secured loans, and investment
securities; (iii) emphasizing the growth of its mortgage banking activities, including the
origination and sale of mortgage loans, and growing its loan servicing operation; (iv) developing
new business relationships through an increased emphasis on commercial real estate and commercial
business lending; (v) diversifying its retail products and services, including an increase in
consumer loan originations; (vi) meeting the financial needs of
its customers through, among other
things, the offering of trust and investment services and insurance
products; (vii) expanding its
operations in the continental United States; and, (viii) emphasizing controlled growth, while
pursuing a variety of acquisition opportunities when appropriate. 3




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The Companys principal executive offices are located at 280 Jésus T. Piñero Avenue, San Juan,
Puerto Rico 00918 and its telephone number is (787) 758-2424.

Risk Factors

Fluctuations in interest rates may impact R&G Financials business. The primary
market risk affecting R&G Financial is interest rate fluctuations. Changes in interest rates
affect the following areas of the Companys business.



| |  | the number of mortgage loans originated and purchased;                                                                            
| | - | ----------------------------------------------------------------------------------------------------------------------------------
|
| |  | the interest income earned on loans and securities;                                                                               
|
| |  | the interest expense paid on deposits and borrowings;                                                                             
|
| |  | the gain on sale of loans;                                                                                                        
|
| |  | the value of securities holdings, retained residual interests
(including interest-only strips or IOs) and derivative
instruments;
|
| |  | the value of the Companys servicing asset; and                                                                                   
|
| |  | the level of prepayment of loans.                                                                                                 

Increases in interest rates reduce demand for new mortgage loan originations and
refinancings. Higher interest rates increase the cost of mortgage loans to consumers and
reduce demand for mortgage loans, which negatively impacts the Companys profits. Based on
historical experience, the Company

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expects a decrease in demand for its mortgage loans as interest rates increase. Reduced
demand for mortgage loans results in reduced loan originations and lower gain on sale of loans.
Demand for refinancings is particularly sensitive to increases in interest rates. Increases in interest rates reduce net interest income. Increases in short-term
interest rates reduce net interest income, which is an important part of the Companys earnings.
Net interest income is the difference between the interest the Company receives on its earning
assets and the interest the Company pays on its borrowings. Most of the Companys assets, like its
mortgage loans and mortgage-backed securities, are long-term assets. In contrast, a large portion
of the Companys borrowings are short-term. When interest rates rise, the Company must pay more in
interest on its borrowings while interest earned on its assets does not rise as quickly, which
causes profits to decrease. Increases in interest rates may reduce or eliminate gain on sale of mortgage loans.
If long-term interest rates increase between the time the Company commits to or establishes an
interest rate on a mortgage loan and the time it sells the loan, the Company may realize a reduced
gain or a loss on such sale. Increases in interest rates may reduce the value of mortgage loans and securities
holdings. Increases in interest rates may reduce the value of the Companys financial assets
and have an adverse impact on the Companys earnings and financial condition. The Company owns a
substantial portfolio of mortgage loans, mortgage-backed securities
and other debt securities, including interest only strips (IOs), and trading derivatives, including residual interests  in financial asset transfers
accounted for as sales considered implied interest rate swaps, which have both fixed and adjustable interest rates. The market value may have an adverse effect
on the Companys earnings and financial condition. In addition, the market value of an obligation
with an adjustable interest rate can be adversely affected when interest rates increase due to a
lag in the implementation of repricing terms as well as due to caps, which may limit the amount of
increase in the obligations interest rate. Decreases in interest rates may adversely affect the value of the Companys servicing
asset. Decreases in interest rates lead to increases in the prepayment of mortgages by
borrowers, which may reduce the value of the Companys servicing asset. The servicing asset is the
estimated present value of the fees the Company expects to receive on the mortgages it services
over their expected term. If prepayments increase above expected levels, the value of the
servicing asset decreases because the amount of future fees expected to be received by the Company
decreases. The Company may be required to recognize this decrease in value by taking a charge
against its earnings, which would cause its profits to decrease. The Company experienced an increase in prepayments of mortgages as interest rates decreased
dramatically during the past two years, which impacted the value of the Companys servicing asset.
As a consequence, the Company recognized impairment charges on its
servicing portfolio of $14.1 million for the year ended December 31, 2004. During the last half of 2004, the Board of Governors
of the Federal Reserve began tightening monetary policy and the increasing interest rates it
charges to banks, which has resulted in an increase in interest rates generally. The Company
believes, based on historical experience, that the amount of prepayments and related impairment
charges should decrease as interest rates increase. The Company is subject to default and recourse risk in connection with its loan
originations. From the time that the Company funds the mortgage loans it originates for third
parties to the time it sells them, the Company is generally at risk or any mortgage loan defaults.
Once the Company sells the mortgage loan, the risk of loss from mortgage loan defaults and
foreclosures passes to the purchaser or insurer of the mortgage loans. However, in the ordinary
course of business, the Company makes representations and warranties to the purchasers and insurers
of mortgage loans. If a borrower defaults on a mortgage loan and there has been a breach of any of
these representations or warranties, the Company 5




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may become liable for the unpaid principal and interest on the defaulted mortgage loan and may
be required to repurchase the mortgage loan and bear any subsequent loss on the mortgage loan. In
addition, with respect to the non-conventional mortgage loans originated by the Company, which are
subsequently securitized and/or sold from time to time, the Company provides recourse in the event
of mortgage loan defaults and/or foreclosures or certain documentation deficiencies. At December
31, 2004, there were $2.1 billion of loans subject to such recourse provisions. The Company is subject to default risk in connection with loan originations of its banking
subsidiaries. Both Premier Bank and Crown Bank are subject to the risk of loss from mortgage
loan defaults and foreclosures with respect to the loans originated for their respective
portfolios. Notwithstanding the care with which loans are originated, industry experience
indicates that a portion of a banks loans will become delinquent and a portion of the loans will
require partial or entire charge-off. Regardless of the underwriting criteria utilized by Premier
Bank and Crown Bank, losses may be experienced as a result of various factors beyond each banks
control, including, among others, changes in market conditions affecting the value of collateral
and problems affecting the credit of the borrower. Due to the concentration of Premier Bank and
Crown Banks loans in Puerto Rico or Florida, respectively, adverse economic conditions in Puerto
Rico and Florida could result in a decrease in the value of either banks loan portfolio and
underlying collateral. Although loan delinquencies have historically been higher in Puerto Rico
than in the continental United States, loan charge-offs have historically been lower than in the
continental United States. Each of Premier Bank and Crown Bank has established provisions for loan losses, which are
charged to operations, in order to maintain the allowance or loan losses at a level which is deemed
to be appropriate by management based upon an assessment of prior loss experience, the volume and
type of lending being conducted, industry standards, past due loans, general economic conditions in
their market area and other factors related to the collectibility of the loan portfolios. Although
each banks management utilizes its best judgment in providing for loan losses, there can be no
assurance that management has accurately estimated the level of future loan losses or that either
bank will not have to increase its provisions for loan losses in the future as a result of future
increases in non-performing loans or for other reasons beyond the control of either bank. Any such
increases in either banks provisions for loan losses with respect thereto could have a negative impact on the Companys future financial
condition and/or results of operations. The Companys exposure to larger credit risk will increase as a consequence of the
increase in construction and commercial lending activities. Each of the banking subsidiaries
of R&G Financial has increased its emphasis on residential construction, commercial real estate and
commercial business lending, which is likely to increase overall credit risk. Banks generally
charge higher interest rates on commercial and residential construction loans than on residential
mortgage loans, because larger loan losses are expected in this business line. Generally,
commercial and construction loans are considered to be riskier than residential mortgage loans
because they have larger balances to a single borrower or group of related borrowers. In addition,
the borrowers ability to repay a commercial and a construction loan depends, in the case of a
commercial loan, on the successful operation of the business or the property securing the loan and,
in the case of a construction loan, on the successful completion and sale or operation of the
project. The properties securing these loans are also more difficult to dispose of in foreclosure.
If Premier Bank or Crown Bank experienced loan losses that are higher than its allowance for loan
losses, the Companys profits and financial condition would be adversely affected. The Company is subject to risks in servicing loans for others. The Company is also
affected by mortgage loan delinquencies and defaults on mortgage loans that the Company services
for third parties. Under certain types of servicing contracts, the servicer must forward all or
part of the scheduled payments to the owner of the mortgage loan, even when mortgage loan payments
are delinquent. Also, to protect 6




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their liens on mortgaged properties, owners of mortgage loans usually require the servicer to
advance mortgage and hazard insurance and tax payments on schedule even though sufficient escrow
funds may not be available. The servicer will generally recover its advances from the mortgage
owner or from liquidation proceeds when the mortgage loan is foreclosed. However, in the interim,
the servicer must absorb the cost of funds advanced during the time the advance is outstanding.
Further, the servicer must bear the increased costs of attempting to collect on delinquent and
defaulted mortgage loans. In addition, if a default is not cured, the mortgage loan will be
cancelled as a result of foreclosure proceedings. As a consequence, the Company is required to
forego servicing income from the time such loan becomes delinquent forward. The economic hedging transactions which the Company enters into may not be effective in
managing its exposure to interest rate risk. The Company uses derivatives to manage its
exposure to interest rate risk caused by changes in interest rates. Derivatives include interest
rate swaps, interest rate collars, futures, forwards and options. Derivatives are generally either
privately-negotiated over-the-counter, or OTC, or standard contracts transacted through regulated
exchanges. OTC contracts generally consist of swaps, collars, forwards and options.
Exchange-traded derivatives include futures and options. The derivative instruments that the
Company may utilize also have their own risks, which include (1) basis risk, which consists of the
risk of loss associated with variations in the spread between the asset yield and the funding
and/or hedge cost; (2) credit or default risk, which consists of the risk of insolvency or other
inability of the counterparty to a particular transaction to perform its obligations thereunder;
and (3) legal risk, which consists of the risk that the Company is unable to enforce certain terms
of such instruments. All or any of such risks could expose the Company to losses. Consequently,
the Companys profitability may be adversely affected during any period as a result of the use of
derivatives in a hedging transaction. For financial reporting purposes, the Companys general policy is to account for derivative
instruments on a marked-to-market basis with gains or losses charged to current operations as they
occur. Contracts with positive fair value are reported as assets and contracts with negative fair
values are reported as liabilities, after the application of netting arrangements, with unrealized
gains and losses recorded either in other comprehensive income in the Companys consolidated
statements of financial condition or in the Companys consolidated statements of income, depending
on the purpose for which the derivative is held. Under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as subsequently amended, the Company may
designate a derivative as a hedge of the fair value of a recognized fixed rate asset or liability
(fair value hedge) only if certain conditions are met.
Certain hedging activities related to the fair value of
certain beneficial interests retained on financial asset transfers accounted for as sales are
reported as trading derivatives. Both the changes in fair value of the hedged item (in this case
beneficial interests retained on financial asset transfers accounted for as sales) and changes in
fair value of the derivative are included in trading activities in the Companys consolidated
statements of income. The Company recognized pre-tax losses of $2.6 million on such trading derivatives that
serve as economic fair value hedges for its beneficial interests retained during the year ended
December 31, 2004. The Companys business has historically been concentrated in Puerto Rico, and adverse
conditions in Puerto Rico could negatively impact the Companys operations. The Companys
business activities and credit exposure have historically been concentrated with customers in
Puerto Rico. Accordingly, the Companys financial condition and results of operations have been
dependent to a significant extent upon the economic conditions prevailing in Puerto Rico, including
the effect of such economic conditions on real estate values. Any significant adverse political or
economic developments or 7




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nature-related occurrences, such as hurricanes, in Puerto Rico, and, in particular, any
decline in real estate values, could result in a downturn in loan originations, an increase in the
level of nonperforming assets and a reduction in the value of the Companys loans, real estate
owned and mortgage servicing portfolio, all of which would negatively affect the Companys
profitability. While the acquisition and subsequent growth of Crown Bank has facilitated a
diversification of overall lending concentration, Crown Bank is subject to similar concentration
risks in the Florida markets in which it operates. The Companys origination business could be adversely affected if the Company cannot
maintain access to stable funding sources. The Companys business requires continuous access
to various funding sources. While Premier Bank and Crown Bank are able to fund their operations
through deposits as well as through longer-term borrowings from the Federal Home Loan Bank, or FHLB, and
other alternative sources, the business of R&G Mortgage has been significantly dependent upon
short-term borrowings under warehousing lines. Some of these warehousing lines of credit
require the maintenance of minimum levels of net worth and debt service and limit the amount of
indebtedness and dividends that may be declared. While the Company expects to have continued access to credit from the foregoing sources of
funds, there can be no assurance that such financing sources will continue to be available or will
be available on favorable terms. In the event that the warehousing lines of credit of the
Companys subsidiaries were reduced or eliminated and the Company was not able to replace such
lines on a cost-effective basis, the Company would be forced to curtail or cease its mortgage
origination business, which would have a material adverse effect on its operations and financial
condition. Although the Companys subsidiaries could also potentially access borrowings from the
Companys banking subsidiaries, any such borrowings would be subject to and limited by certain
regulatory restrictions which apply to transactions between banks and their affiliates, including
certain of the Companys subsidiaries. For
the quarters ended September 30, and December 31, 2004, R&G
Mortgage breached a covenant not to pay in excess of 50% of its net
income for the fiscal year. The breach was occasioned primarily due
to the previously disclosed trading losses during
the last two quarters of 2004. See Managements Discussion and
Analysis of Financial Condition and Results of Operations in
Item 7 hereof. R&G Mortgages lender has agreed to
waive the breach of covenant for each of the quarters in question.
Except as disclosed herein, management of R&G Financial believes that
as of December 31, 2004, it was in compliance with all such
covenants and restrictions and does not anticipate that such
covenants and restrictions will limit its operations. The Companys loan portfolio has significantly increased in recent years and many of the
Companys commercial real estate and commercial construction loans are relatively unseasoned, and
defaults on such loans could adversely affect the Companys financial condition and results of
operations. The Companys total loan portfolio has grown significantly in recent years, from
$1.6 billion at December 31, 2000 to $5.1 billion at
December 31, 2004. While
52.4% of the
Companys loan portfolio continues to be secured by residential properties, an increasing amount of
the Companys loan portfolio is comprised of commercial real estate loans and commercial
construction and land acquisition loans. At December 31, 2004, the Companys commercial real estate, land acquisition and construction
portfolios amounted to an aggregate of
$2.2 billion or
38.5% of the Companys loan
portfolio. Because such loans are relatively unseasoned, many of the loans may be too new to
demonstrate problems. While the Company attempts to mitigate these risks in commercial real estate
lending through stringent underwriting criteria and in the case of construction loans, by limiting
originations to primarily residential properties, no assurance can be made that an increase in
delinquencies and defaults will not occur. Defaults on these loans could negatively effect the
Companys financial condition and results of operations. Taxation of the Companys international banking entity may impact the Companys future
earnings. In January 2004, the Puerto Rico Legislature passed legislation to modify the
taxation of international banking entities, or IBEs, organized under the Puerto Rico International
Banking Center Law. Under the new legislation, which affects only those entities organized as
divisions of banks (as opposed to those organized as separate subsidiaries of banks), the income
generated by international bank divisions will be subject to the regular Puerto Rico statutory tax
rate to the extent it exceeds 40% of the combined taxable income of the bank and its IBE divisions
for the period January 1, 2004 to December 8




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31, 2004, 30% for the period January 1, 2005 to December 31, 2005, and 20% thereafter. The
new law does not impose taxes on IBEs that operate as a subsidiary of a bank. The Company presently operates an IBE as a division of Premier Bank. The Company intends to
transfer some of the assets of Premier Banks IBE to a new IBE that will operate as a subsidiary of
Premier Bank, which will allow the Company to continue to enjoy such tax benefits. The Company
cannot give any assurance that the legislation may not be further modified in the future in a
manner which would reduce the tax benefits available to the Companys IBE. A reduction of such tax
benefits may reduce the Companys earnings. The Company is subject to numerous laws and significant regulation and the failure to
comply with these laws and regulations could adversely affect the Company. The Sarbanes-Oxley
Act of 2002, or the Sarbanes-Oxley Act, and the related rules and regulations promulgated
by the Securities Exchange Commission, or SEC, and the New York Stock Exchange, have increased the scope, complexity and cost of the Companys
corporate governance reporting and disclosure practices. The Sarbanes-Oxley Act imposes a variety
of civil and criminal penalties with respect to any violations of such act and the related rules
and regulations. The USA Patriot Act of 2001, or Patriot Act, and the Bank Secrecy Act, or BSA, contain anti-money laundering
and financial transparency laws. The regulations under such acts include standards for verifying
client identification at account opening and rules designed to prevent money laundering and to
identify parties that may be involved in terrorism. In connection with BSA, as a result of an
examination of Premier Bank as of June 2004, in December 2004 the
Federal Deposit Insurance Corporation, or FDIC, the
Office of Puerto Rico Commissioner of Financial Institutions, or OCFI, and Premier Bank
entered into a Memorandum of Understanding, or MOU, to correct and strengthen perceived
deficiencies in Premier Banks BSA and anti-money laundering programs. Premier Bank is required,
among other things, to enhance monitoring, reporting, and documentation, strengthen controls,
revise policies, increase its audits and enhance the training of its personnel. Premier Bank has
taken certain measures in accordance with a corrective action plan submitted to the FDIC and OCFI,
and believes that it is in substantial compliance with the MOU. Changes in statutes, regulations and the regulatory environment in which the Company
operates could adversely affect the Company. R&G Financial, as a Puerto Rico chartered
financial holding company, and its various subsidiaries, are each subject to federal and local
governmental supervision and regulation. There are laws and regulations which restrict
transactions between the Company and its various subsidiaries. Any change in such regulations,
whether by applicable regulators or as a result of legislation subsequently enacted by the Congress
of the United States or the applicable local legislatures, could have a substantial impact on the
Companys operations and profitability. Competition with other financial institutions could adversely affect the Companys
profitability. The Company faces substantial competition in originating loans and in
attracting deposits. The competition in originating loans comes principally from other United
States, Puerto Rico and foreign banks, mortgage banking companies, consumer finance companies,
insurance companies and other institutional lenders and purchasers of loans. The Company will
encounter greater competition as it continues to expand its operations in the continental United
States. A number of institutions with which the Company competes have significantly greater
assets, capital, name recognition and other resources. In addition, many of the Companys
competitors are not subject to the same federal regulation that governs the Companys business. As
a result, many of the Companys competitors have advantages in conducting certain businesses and
providing certain services. Increased competition could require the Company to increase the rates
it offers on deposits or lower the rates it charges on loans, which could adversely affect the
Companys profitability. 9




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##### Table of Contents



If the Company was to lose the services of its key individuals, its business would
suffer. The Companys success has been largely dependent on Víctor J. Galán, Chairman of the
Board and Chief Executive Officer, and Ramón Prats, Vice Chairman of the Board and President. The
Companys future success will also depend, to a great extent, upon the services of Mr. Galán and
Mr. Prats. The Company believes that the prolonged unavailability or the unexpected loss of the
services of Mr. Galán and/or Mr. Prats could have a material adverse effect upon the Company, as
attracting suitable replacements may involve significant time and/or expense. The concentration of ownership in the Companys stock and disparate voting rights may
leave minority stockholders with little control over R&G Financial. Shares of the Companys
Class A common stock are entitled to two votes per share and shares of the Companys Class B common
stock are entitled to one vote per share. At December 31, 2004, Víctor J. Galán, Chairman of the
Board and Chief Executive Officer, owned 42.2% of the Companys outstanding common stock and was
entitled to exercise 59.3% of the outstanding voting rights. As a result, Mr. Galán has the power
to elect and remove all of R&G Financials board of directors and management and to determine the
outcome of substantially all other matters to be decided by a vote of stockholders. Mr. Galáns
interest may not necessarily always be consistent with the interests of all other stockholders.
Any future offerings of Class A common stock will dilute the voting power of the Class B common
stock. Certain provisions in the Companys certificate of incorporation and bylaws could
discourage an acquisition of R&G Financial. In addition to the amount of common stock
controlled by the Companys Chairman of the Board and Chief Executive Officer described above under
 The concentration of ownership in the Companys stock and disparate voting right may leave
minority stockholders with little control over R&G Financial, certain provisions of the Companys
certificate or incorporation and bylaws could have the effect of discouraging non-negotiated
takeover attempts, which certain stockholders might deem to be in their interest, and make it more
difficult for the Companys stockholders to remove members of the Companys board of directors and
management. In addition, various federal laws and regulations could affect the ability of a
person, firm or entity to acquire the Company or shares of the Companys common stock. Banking Operations General. The Company provides a full range of banking services through its banking
subsidiaries, including residential, commercial and personal loans and a diversified range of
deposit products. Premier Bank also provides private banking, trust and other financial services
to its customers. R&G Financials banking business consists principally of holding deposits from the general
public and using them, together with funds obtained from other sources, to originate and purchase
loans secured primarily by residential real estate, and to purchase mortgage-backed and other
securities. To a lesser extent, but with increasing emphasis over the past few years, R&G
Financial also originates construction loans and loans secured by commercial real estate, as well
as consumer and personal loans and commercial business loans. Such loans offer higher yields, are
generally for shorter terms and offer the Company an opportunity to provide a greater range of
financial services to its customers. Premier Bank also offers trust services through its trust
department. To date, Premier Bank has engaged in business solely in Puerto Rico. Crown Bank
conducts business from its Florida locations, and Continental originates retail construction and
commercial loans in New York, New Jersey, Connecticut, North Carolina and Florida. Residential Loans. At December 31, 2004, R&G Financials loans receivable, net,
totaled $5.1 billion, that represented 50.3% of R&G Financials $10.2 billion of total assets. At
such date, all of R&G Financials loans receivable were held by its banking subsidiaries. R&G
Financials loan portfolio 10




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##### Table of Contents



historically has had a substantial amount of loans secured by first mortgage liens on existing
single-family residences. At December 31, 2004, $2.9 billion, or 51.7% of R&G Financials total
loans held for investment, consisted of such loans, of which all but
$1.2 million consisted of
conventional loans. Construction Loans. At December 31, 2004, retail construction loans amounted to
$428.2 million, or 7.6% of R&G Financials total loans held for investment, while commercial
construction and land acquisition loans amounted to
$836.0 million in the aggregate, or
14.9%
of total loans held for investment. R&G Financial intends to continue to increase its involvement
in single-family residential construction lending. Such loans afford the Company the opportunity
to increase the interest rate sensitivity of its loan portfolio. Commercial and Consumer Loans. R&G Financial also originates mortgage loans secured
by commercial real estate, primarily office buildings, retail stores, warehouses and general
purpose industrial space. At December 31, 2004,
$896.0 million, or
16.0% of R&G
Financials total loans held for investment, consisted of such loans. Finally, R&G Financial also
offers commercial business loans, including working capital lines of credit, inventory and accounts
receivable loans, equipment financing (including equipment and auto leases), term loans, insurance premium
loans and loans guaranteed by the Small Business Administration and various consumer loans. At
December 31, 2004, consumer loans, some of which are secured by real estate and deposits, amounted
to $206.5 million, or 3.7% of total loans held for investment, and commercial business loans
(including leases) amounted to $307.5 million, or 5.5% of total loans held for investment. Mortgage Banking Originations. The Company is the second largest mortgage loans originator and
servicer of mortgage loans on single-family residences in Puerto Rico. R&G Mortgage is primarily
engaged in the business of originating first and second mortgage loans on single-family residential
properties secured by real estate. R&G Mortgage also originates residential mortgage loans through
The Mortgage Store, its wholly-owned subsidiary. Pursuant to agreements entered into between R&G
Mortgage and Premier Bank, non-conforming conventional single-family residential loans and consumer
loans secured by real estate are also originated by R&G Mortgage for portfolio retention by Premier
Bank. Premier Bank retains most of the nonconforming conventional single-family residential loans
because these loans generally do not satisfy resale guidelines of purchasers in the secondary
mortgage market, primarily because of size (in the case of jumbo loans) or other underwriting
technicalities (mostly related to documentation requirements) at the time of origination. However,
from time to time, the Company may sell or securitize some of these loans should the need arise for
asset/liability management or other considerations. Jumbo loans may be packaged and sold in the
secondary market, while loans with underwriting technicalities may be cured through payment
experience and subsequently sold. Management believes that these loans are essentially of the same
credit quality as conforming loans. During the years ended December 31, 2004, 2003 and 2002, R&G
Financial originated a total of $2.3 billion, $2.8 billion and $2.0 billion of residential
mortgage loans, respectively. These aggregate originations include loans originated by R&G
Mortgage directly for Premier Bank of $1.3 billion, $1.3 billion and $811.8 million during the
years ended December 31, 2004, 2003 and 2002, respectively, or 55%, 45% and 41%, respectively,
of total originations. The loans originated by R&G Mortgage for Premier Bank are comprised
primarily of conventional residential loans and, to a lesser extent, residential construction loans
and consumer loans secured by real estate. Servicing. R&G Financials servicing portfolio has grown significantly over the past
several years. At December 31, 2004, R&G Financials servicing portfolio totaled $11.4 billion and
consisted of a total of 145,324 loans. These amounts include R&G Mortgages servicing portfolio,
totaling $8.5 billion, and Crown Banks servicing portfolio, totaling $2.9 billion, at December 31,
2004. At December 11




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##### Table of Contents



31, 2004, R&G Financials servicing portfolio included $2.1 billion of loans serviced for
Premier Bank and $647.7 million of loans serviced for Crown Bank, or 18.3% and 5.7%, respectively,
of the total servicing portfolio. Substantially all of the mortgage loans in R&G Financials
servicing portfolio are secured by single-family residences. R&G Financial generally retains the
servicing function with respect to the loans that have been securitized and sold. Securitizations. R&G Financial pools
Federal Housing Administration, or FHA, and
Veterans Administration, or VA, loans into mortgage-backed securities that are guaranteed by the
Government National Mortgage Association, the GNMA. These securities are sold to securities
broker-dealers and other investors in Puerto Rico. Conventional loans may either be sold directly
to agencies such as the Federal National Mortgage Association, or FNMA,
and the Federal Home
Loan Mortgage Corporation, or FHLMC, or to private investors, or may be pooled into FNMA or
FHLMC mortgage-backed securities, that are generally sold to investors. During the years ended
December 31, 2004, 2003 and 2002, R&G Financial sold $1.2
billion, $1.6 billion and $1.2 billion of loans respectively, as part
of its mortgage banking activities, that includes loans
securitized and sold, but does not include loans originated for Premier Bank. Regulation The Company operates its businesses under a variety of federal, state and Puerto Rico laws and
rules. As a financial holding company, it is subject to the rules of the Board of Governors of the
Federal Reserve System and the
OCFI. Among other things, the Company is required to meet minimum capital requirements, and
its activities are limited to those that are determined to be financial in nature or incidental or
complimentary to a financial activity. Premier Bank is subject to extensive regulation and examination by the
FDIC and by the OCFI, and Crown Bank is subject to extensive
regulation and supervision by the Office of Thrift
Supervision, or OTS. This regulation and
supervision establishes a comprehensive framework of activities in which the Companys banking
subsidiaries can engage. In addition, the FDIC and the OTS are required to take prompt corrective
action if a given bank does not meet its minimum capital requirements. The FDIC and the OTS have
established five capital tiers to implement this requirement, from well-capitalized to
critically undercapitalized. A banks capital tier will depend on various capital measures and
other qualitative factors and will subject it to specific requirements. As of December 31, 2004,
Premier Bank and Crown Bank met the capital measures for being well-capitalized under the
regulations. The Companys mortgage banking business is subject to the rules of the FHA, VA, GNMA, FNMA,
FHLMC and the Department of Housing and Urban Development with respect to originating, processing,
selling and servicing mortgage loans. In addition to these rules, the Companys Puerto Rico
mortgage banks are subject to the rules of the OCFI and Continental is subject to the rules of the
OTS. Among other things, all of these rules prohibit discrimination, establish underwriting
guidelines, require credit reports, fix maximum loan amounts and, in some cases, fix maximum
interest rates. Lending Activities from Banking Operations General. At December 31, 2004, R&G Financials loans receivable, net totaled $5.1
billion, which represented 50.3% of R&G Financials $10.2 billion of total assets. At December 31,
2004, all of R&G Financials loans receivable, net were held by its banking subsidiaries. The
principal category of loans in R&G Financials portfolio is conventional loans that are secured by
first liens on single-family residences. Conventional residential real estate loans are loans that
are neither insured by the FHA nor 12




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##### Table of Contents



partially guaranteed by the VA. At December 31, 2004, all but $1.2 million of R&G Financials
first mortgage single-family residential loans consisted of conventional loans. The other
principal categories of loans in R&G Financials loans receivable, net portfolio are second
mortgage residential real estate loans, construction loans, commercial real estate loans,
commercial business loans and consumer loans. 13




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##### Table of Contents



Loan Portfolio Composition. The following table sets forth the composition of R&G
Financials loan portfolio by type of loan at the dates indicated. Except as noted in the
footnotes to the table, all of the loans are held by banking subsidiaries of R&G Financial. December 31,2004
    
    
    2003
    
    
    2002Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Residential real estate  first mortgage
    
    $
    2,900,196
    
    
    
    51.65
    %
    
    $
    2,384,279
    
    
    
    55.24
    %
    
    $
    1,473,051
    
    
    
    50.12
    %Residential real estate  second
mortgage
    
    
    40,514
    
    
    
    0.72
    
    
    
    34,999
    
    
    
    0.81
    
    
    
    40,429
    
    
    
    1.37Retail construction
    
    
    428,159
    
    
    
    7.63
    
    
    
    169,963
    
    
    
    3.94
    
    
    
    159,754
    
    
    
    5.44Commercial construction and land
acquisition(1)
    
    
    836,038
    
    
    
    14.89
    
    
    
    595,030
    
    
    
    13.79
    
    
    
    329,932
    
    
    
    11.23Commercial real estate
    
    
    896,048
    
    
    
    15.96
    
    
    
    728,620
    
    
    
    16.88
    
    
    
    582,114
    
    
    
    19.81Commercial business
    
    
    307,502
    
    
    
    5.48
    
    
    
    193,262
    
    
    
    4.48
    
    
    
    152,743
    
    
    
    5.20Consumer loans:Loans secured by deposits
    
    
    24,258
    
    
    
    0.43
    
    
    
    24,713
    
    
    
    0.57
    
    
    
    28,070
    
    
    
    0.95Real estate secured consumer loans
    
    
    44,484
    
    
    
    0.79
    
    
    
    53,709
    
    
    
    1.24
    
    
    
    68,156
    
    
    
    2.32Unsecured consumer loans
    
    
    137,743
    
    
    
    2.45
    
    
    
    131,711
    
    
    
    3.05
    
    
    
    104,715
    
    
    
    3.56Total loans receivable
    
    
    5,614,942
    
    
    
    100.00
    %
    
    
    4,316,286
    
    
    
    100.00
    %
    
    
    2,938,964
    
    
    
    100.00
    %Less:Allowance for loan losses
    
    
    (51,878
    )
    
    
    
    
    
    
    (39,615
    )
    
    
    
    
    
    
    (32,676
    )Loans in process
    
    
    (431,430
    )
    
    
    
    
    
    
    (224,960
    )
    
    
    
    
    
    
    (146,111
    )Deferred loan costs (fees)
    
    
    (172
    )
    
    
    
    
    
    
    1,369
    
    
    
    
    
    
    
    (45
    )Unearned interest
    
    
    (4,564
    )
    
    
    
    
    
    
    (4,573
    )
    
    
    
    
    
    
    (443
    )(488,044
    )
    
    
    
    
    
    
    (267,779
    )
    
    
    
    
    
    
    (179,275
    )Loans receivable, net(2)
    
    $
    5,126,898
    
    
    
    
    
    
    $
    4,048,507
    
    
    
    
    
    
    $
    2,759,689
 December 31,2001
    
    
    2000Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentResidential real estate  first mortgage
    
    $
    996,885
    
    
    
    52.11
    %
    
    $
    998,984
    
    
    
    58.08
    %Residential real estate  second mortgage
    
    
    33,321
    
    
    
    1.74
    
    
    
    27,419
    
    
    
    1.59Retail construction
    
    
    50,767
    
    
    
    2.65
    
    
    
    47,698
    
    
    
    2.77Commercial construction and land acquisition(1)
    
    
    230,725
    
    
    
    12.06
    
    
    
    143,689
    
    
    
    8.35Commercial real estate
    
    
    340,139
    
    
    
    17.78
    
    
    
    270,459
    
    
    
    15.72Commercial business
    
    
    79,909
    
    
    
    4.18
    
    
    
    59,120
    
    
    
    3.44Consumer loans:Loans secured by deposits
    
    
    26,176
    
    
    
    1.37
    
    
    
    26,926
    
    
    
    1.57Real estate secured consumer loans
    
    
    83,509
    
    
    
    4.37
    
    
    
    100,357
    
    
    
    5.83Unsecured consumer loans
    
    
    71,507
    
    
    
    3.74
    
    
    
    45,563
    
    
    
    2.65Total loans receivable
    
    
    1,912,938
    
    
    
    100.00
    %
    
    
    1,720,215
    
    
    
    100.00
    %Less:Allowance for loan losses
    
    
    (17,428
    )
    
    
    
    
    
    
    (11,600
    )Loans in process
    
    
    (92,935
    )
    
    
    
    
    
    
    (78,163
    )Deferred loan fees
    
    
    20
    
    
    
    
    
    
    
    909Unearned interest
    
    
    (207
    )
    
    
    
    
    
    
    (85
    )(110,550
    )
    
    
    
    
    
    
    (88,939
    )Loans receivable, net(2)
    
    $
    1,802,388
    
    
    
    
    
    
    $
    1,631,276
   (1)
    
    Includes $250,000, $665,000 and $1.2 million of loans held by R&G Mortgage at December 31,
2002, 2001 and 2000, respectively.(2)
    
    Does not include mortgage loans held for sale of $323.8 million, $315.7 million, $258.7
million, $236.4 million and $95.7 million at December 31, 2004, 2003, 2002, 2001 and 2000,
respectively. 14




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##### Table of Contents



Contractual Principal Repayments and Interest Rates. The following table sets
forth certain information at December 31, 2004 regarding the dollar amount of loans maturing in R&G
Financials total loan portfolio based on the contractual terms to maturity. Loans having no
stated schedule of repayments and no stated maturity are reported as due in one year or less. Due 1-5
    
    
    Due 5 or moreyears after
    
    
    years afterDue 1 year
    
    
    December 31,
    
    
    December 31,or less
    
    
    2004
    
    
    2004
    
    
    Total(1)(In Thousands)Residential real estate
    
    $
    162,344
    
    
    $
    392,977
    
    
    $
    2,385,389
    
    
    $
    2,940,710Retail construction
    
    
    414,451
    
    
    
    4,128
    
    
    
    9,580
    
    
    
    428,159Commercial real estate(2)
    
    
    718,266
    
    
    
    820,047
    
    
    
    193,773
    
    
    
    1,732,086Commercial business
    
    
    124,796
    
    
    
    140,601
    
    
    
    42,105
    
    
    
    307,502Consumer:Loans on savings
    
    
    14,491
    
    
    
    9,699
    
    
    
    68
    
    
    
    24,258Real estate secured consumer loans
    
    
    14,824
    
    
    
    13,423
    
    
    
    16,237
    
    
    
    44,484Unsecured consumer loans
    
    
    76,828
    
    
    
    54,596
    
    
    
    6,319
    
    
    
    137,743Total(3)
    
    $
    1,526,000
    
    
    $
    1,435,471
    
    
    $
    2,653,471
    
    
    $
    5,614,942
   (1)
    
    Amounts have not been reduced for the allowance for loan losses, loans in process, deferred
loan fees or unearned interest.(2)
    
    Includes $836.0 million of commercial construction and land acquisition loans.(3)
    
    Does not include mortgage loans held for sale. The following table sets forth the dollar amount of total loans at December 31, 2004 that
have fixed interest rates or that have floating or adjustable interest rates. Floating orFixed rate
    
    
    adjustable-rate
    
    
    Total(1)(In Thousands)Residential real estate
    
    $
    2,671,566
    
    
    $
    269,144
    
    
    $
    2,940,710Retail construction
    
    
    227,504
    
    
    
    200,655
    
    
    
    428,159Commercial real estate(2)
    
    
    573,754
    
    
    
    1,158,332
    
    
    
    1,732,086Commercial business
    
    
    168,263
    
    
    
    139,239
    
    
    
    307,502Consumer:Loans on savings
    
    
    24,258
    
    
    
    
    
    
    
    24,258Real estate secured consumer loans
    
    
    30,803
    
    
    
    13,681
    
    
    
    44,484Unsecured consumer loans
    
    
    136,761
    
    
    
    982
    
    
    
    137,743Total(3)
    
    $
    3,832,909
    
    
    $
    1,782,033
    
    
    $
    5,614,942
   (1)
    
    Amounts have not been reduced for the allowance for loan losses, loans in process, deferred
loan fees or unearned interest.(2)
    
    Includes $836.0 million of commercial construction and land acquisition loans.(3)
    
    Does not include mortgage loans for sale. Scheduled contractual amortization of loans does not reflect the expected term of R&G
Financials loan portfolio. The average life of loans is substantially less than their contractual
terms 15




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##### Table of Contents



because of prepayments and due-on-sale clauses that give R&G Financial the right to declare a
conventional loan immediately due and payable in the event, among other things, that the borrower
sells the real property subject to the mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase when current mortgage loan rates are higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgage loans are lower than
current mortgage loan rates (due to refinancing of adjustable-rate and fixed-rate loans at lower
rates). Under the latter circumstance, the weighted average yield on loans decreases as
higher-yielding loans are repaid or refinanced at lower rates. Origination, Purchases and Sales of Loans. The following table sets forth loan
originations, purchases and sales from banking operations for the periods indicated. Year Ended December 31,2004
    
    
    2003
    
    
    2002(Dollars in Thousands)Loan originations:Loans originated by R&G Mortgage:Residential mortgages
    
    $
    1,233,283
    
    
    $
    1,235,935
    
    
    $
    764,115Commercial mortgages
    
    
    
    
    
    
    
    
    
    
    Residential construction
    
    
    56,162
    
    
    
    45,388
    
    
    
    45,026Consumer loans
    
    
    6,062
    
    
    
    1,985
    
    
    
    2,632Total loans originated by R&G Mortgage
    
    
    1,295,507
    
    
    
    1,283,308
    
    
    
    811,773Other loans originated:Residential real estate(1)
    
    
    178,925
    
    
    
    63,695
    
    
    
    26,163Commercial real estate
    
    
    672,482
    
    
    
    534,544
    
    
    
    357,718Commercial business
    
    
    171,117
    
    
    
    100,224
    
    
    
    62,965Construction and development(2)
    
    
    706,259
    
    
    
    320,027
    
    
    
    143,356Consumer loans:Loans on deposit
    
    
    35,059
    
    
    
    32,553
    
    
    
    40,061Real estate secured consumer loans
    
    
    12,125
    
    
    
    10,560
    
    
    
    4,191Unsecured consumer loans
    
    
    84,727
    
    
    
    112,182
    
    
    
    90,431Total other loans originated
    
    
    1,860,694
    
    
    
    1,173,785
    
    
    
    724,885Loans purchased(3)
    
    
    607,116
    
    
    
    430,826
    
    
    
    236,181Total loans originated and purchased
    
    
    3,763,317
    
    
    
    2,887,919
    
    
    
    1,772,839Loans sold(3)
    
    
    (981,410
    )
    
    
    (253,977
    )
    
    
    (35,311
    )Loan participations sold
    
    
    (35,543
    )
    
    
    (63,452
    )
    
    
    (43,301
    )Loan principal reductions
    
    
    (1,325,815
    )
    
    
    (1,109,788
    )
    
    
    (691,013
    )Net increase before other items, net
    
    
    1,420,549
    
    
    
    1,460,702
    
    
    
    1,003,214Loans acquired in connection with acquisition of
Crown Bank
    
    
    
    
    
    
    
    
    
    
    486,958Loans securitized and transferred to
mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    (534,656
    )Net increase in loans
    
    $
    1,420,549
    
    
    $
    1,460,702
    
    
    $
    955,516
   (1)
    
    All of such loans were conventional loans.(2)
    
    Includes
$29.7 million and $32.2 million originated by Continental
in 2003 and 2002, respectively.(3)
    
    Includes $200.0 million conventional loans
sold to another financial
institution during late 2004; the Company acquired other
loans totaling approximately $201.0 million on such date from
the same financial institution. R&G Financial, through its banking subsidiaries, originates for both investment and sale
mortgage loans secured by residential real estate (secured by both first and second mortgage liens)
as well as construction loans (for residential real estate), commercial real estate loans,
commercial business loans and consumer loans. 16




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##### Table of Contents



R&G Mortgage assists Premier Bank in meeting its loan production targets and goals by, among
other things, (i) advertising, promoting and marketing to the general public; (ii) interviewing
prospective borrowers and conducting the initial processing of the requisite loan applications,
consistent with Premier Banks underwriting guidelines; and (iii) providing personnel and
facilities with respect to the execution of loan agreements approved by Premier Bank. R&G Mortgage
performs the foregoing loan origination services on behalf of Premier Bank with respect to
residential mortgage loans, some commercial real estate loans and construction loans. R&G Mortgage
receives from Premier Bank 75% of the applicable loan origination fee with respect to loans
originated by R&G Mortgage on behalf of Premier Bank. During the years ended December 31, 2004,
2003 and 2002, R&G Mortgage received $14.7 million, $15.6 million and $11.6 million, respectively,
of loan origination fees with respect to loans originated by R&G Mortgage on behalf of Premier
Bank. These fees are eliminated in consolidation in R&G Financials Consolidated Financial
Statements. See  Regulation  R&G Financial  Limitations on Transactions with Affiliates. R&G Financial originates commercial real estate, commercial business and consumer loans.
Applications for commercial real estate, commercial business and unsecured consumer loans are taken
at all branch offices of the Companys banking subsidiaries, and may be approved by lending
officers of each banking subsidiary within designated limits that are established and modified from
time to time to reflect an individuals expertise and experience. All loans in excess of an
individuals designated limits are referred to an officer with the requisite authority. In
addition, Premier Banks Management Credit Committee is authorized to approve all loans not
exceeding $5.0 million, and the Executive Committee of the Board of Directors is authorized to
approve all loans exceeding $5.0 million. In the case of Crown Bank, all loans over $1.0 million
require approval by Crown Banks Credit Committee and Board of Directors. Management of R&G
Financial believes that its relatively centralized approach to approving loan applications ensures
strict adherence to its underwriting guidelines, while still allowing the Company to approve loan
applications on a timely basis. R&G Financial also purchases conventional loans secured by first liens on single-family
residential real estate from unrelated financial institutions. Such loan purchases are
underwritten pursuant to the same guidelines as direct loan originations. During the years ended
December 31, 2004, 2003 and 2002, Premier Bank purchased
$207.2 million, $7.1 million and $236.2 million of
loans, respectively, and Crown Bank purchased $399.9 million and $423.7 million during
the years ended December 31, 2004 and 2003. Crown Bank did not purchase any such loans during the
year ended December 31, 2002. During the years ended December 31, 2004, 2003 and 2002, loans sold from banking operations
were $981.4 million, $254.0 million and $35.3 million, respectively. These loans, which were
primarily nonconforming loans at the time of origination, were generally sold in packages in
privately negotiated transactions with FNMA and FHLMC or other private parties. Loans
sold from banking institutions may include loans
sold in which the Company promises to pay a variable
yield to the investor. As part of its risk management
activities, the Company may purchase variable yielding loans
from the same counterparty to achieve an economic
hedge against loans sold to other counterparties at variable yields.
During late 2004, the Company sold $200.0 million conventional
loans to another financial institution; on the same date, the Company
acquired other loans totaling approximately
$201.0 million from the same financial institution. R&G Mortgage services all loans held in Premier Banks portfolio (including single-family
residential loans retained by Premier Bank, commercial real estate, commercial business and
consumer loans (although R&G Mortgage does not actually acquire such servicing rights)). In
addition, Premier Bank processes payments on all loans serviced by R&G Mortgage on behalf of
Premier Bank. Finally, R&G Mortgage renders securitization services with respect to the pooling of
some of Premier Banks mortgage loans into mortgage-backed
securities. See  Mortgage Banking
Activities. Single-Family Residential Real Estate Loans. R&G Financial historically has had a
substantial portion of its lending activities in the origination of loans secured by first mortgage
liens on existing single-family residences. At December 31, 2004, $2.9 billion or 51.7% of R&G
Financials total loans held for investment consisted of such loans, of which all but $1.2 million
consisted of conventional loans. Premier Banks first mortgage single-family residential loans
consist exclusively of fixed-rate loans with 17




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##### Table of Contents



terms of between 15 and 30 years. As evidenced by this statistic, the Puerto Rico residential
mortgage market has not been receptive to long-term adjustable rate mortgage loans. R&G Financials first mortgage single-family residential loans typically do not exceed 80% of
the appraised value of the security property. Pursuant to underwriting guidelines adopted by its
Board of Directors, R&G Financial may lend up to 95% of the appraised value of the property
securing a first mortgage single-family residential loan provided it is with private mortgage
insurance with respect to the top 25% of the loan. The Company also originates loans secured by second mortgages on single-family residential
properties. At December 31, 2004, $40.5 million or 0.7% of R&G Financials total loans held for
investment consisted of second mortgage loans on single-family residential properties. R&G
Financial offers such second mortgage loans in amounts up to $125,000 for a term not to exceed 15
years. The loan-to-value ratio of second mortgage loans generally is limited to 75% of the
propertys appraised value (including the first mortgage). Construction Loans. At December 31, 2004, retail construction (spot) loans amounted
to
$428.2 million or 7.6% of R&G Financials total loans held for investment, while commercial
construction and land acquisition loans amounted to
$836.0
million or 14.9% of total loans
held for investment. Premier Bank and Crown Bank offer spot loans to individual borrowers for the purpose of
constructing single-family residences. Substantially all of the Companys construction lending to
individuals is originated on a construction/permanent mortgage loan basis. Construction/permanent
loans are made to individuals who hold a contract with a general contractor acceptable to the
Company to construct their personal residence. The construction phase of the loan provides for
monthly payments on an interest only basis at a designated fixed rate for the term of the
construction period, that generally does not exceed nine months. Thereafter, the permanent loan is
made at then market rates, provided that such rate shall not be more than 2% greater than the
interim construction rate. In the case of Premier Bank, R&G Mortgages construction loan
department approves the proposed contractors and administers the loan during the construction
phase. The Companys construction/permanent loan program has been successful due to its ability to
offer borrowers a single closing and, consequently, reduced costs. R&G Financial also originates construction loans to developers to develop single-family
residential properties. At December 31, 2004, R&G Financial had residential construction loans to
develop single-family residences with an aggregate principal balance
of $366.3 million.
Commitments for future funding included in such amount approximate
$181.9 million. In addition,
R&G Financial had loans to develop commercial properties with an aggregate principal balance of
$95.6 million. All loans were performing in accordance with their terms at December 31, 2004. In addition to the foregoing, at December 31, 2004, R&G Financial had land acquisition
loans with an aggregate balance of $373.2 million, that were made in connection with projects to
construct single-family residences. R&G Financial and the financial institution that made the
interim construction loan have entered into an agreement pursuant to which R&G Financial is to be
paid a percentage of the proceeds from each home as it is released upon construction and sale. R&G
Financial expects to make the permanent construction loan on some of these projects. Premier Bank
also had made a working capital/pre-development loan with an
outstanding principal balance of $1.0 million at December 31, 2004 that is secured by land. 18




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##### Table of Contents



R&G Financial intends to continue to increase its involvement in single-family residential
construction lending. Such loans afford the Company the opportunity to increase the interest rate
sensitivity of its loan portfolio. Construction lending is generally considered to involve a
higher level of risk as compared to permanent single-family residential lending, due to the
concentration of principal in a limited number of loans and borrowers and the effects of general
economic conditions on real estate developers and managers. Moreover, a construction loan can
involve additional risks because of the inherent difficulty in estimating both a propertys value
at completion of the project and the estimated costs (including interest) of the project. The
nature of these loans is such that they are generally more difficult to evaluate and monitor. The
Company has taken steps to minimize the foregoing risks by, among other things, limiting its
construction lending primarily to residential properties. In addition, the Company has adopted
underwriting guidelines that impose stringent loan-to-value, debt service and other requirements
for loans that are believed to involve higher elements of credit risk and by working with builders
with whom it has established relationships or knowledge thereof. At
December 31, 2004, $1.4 million of R&G Financials retail construction loans were classified as non-performing. As of such
date, $711,000 of commercial construction or land acquisition loans were non-performing. Commercial Real Estate Loans. The Company also originates mortgage loans secured by
commercial real estate. At December 31, 2004,
$896.0 million or 16.0% of R&G Financials
total loans held for investment consisted of such loans. At December 31, 2004, $19.1 million of
R&G Financials commercial real estate loans were classified as non-performing. Commercial real estate loans of the Company are primarily secured by office buildings, retail
stores, warehouses and general purpose industrial space. Although terms vary, commercial real
estate loans generally are amortized over a period of 7 to 15 years in Premier Bank and 10 to 20
years in Crown Bank, and have maturity dates of 5 to 7 years in Premier Bank and 3 to 10 years in
Crown Bank. R&G Financial generally originates these loans with interest rates that adjust monthly
in accordance with a designated prime rate plus a margin, which generally is negotiated at the time
of origination. Such loans will have a floor but no ceiling on the amount by which the rate of
interest may adjust over the loan term. Loan-to-value ratios on the Companys commercial real
estate loans are currently limited to 80% or lower. As part of the criteria for underwriting
commercial real estate loans, R&G Financial generally requires a debt coverage ratio (the ratio of
net cash from operations before payment of debt service to debt service) of 1.20 or more. It is
also the Companys policy to seek additional protection to mitigate any weaknesses identified in
the underwriting process. Additional coverage may be provided through mortgage insurance,
secondary collateral and/or personal guarantees from the principals of the borrower. Commercial real estate lending entails different and significant risks when compared to
single-family residential lending because such loans typically involve large loan balances to
single borrowers and because the payment experience on such loans is typically dependent on the
successful operation of the project or the borrowers business. These risks can also be
significantly affected by supply and demand conditions in the local market for apartments, offices,
warehouses or other commercial space. R&G Financial attempts to minimize its risk exposure by
limiting the extent of its commercial lending generally. In addition, the Company imposes
stringent loan-to-value ratios, requires conservative debt coverage ratios, and continually
monitors the operation and physical condition of the collateral. Although the Company has begun to
increase its emphasis on commercial real estate lending, management does not currently anticipate
that the commercial real estate loans portfolio will grow significantly as a percentage of the
total loan portfolio. As of December 31, 2004, no significant
industry concentration exists among the Companys commercial
real estate loan portfolio. Commercial Business Loans. The Company offers commercial business loans, including
working capital lines of credit, inventory and accounts receivable loans, equipment financing
(including equipment leases), term loans, insurance premiums loans and loans guaranteed by the
Small Business Administration. Depending on the collateral pledged to secure the extension of
credit, maximum loan to 19




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##### Table of Contents



value ratios are 75% or less, with exceptions permitted to a maximum of 80%. Loan terms may
vary from one to 15 years. The interest rates on such loans are generally variable and are indexed
to a designated prime rate, plus a margin. The Company also generally obtains personal guarantees
from the principals of the borrowers. At December 31, 2004,
commercial business loans (including leases) amounted to
$307.5 million or 5.5% of total loans held for investment. Although the Company has begun to
increase its emphasis on commercial business lending, management does not currently anticipate that
its portfolio of commercial business loans will grow significantly as a percentage of the total
loan portfolio. Consumer Loans. R&G Financial also originates consumer loans. At December 31, 2004,
$206.5 million or 3.7% of R&G Financials total loans held for investment consisted of consumer
loans. This amount is comprised mostly of credit cards and other unsecured loans, but the Company
also offers real estate secured consumer loans (which in the case of Premier Bank are originated by
R&G Mortgage) and deposit accounts. Although R&G Financial has begun to increase the emphasis on
consumer lending, management does not currently anticipate that its portfolio of consumer loans
will grow significantly as a percentage of the total loan portfolio. R&G Financials unsecured consumer loans consisted principally of credit card receivables and
personal loans. At December 31, 2004, credit card receivables, all held by Premier Bank, totaled
$67.3 million, and personal loans amounted to $70.4 million. Most credit card receivables are
offered to targeted customers, which include referrals (cross selling) from other
segments/divisions of the Company. The Company has established minimum FICO scores for these
loans. R&G Financial also offers loans secured by deposit accounts, that amounted to $24.3 million
at December 31, 2004. Such loans are originated generally for up to 90% of the account balance,
with a hold placed on the account restricting the withdrawal of the account balance. In addition,
R&G Financial offers real estate secured loans in amounts up to 75% of the appraised value of the
property, including the amount of any existing prior liens. Such loans generally have shorter
terms and higher interest rates than other mortgage loans. Real estate secured consumer loans
generally have a maximum term of 10 years, which may be extended at managements sole discretion in
certain circumstances, and an interest rate that is set at a fixed rate based on market conditions.
The loans are secured with a first or second mortgage on the property, including loans where
another institution holds the first mortgage. At December 31, 2004, real estate secured consumer
loans totaled $44.5 million. Most of the Companys secured consumer loans have been primarily
obtained through newspaper advertising, although such loans are also obtained from existing and
walk-in customers. Consumer loans generally have shorter terms and higher interest rates than mortgage loans but
generally involve more credit risk than mortgage loans because of the type and nature of the
collateral and, in certain cases, the absence of collateral. In addition, consumer lending
collections are dependent on the borrowers continuing financial stability, and thus are more
likely to be adversely effected by job loss, divorce, illness and personal bankruptcy. In many
cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source
of repayment of the outstanding loan balance because of improper repair and maintenance of the
underlying security. The remaining deficiency may not warrant further substantial collection
efforts against the borrower. As a matter of policy, R&G
Financial charges-off any unsecured consumer loans delinquent over 120
days. At December 31, 2004, $3.7 million of consumer loans were classified
as non-performing, of which $2.5 million were secured by real estate. Asset Quality. When a borrower fails to make a required payment on a loan, R&G
Financial attempts to cure the deficiency by contacting the borrower and seeking payment. Contacts
are generally made between the 10th and 15th day after a payment is due. In most cases,
deficiencies are cured promptly. If a delinquency extends beyond 15 days, the loan and payment
history is reviewed and efforts are made to collect the loan. While R&G Financial generally
prefers to work with borrowers to resolve such problems, when the account becomes 90 days
delinquent in the case of mortgage loans, R&G 20




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##### Table of Contents



Financial does institute foreclosure or other proceedings, as necessary, to minimize any
potential loss. In the case of consumer loans, the Company refers the file for collection action
after 60 days. Loans secured by real estate are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be insufficient to warrant
further accrual. When such a loan is placed on non-accrual status, previously accrued but unpaid
interest is deducted from interest income. As a matter of policy, R&G Financial does not accrue
interest on loans past due 90 days or more that are secured by real estate, except for certain
residential mortgage loans in which the probability of collection of interest is deemed sufficient
to warrant accrual. The Company generally does not accrue interest on consumer loans past due over
90 days. Real estate acquired by the Company as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until sold. Pursuant to a statement of position
(SOP 92-3) that provides guidance on determining the balance sheet treatment of foreclosed assets
in annual financial statements, there is a rebuttable presumption that foreclosed assets are held
for sale and such assets are recommended to be carried at the lower of fair value minus estimated
costs to sell the property, or cost (generally the balance of the loan on the property at the date
of acquisition). After the date of acquisition, all costs incurred in maintaining the property are
expensed and costs incurred for the improvement or development of such property are capitalized up
to the extent of their net realizable value. The Companys accounting for its real estate owned
complies with the guidance set forth in SOP 92-3. 21




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##### Table of Contents



The following table sets forth the amounts and categories of R&G Financials non-performing
assets at the dates indicated. R&G Financial did not have any troubled debt restructurings at any
of the periods presented. Except as otherwise indicated in the footnotes to the table, the
non-performing assets are assets of banking subsidiaries of the Company. December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in Thousands)Non-accruing loans:Residential real estate(1)
    
    $
    82,856
    
    
    $
    57,031
    
    
    $
    43,281
    
    
    $
    50,358
    
    
    $
    79,234Residential construction
    
    
    2,120
    
    
    
    2,424
    
    
    
    1,512
    
    
    
    871
    
    
    
    487Commercial real estate
    
    
    19,147
    
    
    
    22,589
    
    
    
    29,375
    
    
    
    16,945
    
    
    
    11,881Commercial business
    
    
    1,855
    
    
    
    1,733
    
    
    
    2,197
    
    
    
    3,105
    
    
    
    1,414Consumer unsecured
    
    
    814
    
    
    
    833
    
    
    
    802
    
    
    
    303
    
    
    
    1,186Total
    
    
    106,792
    
    
    
    84,610
    
    
    
    77,167
    
    
    
    71,582
    
    
    
    94,202Accruing loans greater than 90 days delinquent:Residential real estate
    
    
    531
    
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    Residential construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial business
    
    
    651
    
    
    
    382
    
    
    
    261
    
    
    
    462
    
    
    
    420Consumer
    
    
    329
    
    
    
    422
    
    
    
    667
    
    
    
    428
    
    
    
    360Total accruing loans greater than
90 days delinquent
    
    
    1,511
    
    
    
    804
    
    
    
    1,032
    
    
    
    890
    
    
    
    780Total non-performing loans
    
    
    108,303
    
    
    
    85,414
    
    
    
    78,199
    
    
    
    72,472
    
    
    
    94,982Real estate owned, net
    
    
    21,115
    
    
    
    19,954
    
    
    
    15,544
    (2)
    
    
    10,061
    
    
    
    9,056Other repossessed assets
    
    
    14
    
    
    
    220
    
    
    
    292
    
    
    
    362
    
    
    
    58321,129
    
    
    
    20,174
    
    
    
    15,836
    
    
    
    10,423
    
    
    
    9,639Total non-performing assets
    
    $
    129,432
    
    
    $
    105,588
    
    
    $
    94,035
    
    
    $
    82,895
    
    
    $
    104,621Total non-performing loans as a
percentage of total loans(3)
    
    
    1.93
    %
    
    
    1.98
    %
    
    
    2.66
    %
    
    
    3.79
    %
    
    
    5.52
    %Total non-performing assets as a
percentage of total assets
    
    
    1.27
    %
    
    
    1.29
    %
    
    
    1.50
    %
    
    
    1.78
    %
    
    
    2.96
    %
   (1)
    
    Includes $2.5 million, $3.5 million, $4.5 million, $5.8 million and $6.2 million consumer
loans, respectively, held by Premier Bank secured by first and second mortgages on residential
real estate at December 31, 2004, 2003, 2002, 2001 and 2000, respectively. Also includes
$20.1 million, $6.4 million, $6.5 million, $7.3 million and $17.6 million residential real
estate loans secured by first mortgages held by R&G Mortgage at December 31, 2004, 2003, 2002,
2001 and 2000, respectively.(2)
    
    Real estate owned, net acquired in connection with the acquisition of Crown Bank in 2002
amounted to $5.1 million.(3)
    
    While the ratio of non-performing loans to total loans decreased from 1.92% to 1.93% from
December 31, 2003 to December 31, 2004, the ratio was nevertheless larger than it would
otherwise have been due to securitizations from the loan portfolio, which reduced the amount
of loans considered in the calculation of the ratio. 22




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##### Table of Contents



Non-performing loans amounted to $108.3 million at December 31, 2004, as compared to
$85.4 million at December 31, 2003. The increase in the aggregate amount of non-performing loans
during 2004 is due primarily to an increase in residential real estate non-performing loans in the
process of being foreclosed of $25.8 million, partially offset
by a decrease of $3.4 million in non-performing commercial real
estate loans. An aggregate of $82.9 million
or 76.5% of non-performing loans held at December 31, 2004 consisted of residential mortgage loans.
Because of the nature of the collateral, R&G Financial has historically recognized a low level of
loan charge-offs. R&G Financials aggregate charge-offs amounted to 0.27% during 2004, as compared
to 0.32% during 2003. Although loan delinquencies have historically been higher in Puerto Rico
than in the United States, loan charge-offs have historically been lower than in the United States. Non-performing
residential loans increased by $26.4 million or 46.2% from December 31, 2003 to
December 31, 2004. The average loan balance on non-performing mortgage loans amounted to
$74,000 at December 31, 2004. As of such date, 628 loans with an aggregate balance of
$52.6 million (including 85 consumer loans secured by real estate with an aggregate
balance of $1.4 million) were in the process of foreclosure. The total delinquency ratio
(including loans past due less than 90 days) on residential mortgages of banking subsidiaries,
excluding consumer loans secured by real estate,
increased from 3.09% in 2003 to 3.48% in 2004.
The Companys loss experience on such portfolio has been minimal over the last several years. Non-performing commercial real estate loans decreased by $3.4 million or 15.2% from $22.6
million at December 31, 2003 to $19.1 million at December 31, 2004. The decrease in non-performing
commercial real estate loans is attributable to a decrease of $5.4 million of such loans in Premier
Bank, partially offset by an increase of $674,000 in Crown Bank, as certain borrowers brought their
loans current during the year ended December 31, 2004. The number of loans delinquent over 90 days
amounted to 90 loans at December 31, 2004, with an average
balance of $213,000. The largest
non-performing commercial real estate loan as of December 31,
2004 had a balance of $2.4 million. Non-performing
commercial business loans consist of 27 loans. Such loans include three
loans with an aggregate balance of $1.1 million which are 90% guaranteed by the Small
Business Administration, 14 commercial leases amounting to $199,000
and six other commercial
business loans with an aggregate balance of $215,000. These loans have a combined average loan
size of $69,000. The largest non-performing commercial business loan as of December 31, 2004
had a $786,000 balance. At December 31, 2004, R&G Financials five largest loans-to-one borrower and their related
entities amounted to $51.9 million,
$50.7 million,
$38.5 million,
$30.5 million and $29.0 million. All of such loan concentrations were performing at December 31, 2004. At December 31, 2004, R&G Financials allowance for loan losses totaled $51.9 million, which
represented a $12.3 million or 31.0% increase from the level maintained at December 31, 2003. At
December 31, 2004, R&G Financials allowance represented approximately 0.92% of the total loan
portfolio and 47.90% of total non-performing loans, as compared to 0.92% and 46.38% at December 31,
2003. The increase in the allowance for loan losses reflects the increase in R&G Financials
commercial real estate and construction loan portfolios, which have higher inherent credit risk
compared to residential loans. Allowance for Loan Losses. It is the policy of the Company to maintain an allowance
for estimated losses on loans based on a number of quantitative and qualitative factors, including
levels and trends of past due and nonaccrual loans, levels and trends in asset classifications,
change in volume and 23




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##### Table of Contents



mix of loans and collateral values. Quantitative factors used to assess the adequacy of the
allowance for loan losses are established based upon managements assessment of the credit risk in
the portfolio, historical loan loss experience and the Companys loan underwriting policies as well
as managements judgment and experience. Provisions for loan losses are provided on both a
specific and general basis. Specific and general valuation allowances are increased by provisions
charged to expense and decreased by charge-offs of loans, net of recoveries. Specific allowances
are provided for impaired loans for which the expected loss is measurable. General valuation
allowances are provided based on a formula that incorporates the factors discussed above. R&G
Financial periodically reviews the assumptions and formula by which additions are made to the
specific and general valuation allowances for losses in an effort to refine such allowances in
light of the current status of the factors described above. Although management believes that it uses the best information available to make such
determinations, future adjustments to the allowance may be necessary, and net earnings could be
significantly affected, if circumstances differ substantially from the assumptions used in making
the initial determinations. The Companys 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 future losses may exceed current estimates. Premier Banks and Crown
Banks Internal Asset Review Committee undertakes a monthly evaluation of the adequacy of the
allowance for loan losses, which is reviewed and approved at least quarterly by the Board of
Directors. The Company provides an allowance to absorb losses that are both probable and
reasonably quantifiable as well as for those that are not specifically identified but can be
reasonably estimated. 24




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##### Table of Contents



The following table sets forth an analysis of R&G Financials allowance for loan losses during
the periods indicated, of which $49.4 million is maintained against the loan portfolios of the
banking subsidiaries at December 31, 2004: At and For the Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in Thousands)Balance at beginning of period
    
    $
    39,615
    
    
    $
    32,676
    
    
    $
    17,428
    
    
    $
    11,600
    
    
    $
    8,971Charge-offs:Residential real estate
    
    
    5,470
    
    
    
    1,989
    
    
    
    959
    
    
    
    72
    
    
    
    38Construction
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    916
    
    
    
    3,555
    
    
    
    3,263
    
    
    
    1,090
    
    
    
    468Commercial business
    
    
    3,936
    
    
    
    3,457
    
    
    
    3,547
    
    
    
    2,899
    
    
    
    1,539Consumer
    
    
    6,060
    
    
    
    4,940
    
    
    
    3,924
    
    
    
    2,566
    
    
    
    1,940Total charge-offs
    
    
    16,386
    
    
    
    13,941
    
    
    
    11,693
    
    
    
    6,627
    
    
    
    3,985Recoveries:Residential real estate
    
    
    969
    
    
    
    371
    
    
    
    135
    
    
    
    
    
    
    
    Commercial real estate
    
    
    277
    
    
    
    366
    
    
    
    15
    
    
    
    11
    
    
    
    80Commercial business
    
    
    1,166
    
    
    
    1,120
    
    
    
    709
    
    
    
    131
    
    
    
    381Consumer
    
    
    835
    
    
    
    467
    
    
    
    599
    
    
    
    382
    
    
    
    402Other
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    3,253
    
    
    
    2,324
    
    
    
    1,458
    
    
    
    524
    
    
    
    863Net charge-offs
    
    
    13,133
    
    
    
    11,617
    
    
    
    10,235
    
    
    
    6,103
    
    
    
    3,122Transferred reserves from R&G Mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    806
    
    
    
    Allowance for loan losses acquired
in acquisitions(1)
    
    
    
    
    
    
    
    
    
    
    7,463
    
    
    
    
    
    
    
    Provision for losses on loans
    
    
    25,396
    
    
    
    18,556
    
    
    
    18,020
    
    
    
    11,125
    
    
    
    5,751Balance at end of period
    
    $
    51,878
    
    
    $
    39,615
    
    
    $
    32,676
    
    
    $
    17,428
    
    
    $
    11,600Allowance for loan losses as a
percent of total loans outstanding
    
    
    0.92
    %
    
    
    0.92
    %
    
    
    1.11
    %
    
    
    0.91
    %
    
    
    0.67
    %Allowance for loan losses as a
percent of non-performing loans
    
    
    47.90
    %
    
    
    46.38
    %
    
    
    41.79
    %
    
    
    24.05
    %
    
    
    12.21
    %Ratio of net charge-offs to average
loans outstanding
    
    
    0.27
    %
    
    
    0.32
    %
    
    
    0.41
    %
    
    
    0.32
    %
    
    
    0.17
    %
   (1)
    
    Relates to acquired reserves in connection with the acquisition of Crown Bank in 2002. 25




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##### Table of Contents



The following table sets forth information concerning the allocation of R&G Financials
allowance for loan losses by loan category at the dates indicated. December 31,2004
    
    
    2003
    
    
    2002Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans in Each
    
    
    
    
    
    
    Loans in Each
    
    
    
    
    
    
    Loans in EachCategory to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category toAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans(Dollars in Thousands)Residential real estate
    
    $
    8,449
    
    
    
    16.29
    %
    
    $
    6,794
    
    
    
    17.15
    %
    
    $
    2,982
    
    
    
    9.13
    %Construction
    
    
    4,189
    
    
    
    8.07
    
    
    
    2,280
    
    
    
    5.76
    
    
    
    1,522
    
    
    
    4.66Commercial real estate
    
    
    20,893
    
    
    
    40.27
    
    
    
    16,109
    
    
    
    40.66
    
    
    
    17,114
    
    
    
    52.37Commercial business
    
    
    9,866
    
    
    
    19.02
    
    
    
    6,162
    
    
    
    15.55
    
    
    
    4,104
    
    
    
    12.56Consumer
    
    
    8,481
    
    
    
    16.35
    
    
    
    8,270
    
    
    
    20.88
    
    
    
    6,954
    
    
    
    21.28Total
    
    $
    51,878
    
    
    
    100.00
    %
    
    $
    39,615
    
    
    
    100.00
    %
    
    $
    32,676
    
    
    
    100.00
    %
 December 31,2001
    
    
    2000Percent of Loans
    
    
    
    
    
    
    Percent of Loansin Each
    
    
    
    
    
    
    in EachCategory to
    
    
    
    
    
    
    Category toAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans(Dollars in Thousands)Residential real estate
    
    $
    2,496
    
    
    
    14.32
    %
    
    $
    1,278
    
    
    
    11.02
    %Construction
    
    
    800
    
    
    
    4.59
    
    
    
    432
    
    
    
    3.72Commercial real estate
    
    
    7,371
    
    
    
    42.29
    
    
    
    4,880
    
    
    
    42.07Commercial business
    
    
    2,253
    
    
    
    12.93
    
    
    
    1,321
    
    
    
    11.39Consumer
    
    
    4,508
    
    
    
    25.87
    
    
    
    3,689
    
    
    
    31.80Total
    
    $
    17,428
    
    
    
    100.00
    %
    
    $
    11,600
    
    
    
    100.00
    %
 The allowance for loan losses reflects managements judgment of the level of allowance
adequate to absorb estimated credit losses inherent in R&G Financials loan portfolio. The Board
of Directors of R&G Financial approved a policy formulated by management for a systematic analysis
of the adequacy of the allowance. The major elements of the policy consist of: (1) a monthly
analysis of reserve amounts at Premier Bank (quarterly at Crown Bank); (2) approval by the Board of
Directors of each banking subsidiary of the periodic analysis; and (3) division of the reserve into
specific allocation and general reserve portions. The analysis is based on managements
assessment of the historic rate of losses in addition to concentration, segmentation, regional
economic conditions, non-performing loan and asset levels, past due status, composition of the
portfolio, and other factors. Specific Allocations. All classified loans are evaluated for loss portions or
potential loss exposure. The evaluation occurs at the time the loan is classified and on a regular
basis (at least every 360 days) thereafter. This evaluation is documented in the Internal Asset
Review Report relating to a specific loan. Specific allocation of reserves considers the value of
collateral, the financial condition of the borrower, and industry and current economic trends. General Allowances. Management realizes that an institutions past loss history
should be considered in evaluating the inherent loss potential of the loan portfolio.
Consequently, management has deemed it prudent to develop and implement a migration analysis for
the determination of inherent loss 26




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##### Table of Contents



potential for both its homogeneous and non-homogeneous loan portfolios. Homogeneous loan
categories consist of one-to-four family residential mortgages and consumer loans. Commercial
business and commercial real estate loans less than $500,000 are also treated as homogeneous loans
for asset review purposes. Homogeneous loans are analyzed on a group or pool basis for evaluating
credit quality and impairment under FASBs SFAS No 5. Non-homogeneous loan categories consist of
all other commercial business and commercial real estate loans. These assets are reviewed
individually for the purpose of evaluating credit quality and impairment under FASBs SFAS No. 114.
The migration loss percentage factors used for each risk class or grade for both homogeneous and
non-homogeneous loan categories are based on the results of a 3 year write-off experience migration
analysis. General allowances are derived for consumer lending utilizing historical loss factors derived
through migration analysis and adjusting for current trends, economic conditions and portfolio
behavioral characteristics. Consumer lending poses more inherent risks than one-to-four family
residential lending and, consequently, the loss factors are higher. Because of the Companys
limited loss history for one-to-four family residential loans in Crown Bank, general allowances for
Crown Bank are derived utilizing historical industry loss factors, also adjusted for managements
assessment of the qualitative factors presented above. Loss factors are applied based upon
delinquency status with higher loss factors applied as the number of days past due increases. Mortgage Banking Activities Loan Originations, Purchases and Sales. During the years ended December 31, 2004,
2003 and 2002, R&G Financial originated a total of $2.3 billion, $2.8 billion and $2.0 billion
of residential mortgage loans, respectively. These aggregate originations include loans originated
by R&G Mortgage directly for Premier Bank of $1.3 billion, $1.3 billion and $811.8 million
during the years ended December 31, 2004, 2003 and 2002, respectively, of such originations, or
55%, 45% and 41% respectively, of total originations. The loans originated by R&G Mortgage for
Premier Bank are comprised primarily of conventional residential loans and, to a lesser extent,
consumer loans secured by real estate. R&G Financial is engaged to a significant extent in the origination of FHA-insured and
VA-guaranteed single-family residential loans that are primarily securitized into GNMA
mortgage-backed securities and sold to institutional and/or private investors in the secondary
market. During the years ended December 31, 2004, 2003 and 2002, R&G Financial originated
$175.7 million, $358.9 million and $365.2 million, respectively, of FHA/VA loans, which
represented 7.5%, 12.7% and 18.6%, respectively, of total loans originated during such respective
periods. R&G Financial also originates conventional single-family residential loans which are either
insured by private mortgage insurers or do not exceed 80% of the appraised value of the mortgaged
property. During the years ended December 31, 2004, 2003 and 2002, R&G Financial originated
$2.2 billion, $2.5 billion and $1.6 billion, respectively, of conventional single-family
residential mortgage loans. Substantially all conforming conventional single-family residential
loans are securitized and sold in the secondary market, while a substantial portion of
non-conforming conventional single-family residential loans are originated by R&G Mortgage (either
directly or through The Mortgage Store) on behalf of Premier Bank and either held by Premier Bank
in its portfolio or subsequently securitized by R&G Mortgage and/or sold in the secondary market
from time to time. Non-conforming loans generally consist of loans which, primarily because of size or other
underwriting technicalities (mostly related to documentation requirements) which may be cured
through seasoning, do not satisfy the guidelines for resale of FNMA, FHLMC, GNMA and other private
secondary market investors at the time of origination. Management believes that these loans are 27




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##### Table of Contents



essentially of the same credit quality as conforming loans. In connection with mortgage
operations, during the years ended December 31, 2004, 2003 and 2002, non-conforming conventional
loans represented approximately 63%, 52% and 54%, respectively, of R&G Financials total volume
of mortgage loans originated, most of which were originated by R&G Mortgage on behalf of Premier
Bank. During the years ended December 31, 2004, 2003 and 2002, 95.2%, 96.3% and 94.1% of loans
originated by R&G Mortgage on behalf of Premier Bank consisted of single-family residential loans
during such respective periods. R&G Mortgage originates single-family residential, construction
and commercial real estate loans on behalf of Premier Bank pursuant to the terms of a Master
Production Agreement between R&G Mortgage and Premier Bank. See
 Lending Activities from Banking
Operations  Origination, Purchase and Sale of Loans. While R&G Financial makes available a wide variety of mortgage products designed to respond to
consumer needs and competitive conditions, it currently emphasizes 15-year and 30-year conventional
first mortgages and 15-year and 30-year FHA loans and VA loans. Substantially all of such loans
consist of fixed-rate mortgages. R&G Financial also offers second mortgage loans up to $125,000
with a maximum term of 15 years. The maximum loan-to-appraised value ratio on second mortgage
loans permitted by R&G Financial is generally 75% (including the amount of any first mortgage). In
addition, R&G Financial also offers real estate secured consumer loans up to $60,000 with a maximum
term of 15 years. The maximum loan-to-appraised value ratio on real estate secured consumer loans
permitted by R&G Financial is generally 80%. R&G Financial will secure such loans with either a
first or second mortgage on the property. The Companys loan origination activities in Puerto Rico are conducted out of R&G Mortgage
offices and mortgage banking centers, and in the continental United States, mainly through loan
officers and solicitors, out of Crown Banks branches and Continentals mortgage offices.
Residential mortgage loan applications are attributable to walk-in customers, existing customers
and advertising and promotion, referrals from real estate brokers and builders, loan solicitors and
mortgage brokers. Loan origination activities performed by the Company include soliciting, completing and
processing mortgage loan applications and preparing and organizing the necessary loan
documentation. Loan applications are examined for compliance with underwriting criteria and, if
all requirements are met, the Company issues a commitment to the prospective borrower specifying
the amount of the loan and the loan origination fees, points and closing costs to be paid by the
borrower or seller and the date on which the commitment expires. R&G Mortgage also purchases FHA loans and VA loans from other mortgage bankers for resale to
institutional investors and other investors in the form of GNMA mortgage-backed securities. R&G
Mortgages strategy is to increase its servicing portfolio primarily though internal originations
through its branch network and, to a lesser extent, purchases from third parties. Purchases of
loans from other mortgage bankers in the wholesale loan market are generally limited to FHA loans
and VA loans and such purchases provide R&G Mortgage with a source of low cost production that
allows R&G Mortgage to continue to increase the size of its servicing portfolio. R&G Mortgage
purchased $22.7 million, $23.7 million and $21.9 million of loans from third parties during the
years ended December 31, 2004, 2003 and 2002, respectively. 28




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##### Table of Contents



The following table sets forth loan originations, purchases and sales by R&G Financial from
its mortgage banking business for the periods indicated. Year Ended December 31,2004
    
    
    2003
    
    
    2002(Dollars in Thousands)Loans Originated For Premier Bank:Conventional loans(1):Number of loans
    
    
    10,750
    
    
    
    10,674
    
    
    
    7,182Volume of loans
    
    $
    1,289,445
    
    
    $
    1,281,323
    
    
    $
    809,141FHA/VA loans:Number of loans
    
    
    
    
    
    
    
    
    
    
    Volume of loans
    
    
    
    
    
    
    
    
    
    
    Consumer loans(2):Number of loans
    
    
    476
    
    
    
    126
    
    
    
    133Volume of loans
    
    $
    6,062
    
    
    $
    1,985
    
    
    $
    2,632Total loans:Number of loans
    
    
    11,226
    
    
    
    10,800
    
    
    
    7,315Volume of loans
    
    $
    1,295,507
    
    
    $
    1,283,308
    
    
    $
    811,773Percent of total volume
    
    
    55
    %
    
    
    45
    %
    
    
    41
    %Loans Originated For Sale to Third Parties:Conventional loans(1):Number of loans
    
    
    8,058
    
    
    
    10,179
    
    
    
    7,123Volume of loans
    
    $
    873,082
    
    
    $
    1,193,565
    
    
    $
    782,782FHA/VA loans:Number of loans
    
    
    1,623
    
    
    
    3,271
    
    
    
    3,537Volume of loans
    
    $
    175,693
    
    
    $
    358,906
    
    
    $
    365,172Total loans:Number of loans
    
    
    9,681
    
    
    
    13,450
    
    
    
    10,660Volume of loans
    
    $
    1,048,775
    
    
    $
    1,552,471
    
    
    $
    1,147,954Percent of total volume
    
    
    44
    %
    
    
    54
    %
    
    
    58
    %Total loan originations
    
    $
    2,344,282
    
    
    $
    2,835,779
    
    
    $
    1,959,727Loans Purchased For R&G Mortgage:Number of loans
    
    
    302
    
    
    
    315
    
    
    
    283Volume of loans(3)
    
    $
    22,713
    
    
    $
    23,709
    
    
    $
    21,890Percent of total volume
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Total loan originations and purchases
    
    $
    2,366,995
    
    
    $
    2,859,488
    
    
    $
    1,981,617
 29




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##### Table of Contents



Year Ended December 31,2004
    
    
    2003
    
    
    2002(Dollars in Thousands)Loans Sold (4):Conventional loans(1):Number of loans
    
    
    8,824
    
    
    
    10,935
    
    
    
    7,114Volume of loans
    
    $
    935,665
    
    
    $
    1,255,701
    
    
    $
    794,869FHA/VA loans:Number of loans
    
    
    1,781
    
    
    
    2,957
    
    
    
    2,668Volume of loans
    
    $
    188,331
    
    
    $
    351,162
    
    
    $
    369,449Total loans:Number of loans
    
    
    10,605
    
    
    
    13,892
    
    
    
    9,782Volume of loans(3)
    
    $
    1,123,996
    
    
    $
    1,606,863
    
    
    $
    1,164,318Percent of total volume
    
    
    47
    %
    
    
    56
    %
    
    
    59
    %Adjustments:Loans originated for Premier Bank
    
    $
    (1,295,507
    )
    
    $
    (1,283,308
    )
    
    $
    (811,773
    )Loan amortization
    
    
    (69,438
    )
    
    
    (60,149
    )
    
    
    (44,200
    )Net (decrease) increase in loans
    
    $
    (121,946
    )
    
    $
    (90,832
    )
    
    $
    (38,674
    )Average Initial Loan Origination Balance:Premier Bank:Conventional loans(1)
    
    $
    120
    
    
    $
    120
    
    
    $
    113FHA/VA loans
    
    
    
    
    
    
    
    
    
    
    Third Parties:Conventional loans(1)
    
    $
    108
    
    
    $
    117
    
    
    $
    110FHA/VA loans
    
    
    108
    
    
    
    110
    
    
    
    103Total
Conventional loans(1)
    
    $
    115
    
    
    $
    119
    
    
    $
    111FHA/VA loans
    
    
    108
    
    
    
    110
    
    
    
    103Refinancings(5):Premier Bank
    
    
    43
    %
    
    
    52
    %
    
    
    50
    %Third Parties
    
    
    55
    %
    
    
    68
    %
    
    
    56
    %
   (1)
    
    Includes non-conforming loans.(2)
    
    All of such loans were secured by real estate.(3)
    
    Includes $22.7 million, $23.7 million and $21.8 million of loans purchased from another
institution, and securitized and sold to the same financial institution during 2004, 2003 and
2002, respectively.(4)
    
    Includes loans converted into mortgage-backed securities.(5)
    
    As a percent of the total dollar volume of mortgage loans originated by R&G Mortgage for
Premier Bank (excluding consumer loans) or third parties, as the case may be. In the case of
Premier Bank, refinancings do not necessarily represent refinancings of loans previously held
by Premier Bank. All loan originations, regardless of whether originated by the Company or purchased from
third parties, must be underwritten in accordance with R&G Financials underwriting criteria,
including loan-to-appraised value ratios, borrower income qualifications, debt ratios and credit
history, investor requirements, necessary insurance and property appraisal requirements. R&G
Financials underwriting standards also comply with the relevant guidelines set forth by HUD, VA,
FNMA, FHLMC, bank regulatory authorities, private mortgage investment conduits and private mortgage
insurers, as applicable. The Companys underwriting personnel, while operating out of its loan
offices, make underwriting decisions independent of the Companys mortgage loan origination
personnel. 30




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##### Table of Contents



Typically, when a mortgage loan is originated, the borrower pays an origination fee. These
fees are generally in the range of 0% to 7% of the principal amount of the mortgage loan, and are
payable at the closing of such loan. The Company receives these fees on mortgage loans originated
through its retail branches. The Company may charge additional fees depending upon market
conditions and regulatory considerations as well as the Companys objectives concerning mortgage
loan origination volume and pricing. The Company incurs certain costs in originating mortgage
loans, including overhead, out-of-pocket costs and, in some cases, where the mortgage loans are
subject to a purchase commitment from private investors, related commitment fees. The volume and
type of mortgage loans and of commitments made by investors vary with competitive and economic
conditions (such as the level of interest rates and the status of the economy in general),
resulting in fluctuations in revenues from mortgage loan originations. Generally accepted
accounting principles, or GAAP, require that general operating expenses incurred in originating
mortgage loans be charged to current expense. Direct origination costs and origination fee income
must be deferred until the repayment or sale of the
related mortgage loans. Historically, the value of servicing rights which result from R&G
Financials origination activities has exceeded the net costs attributable to such activities. R&G Financial customarily sells most of the loans that it originates, except for those
originated on behalf of Premier Bank pursuant to a Master Production Agreement with R&G Mortgage.
See Lending Activities from Banking Operations  Origination, Purchases and Sales of Loans.
During the years ended December 31, 2004, 2003 and 2002,
R&G Financial sold $1.2 billion,
$1.6 billion and $1.2 billion of loans, respectively, which includes loans securitized and sold but
does not include loans originated by R&G Mortgage on behalf of Premier Bank. With respect to such
loan sales,
$136.5 million or 11.2%, $211.8 million or 13.2% and $253.1 million or 21.7%,
respectively, consisted of GNMA-guaranteed mortgage-backed securities of FHA loans or VA loans
packaged into pools of $1 million or more ($2.5 million to $5 million for GNMA serial notes) by R&G
Mortgage. These securities were sold directly either through R-G Investments Corporation, R&G
Financials broker-dealer, Premier Banks Trust Department, or indirectly through securities
broker-dealers. Conforming conventional loans originated or purchased by the Company are generally sold
directly to FNMA, FHLMC or private investors for cash or are grouped into pools of $1 million or
more in aggregate principal balance and exchanged for FNMA or FHLMC-issued mortgage-backed
securities, which the Company sells to securities broker-dealers. In connection with any such
exchanges, the Company pays guarantee fees to FNMA and FHLMC. The issuance of mortgage-backed
securities provides R&G Financial with flexibility in selling the mortgages that it originates or
purchases and also provides income by increasing the value and marketability of the loans.
Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements (so-called non-conforming
loans) are generally originated on behalf of Premier Bank by R&G Mortgage and either retained in
Premier Banks portfolio, sold to financial institutions or other private investors. While R&G Financials exchanges of mortgage loans into agency securities and sales of mortgage
loans are generally made on a non-recourse basis, the Company also engages in the sale or exchange
of mortgage loans on a recourse basis. In the past, recourse sales often involved the sale of
non-conforming loans to FNMA, FHLMC and local financial institutions. R&G Financial estimates the
fair value of the retained recourse obligation at the time mortgage loans are sold. At December
31, 2004, R&G Financial had loans in its servicing portfolio with provisions for recourse in the
principal amount of approximately $2.1 billion, as compared to $1.1 billion and $762.3 million as
of December 31, 2003 and 2002, respectively. Of the recourse loans existing at December 31, 2004,
approximately $222.9 million in principal amount consisted of loans sold to FNMA and FHLMC and
converted into mortgage-backed securities of such agencies, and approximately $1.9 billion in
principal amount consisted of non-conforming loans sold to other financial institutions and/or
private investors. As of December 31, 2004, 31




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##### Table of Contents



R&G Financial had reserves for possible losses related to its recourse obligations of $6.8
million. Historical losses on recourse obligations have not been significant. Loan Servicing. R&G Financial acquires servicing rights through its mortgage loan
originations (including originations on behalf of Premier Bank) and purchases from third parties.
The Company generally retains the rights to service mortgage loans sold, which it has originated or
purchased, and receives the related servicing fees. Loan servicing includes collecting principal
and interest and remitting the same to the holders of the mortgage loans or mortgage-backed
securities to which such mortgage loan relates, holding escrow funds for the payment of real estate
taxes and insurance premiums, contacting delinquent borrowers, supervising foreclosures in the
event of unremedied defaults and generally administering the loans. The Company receives annual
loan servicing fees ranging from 0.25% to 0.50% of the declining outstanding principal balance of
the loans serviced plus any late charges. In general, the Companys servicing agreements are
terminable by the investor for cause without penalty or after payment of a termination fee ranging
from 0.5% to 1.0% of the outstanding principal balance of the loans being serviced. R&G Financials servicing portfolio has grown significantly over the past several years. At
December 31, 2004, R&G Financials servicing portfolio totaled $11.4 billion and consisted of a
total of 145,324 loans. These amounts include R&G Mortgages servicing portfolio totaling $8.5
billion and Crown Banks servicing portfolio totaling $2.9 billion at December 31, 2004. At
December 31, 2004, R&G Financials servicing portfolio included $2.1 billion of loans serviced for
Premier Bank and $647.7 million of loans serviced for Crown Bank, or 18.3% and 5.7%, respectively,
of the total servicing portfolio. Most of the mortgage loans in R&G Financials servicing
portfolio are secured by single (one-to-four) family residences. At December 31, 2004,
approximately 75% of R&G Financials mortgage servicing portfolio is comprised of mortgages secured
by real estate located in Puerto Rico. R&G Mortgage services all loans held in Premier Banks loan portfolio (including single-family
residential loans retained by Premier Bank and certain commercial real estate loans), although R&G
Mortgage does not actually acquire such servicing rights. Once loans are sold, Premier Bank
retains the servicing rights to such loans; R&G Mortgage continues to service the loans on behalf
of Premier Bank. Premier Bank pays R&G Mortgage servicing fees with respect to the loans serviced
by R&G Mortgage on behalf of Premier Bank. In addition, Premier Bank processes payments of all
loans originated by R&G Mortgage on behalf of Premier Bank. In connection therewith, R&G Mortgage
pays Premier Bank a fee equal to between $0.50 and $1.00 per loan.
See  Regulation  R&G
Financial  Limitations on Transactions with Affiliates. R&G Financials mortgage loan servicing portfolio is subject to reduction by reason of normal
amortization, prepayments and foreclosure of outstanding mortgage loans. Additionally, R&G
Financial may sell mortgage loan servicing rights from time to time. 32




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##### Table of Contents



The following table sets forth certain information regarding the total loan servicing
portfolio of R&G Financial for the periods indicated. Year Ended December 31,2004
    
    
    2003
    
    
    2002(Dollars in Thousands)Composition of Servicing Portfolio at End of
Period:Conventional and other mortgage loans(1)
    
    $
    9,223,563
    
    
    $
    8,317,318
    
    
    $
    8,035,208FHA/VA loans
    
    
    2,180,740
    
    
    
    2,625,503
    
    
    
    2,956,736Total servicing portfolio
    
    $
    11,404,303
    
    
    $
    10,942,821
    
    
    $
    10,991,944Activity in the Servicing Portfolio:Beginning servicing portfolio
    
    
    10,942,821
    
    
    $
    10,991,944
    
    
    $
    7,224,571Add: Loan originations and purchases
    
    
    2,918,983
    
    
    
    2,935,327
    
    
    
    2,204,275Servicing of portfolio loans acquired(2)
    
    
    3,495
    
    
    
    1,008,231
    
    
    
    4,325,499Less: Sale of servicing rights(3)
    
    
    (191,914
    )
    
    
    (255,814
    )
    
    
    (229,587
    )Run-offs(4)
    
    
    (2,269,082
    )
    
    
    (3,736,867
    )
    
    
    (2,532,814
    )Ending servicing portfolio
    
    $
    11,404,303
    
    
    $
    10,942,821
    
    
    $
    10,991,944Number of loans serviced
    
    
    145,324
    
    
    
    147,981
    
    
    
    158,659Average loan size
    
    $
    78
    
    
    $
    74
    
    
    $
    69Average servicing fee rate
    
    
    0.397
    %
    
    
    0.467
    %
    
    
    0.508
    %
   (1)
    
    Includes non-conforming loans.(2)
    
    Includes $2.6 billion acquired in connection with the acquisition of Crown Bank in June 2002.(3)
    
    Includes loans sold, servicing released, by Continental totaling $191.9 million, $255.8
million and $229.6 million in 2004, 2003 and 2002, respectively.(4)
    
    Run-off refers to regular amortization of loans, prepayments and foreclosures. The following table sets forth certain information at December 31, 2004 regarding the
number and aggregate principal balance of the mortgage loans serviced by R&G Financial for its loan
portfolio and for third parties at various mortgage interest rates. At December 31, 2004Portfolio
    
    
    Loans Serviced
    
    
    Total LoansLoans Serviced
    
    
    for Third Parties
    
    
    ServicedNumber of
    
    
    Aggregate
    
    
    Number of
    
    
    Aggregate
    
    
    Number of
    
    
    AggregateLoans
    
    
    Principal Balance
    
    
    Loans
    
    
    Principal Balance
    
    
    Loans
    
    
    Principal Balance(Dollars in Thousands)Mortgage Interest
RateLess than
4.99%
    
    
    630
    
    
    
    152,242
    
    
    
    5,051
    
    
    
    372,757
    
    
    
    5,681
    
    
    
    524,9995.00% - 5.49%
    
    
    831
    
    
    
    204,796
    
    
    
    4,595
    
    
    
    465,890
    
    
    
    5,426
    
    
    
    670,6865.50% - 5.99%
    
    
    3,940
    
    
    
    686,698
    
    
    
    12,853
    
    
    
    1,321,965
    
    
    
    16,793
    
    
    
    2,008,6636.00% - 6.49%
    
    
    6,989
    
    
    
    842,917
    
    
    
    13,958
    
    
    
    1,450,699
    
    
    
    20,947
    
    
    
    2,293,6166.50% - 6.99%
    
    
    4,976
    
    
    
    515,804
    
    
    
    17,988
    
    
    
    1,461,910
    
    
    
    22,964
    
    
    
    1,977,7147.00% - 7.49%
    
    
    2,204
    
    
    
    192,828
    
    
    
    20,308
    
    
    
    1,397,654
    
    
    
    22,512
    
    
    
    1,590,4827.50% - 7.99%
    
    
    1,077
    
    
    
    79,049
    
    
    
    19,425
    
    
    
    1,070,122
    
    
    
    20,502
    
    
    
    1,149,1718.00% - 8.49%
    
    
    453
    
    
    
    29,755
    
    
    
    9,145
    
    
    
    450,686
    
    
    
    9,598
    
    
    
    480,4418.50% - 8.99%
    
    
    553
    
    
    
    26,336
    
    
    
    8,637
    
    
    
    361,150
    
    
    
    9,190
    
    
    
    387,4869.00% - 9.49%
    
    
    199
    
    
    
    8,556
    
    
    
    3,202
    
    
    
    116,392
    
    
    
    3,401
    
    
    
    124,9489.50% - 9.99%
    
    
    242
    
    
    
    8,466
    
    
    
    2,595
    
    
    
    67,514
    
    
    
    2,837
    
    
    
    75,98010.00% or more
    
    
    351
    
    
    
    9,865
    
    
    
    4,801
    
    
    
    110,252
    
    
    
    5,152
    
    
    
    120,11722,445
    
    
    
    2,757,312
    
    
    
    122,558
    
    
    
    8,646,991
    
    
    
    145,003
    
    
    
    11,404,303
 33




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##### Table of Contents



The amount of principal prepayments on mortgage loans serviced by R&G Financial was
$373.9 million, $356.9 million and $288.2 million for the years ended December 31, 2004, 2003,
and 2002, respectively. This represented approximately 3.3%, 3.3% and 3.1% of the aggregate
principal amount of mortgage loans serviced during such periods. The primary means used by R&G
Mortgage to reduce the sensitivity of its servicing fee income to changes in interest and
prepayment rates is the development of a strong internal origination capability that has allowed
R&G Financial to continue to increase the size of its servicing portfolio even in times of high
prepayments. Servicing agreements relating to the mortgage-backed securities programs of FNMA, FHLMC and
GNMA, and certain other investors, require R&G Financial to advance funds to make scheduled
payments of principal, interest, taxes and insurance, if such payments have not been received from
the borrowers. During the years ended December 31, 2004, 2003 and 2002, the monthly average amount
of funds advanced by R&G Financial under such servicing
agreements was $28.9 million, $26.7 million and $24.4 million, respectively. Funds advanced by R&G Financial pursuant to these
arrangements are generally recovered by R&G Financial within 30 days. In connection with its loan servicing activities, R&G Financial holds escrow funds for the
payment of real estate taxes and insurance premiums with respect to the mortgage loans it services.
At December 31, 2004, R&G Financial held $150.3 million of such escrow funds, $94.6 million of
which were deposited in Premier Bank, $55.6 million of which were deposited in Crown Bank and
$101,000 of which were deposited with other financial institutions. The escrow funds lower the
overall cost of funds, while the escrow funds deposited with other financial institutions serve as
part of R&G Financials compensating balances which permit the Company to borrow funds from such
institutions (pursuant to certain warehouse lines of credit) at rates that are lower than would
otherwise apply. See  Sources of Funds  Borrowings. The degree of risk associated with a mortgage loan servicing portfolio is largely dependent on
the extent to which the servicing portfolio is non-recourse or recourse. In non-recourse
servicing, the principal credit risk to the servicer is the cost of temporary advances of funds.
In recourse servicing, the servicer agrees to share credit risk with the owner of the mortgage
loans such as FNMA or FHLMC or with an insurer or guarantor. Losses on recourse servicing occur
primarily when foreclosure sale proceeds of the property underlying a defaulted mortgage are less
than the then outstanding principal balance and accrued interest of such mortgage loan and the cost
of holding and disposing of such underlying property. At December 31, 2004, R&G Financial was
servicing mortgage loans with an aggregate principal amount of $2.1 billion on a recourse basis.
During the last three years, losses incurred due to recourse servicing have not been significant. R&G Financials general strategy is to retain the servicing rights related to the mortgage
loans it originates and purchases. Nevertheless, there is a market for servicing rights, which are
generally valued in relation to the present value of the expected income stream generated by the
servicing rights. Among the factors which influence the value of a servicing portfolio are
servicing fee rates, loan balances, loan types, loan interest rates, the expected average life of
the underlying loans (which may be reduced through foreclosure or prepayment), the value of escrow
balances, delinquency and foreclosure experience, servicing costs, servicing termination rights of
permanent investors and any recourse provisions. Although the Company may on occasion consider
future sales of a portion of its servicing portfolio, management does not anticipate sales of
servicing rights to become a significant part of its operations. The market value of, and earnings from, R&G Financials mortgage loan servicing portfolio may
be adversely affected if mortgage interest rates decline and mortgage loan prepayments increase.
In a period of declining interest rates and accelerated prepayments, income generated from the
Companys 34




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##### Table of Contents



mortgage loan servicing portfolio may also decline. Conversely, as mortgage interest rates
increase, the market value of the Companys mortgage loan servicing portfolio may be positively
affected. See Note 1 to R&G Financials Notes to Consolidated Financial Statements for a
discussion of SFAS No. 140 and the treatment of servicing rights, incorporated by reference into
Item 8 hereof. Mortgage Loan Delinquencies and Foreclosures. The following table shows the
delinquency statistics for R&G Financials servicing portfolio at the dates indicated. Year Ended December 31,2004
    
    
    2003
    
    
    2002Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofNumber of
    
    
    Servicing
    
    
    Number of
    
    
    Servicing
    
    
    Number of
    
    
    ServicingLoans
    
    
    Portfolio
    
    
    Loans
    
    
    Portfolio
    
    
    Loans
    
    
    PortfolioLoans delinquent for:30-59 days
    
    
    5,089
    
    
    
    3.50
    %
    
    
    5,106
    
    
    
    3.45
    %
    
    
    5,708
    
    
    
    3.60
    %60-89 days
    
    
    1,601
    
    
    
    1.10
    %
    
    
    1,672
    
    
    
    1.13
    
    
    
    1,696
    
    
    
    1.0790 days or more
    
    
    3,162
    
    
    
    2.18
    %
    
    
    3,559
    
    
    
    2.41
    
    
    
    3,298
    
    
    
    2.08Total delinquencies(1)
    
    
    9,852
    
    
    
    6.78
    %
    
    
    10,337
    
    
    
    6.99
    %
    
    
    10,702
    
    
    
    6.75
    %Foreclosures pending(2)
    
    
    2,573
    
    
    
    1.77
    %
    
    
    2,345
    
    
    
    1.58
    %
    
    
    2,199
    
    
    
    1.39
    %
   (1)
    
    Includes at December 31, 2004 an aggregate of $115.9 million of delinquent loans
serviced for Premier Bank, or 1.02% of the total servicing portfolio, $7.5
million of delinquent loans held by Crown Bank, or 0.07% of the total servicing
portfolio, and $14.9 million of delinquent loans held by R&G Mortgage, or 0.13% of
the total servicing portfolio.(2)
    
    At December 31, 2004, Premier Bank had foreclosures pending on $38.9 million of
loans being serviced by R&G Mortgage, which constituted 0.34% of the servicing portfolio.
Crown Bank had foreclosures pending on $847,000 of loans it is servicing
for its own portfolio, and R&G Mortgage had foreclosures pending on $11.9 million of
loans it is servicing for its own portfolio at December 31, 2004. While delinquency rates in Puerto Rico are generally higher than in the mainland United
States, these rates are not necessarily indicative of future foreclosure rates or losses on
foreclosures. Real estate owned as a result of foreclosures, or REO, related to R&G Financials
mortgage banking business arises primarily through foreclosure on mortgage loans repurchased from
investors either because of breach of representations or warranties or pursuant to recourse
arrangements. As of December 31, 2004, 2003 and 2002, R&G Financial held REO related to servicing
activities with a book value of approximately $13.4 million, $13.0 million and $9.6 million,
respectively. Sales of REO resulted in losses to R&G Financial
of $4.1 million, $3.5 million and $1.5 million during the years ended December 31, 2004, 2003 and 2002, respectively.
There is no liquid secondary market for the sale of R&G Financials REO. The increase in the
amount of losses resulting from the sale of REO is related to an increase in the volume of
foreclosed loans and the eventual disposition of the resulting REOs. With respect to mortgage loans securitized through GNMA programs, the Company is fully insured
as to principal by the FHA and VA against foreclosure loans. As a result of these programs,
foreclosure on these loans had generated no loss of principal as of December 31, 2004. Currently,
Crown Bank only services conventional loans, as opposed to FHA/VA loans. R&G Mortgage, however,
incurs about $3,000 per loan foreclosed in interest and legal charges during the time between
payment by R&G Mortgage and FHA or VA reimbursement. For the years ended December 31, 2004, 2003
and 2002, total expenses related to FHA or VA loans foreclosed
amounted to $3,002,000, $983,000
and $797,000, 35




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##### Table of Contents



respectively. Although FNMA and FHLMC are obligated to reimburse the Company for principal
and interest payments advanced by the Company as a servicer (except for recourse servicing), the
funding of delinquent payments or the exercise of foreclosure rights involves costs to the Company
which may not be recovered. Such unrecovered expenses have to date been immaterial. Any significant adverse economic developments could result in an increase in defaults or
delinquencies on mortgage loans that are serviced by the Company or held by the Company pending
sale in the secondary mortgage market, thereby reducing the resale value of such mortgage loans. Investment Activities General. R&G Financials securities portfolio is managed by investment officers in
accordance with a comprehensive written investment policy which addresses strategies, types and
levels of allowable investments and which is reviewed and approved annually by the respective
Boards of Directors of the Companys banking subsidiaries. The management of the securities
portfolio is set in accordance with strategies developed by Interest Rate Risk, Budget and
Investments Committee, or IRRBICO, of each banking subsidiary. As
discussed under  Mortgage Banking Activities, R&G Mortgage is primarily engaged in the
origination of mortgage loans and the securitization of such loans into mortgage-backed and related
securities and the subsequent sale of such securities to securities broker-dealers and other
investors in the secondary market. As a result of R&G Mortgages securitization activities, R&G
Mortgage maintains a substantial portfolio of GNMA mortgage-backed securities. As of December 31,
2004, R&G Mortgage held tax-exempt GNMA mortgage-backed securities with a fair value of $251.0
million, which are classified as available for sale. At December 31, 2004, R&G Mortgages CMO
interest-only residuals and interest only strips, which are classified as available for sale, had
an amortized cost of $38.7 million and a fair value of $38.7 million. Under Premier Banks and Crown Banks Investment Policies, the Companys banking subsidiaries
generally invest in U.S. Treasury obligations (with a maturity up to five years), U.S. Agency
obligations, FNMA, GNMA and FHLMC mortgage-backed certificates, investment grade municipal
obligations (with a maturity of up to five years), bankers acceptances and FHLB
notes (with a maturity of up to five years), investment grade commercial paper (with a
maturity of up to 9 months), federal funds (with a maturity of six months or less), certificates of
deposit in other financial institutions (including Eurodollar deposits), repurchase agreements
(with a maturity of six months or less), investment grade corporate bonds (with a maturity of five
years or less) and certain mortgage-backed derivative securities (with a weighted average life of
less than ten years). At December 31, 2004, the securities portfolios of the Companys banking subsidiaries included
$58.7 million of securities held for investment, consisting principally of $3.5 million of GNMA
mortgage-backed securities, $4.0 million of FHLMC and FNMA mortgage backed securities, and $51.2
million of certain Puerto Rico Government obligations and other Puerto Rico securities, all held by
Premier Bank. In addition, at December 31, 2004, the securities portfolios of the Companys
banking subsidiaries classified as available for sale had a fair value of $3.4 billion, consisting
principally of $46.3 million of GNMA mortgage-backed securities, $894.5 million of FHLMC and FNMA
mortgage-backed securities, $1.5 billion of CMOs, $24.8 million of CMO interest-only residuals and
interest only strips, $50.4 million corporate debt obligations and $834.1 million of U.S.
Government and Agency securities. A substantial amount of securities held by Premier Bank are
tax-exempt. 36




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##### Table of Contents



Premier Banks Treasury Department from time to time conducts certain trading. At
December 31, 2004, securities for trading held by Premier Bank
totaled $60.0 million,
consisting of interest only strips and FHLMC mortgage-backed securities. At
December 31, 2004,
$408.3 million or 10.7% of R&G Financials
mortgage-backed and investment securities were pledged to secure various obligations
of R&G Financial (excluding repurchase agreements). The following table presents certain information regarding the composition and
period to maturity of R&G Financials securities portfolio held to maturity as of the
dates indicated below. The weighted average yield in the following table is
calculated on an actual basis and not on a tax-equivalent basis. All of the
securities in the following table are assets of the Companys banking subsidiaries,
except as otherwise indicated in the footnote below. December 31,2004
    
    
    2003Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedCarrying
    
    
    Market
    
    
    Average
    
    
    Carrying
    
    
    Market
    
    
    AverageValue
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Value
    
    
    Yield(Dollars in Thousands)Mortgage-backed securities:GNMADue from one-five years
    
    $
    2,488
    
    
    $
    2,519
    
    
    
    5.77
    %
    
    $
    3,497
    
    
    $
    3,581
    
    
    
    5.78
    %Due from five-ten years
    
    
    353
    
    
    
    348
    
    
    
    6.24
    
    
    
    463
    
    
    
    469
    
    
    
    6.17Due over ten years
    
    
    17,395
    
    
    
    17,772
    
    
    
    6.24
    
    
    
    25,475
    
    
    
    26,079
    
    
    
    6.28FNMADue over ten years
    
    
    3,914
    
    
    
    4,175
    
    
    
    7.09
    
    
    
    4,785
    
    
    
    4,999
    
    
    
    7.08FHLMCDue over ten years
    
    
    62
    
    
    
    60
    
    
    
    2.93
    
    
    
    81
    
    
    
    79
    
    
    
    5.20Investment securities:United States Government and
Agencies obligations:Due within one year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Due from one-five years
    
    
    2,500
    
    
    
    2,500
    
    
    
    2.02
    
    
    
    1,997
    
    
    
    1,997
    
    
    
    1.03Puerto Rico Government and
Agencies obligations:Due within one year
    
    
    10,715
    
    
    
    10,812
    
    
    
    4.83
    
    
    
    558
    
    
    
    567
    
    
    
    5.85Due from one-five years
    
    
    38,456
    
    
    
    38,746
    
    
    
    4.30
    
    
    
    31,846
    
    
    
    33,088
    
    
    
    4.91Due from five-ten years
    
    
    2,000
    
    
    
    2,005
    
    
    
    4.10
    
    
    
    9,398
    
    
    
    9,230
    
    
    
    3.78OtherDue from one-five years
    
    
    100
    
    
    
    100
    
    
    
    6.20
    
    
    
    100
    
    
    
    100
    
    
    
    6.20Total securities held for
investment
    
    $
    77,983
    
    
    $
    79,037
    
    
    
    4.92
    %
    
    $
    78,200
    
    
    $
    80,189
    
    
    
    5.31
    %
 37




---



##### Table of Contents



December 31,2002WeightedCarrying
    
    
    Market
    
    
    AverageValue
    
    
    Value
    
    
    Yield(Dollars in Thousands)Mortgage-backed securities:GNMADue from one-five years
    
    $
    
    
    
    $
    
    
    
    
    
    %Due from five-ten years
    
    
    5,457
    
    
    
    5,513
    
    
    
    5.82Due over ten years
    
    
    33,521
    
    
    
    34,091
    
    
    
    6.30FNMADue over ten years
    
    
    6,328
    
    
    
    6,698
    
    
    
    7.06FHLMCDue over ten years
    
    
    102
    
    
    
    102
    
    
    
    5.35Investment securities:United States Government and
Agencies obligations:Due within one year
    
    
    997
    
    
    
    997
    
    
    
    1.75Due from one-five years
    
    
    1,500
    
    
    
    1,500
    
    
    
    2.38Puerto Rico Government and
Agencies obligations:Due within one year
    
    
    
    
    
    
    
    
    
    
    Due from one-five years
    
    
    26,586
    
    
    
    26,804
    
    
    
    5.40Due from five-ten years
    
    
    1,000
    
    
    
    1,005
    
    
    
    5.05OtherDue from one-five years
    
    
    100
    
    
    
    100
    
    
    
    6.20Total securities held for
investment
    
    $
    75,591
    
    
    $
    76,810
    
    
    
    5.86
    %
 38




---



##### Table of Contents



The following table presents certain information regarding the composition and period to
maturity of R&G Financials held for trading and available for sale mortgage-backed and investment
securities portfolio as of the dates indicated below. December 31,2004
    
    
    2003Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    
    
    
    
    Average
    
    
    Amortized
    
    
    
    
    
    
    AverageCost
    
    
    Fair Value
    
    
    Yield
    
    
    Cost
    
    
    Fair Value
    
    
    Yield(Dollars in Thousands)Mortgage-backed securities available for sale:GNMA certificatesDue from one-five years
    
    $
    2,582
    
    
    $
    2,672
    
    
    
    5.60
    %
    
    $
    50
    
    
    $
    52
    
    
    
    6.67
    %Due from five-ten years
    
    
    7,866
    
    
    
    8,045
    
    
    
    6.54
    
    
    
    12,563
    
    
    
    12,918
    
    
    
    6.32Due over ten years
    
    
    286,554
    
    
    
    286,618
    
    
    
    6.30
    
    
    
    346,568
    
    
    
    350,217
    
    
    
    6.24FNMA certificatesDue from one-five years
    
    
    245
    
    
    
    254
    
    
    
    5.79
    
    
    
    71
    
    
    
    72
    
    
    
    3.84Due from five-ten years
    
    
    271,004
    
    
    
    271,487
    
    
    
    4.65
    
    
    
    87,989
    
    
    
    87,101
    
    
    
    4.38Due over ten years
    
    
    276,136
    
    
    
    279,089
    
    
    
    5.05
    
    
    
    388,687
    
    
    
    405,193
    
    
    
    5.50FHLMC certificatesDue within one year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Due from one-five years
    
    
    910
    
    
    
    921
    
    
    
    6.05
    
    
    
    3
    
    
    
    3
    
    
    
    9.06Due from five-ten years
    
    
    61,305
    
    
    
    61,218
    
    
    
    4.67
    
    
    
    20,308
    
    
    
    19,955
    
    
    
    4.28Due over ten years
    
    
    275,613
    
    
    
    281,564
    
    
    
    6.18
    
    
    
    439,876
    
    
    
    448,161
    
    
    
    6.26Collateralized mortgage obligations (CMOs)Due within one year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Due from one-five years
    
    
    20,949
    
    
    
    20,824
    
    
    
    4.35
    
    
    
    5,939
    
    
    
    6,019
    
    
    
    4.14Due from five-ten years
    
    
    135,793
    
    
    
    134,377
    
    
    
    4.27
    
    
    
    20,889
    
    
    
    20,873
    
    
    
    4.14Due over ten years
    
    
    1,348,808
    
    
    
    1,338,196
    
    
    
    4.46
    
    
    
    941,970
    
    
    
    939,757
    
    
    
    4.43CMO residuals and other mortgage-backed
securitiesDue from one-five years
    
    
    5,187
    
    
    
    5,621
    
    
    
    10.00
    
    
    
    5,885
    
    
    
    9,455
    
    
    
    12.44Due from five-ten years
    
    
    57,939
    
    
    
    57,939
    
    
    
    6.46
    
    
    
    58,106
    
    
    
    55,435
    
    
    
    12.00Investment securities available for sale:U.S. Government & AgenciesDue within one year
    
    
    12,405
    
    
    
    12,574
    
    
    
    3.65
    
    
    
    62,519
    
    
    
    63,113
    
    
    
    3.78Due from one-five years
    
    
    807,732
    
    
    
    801,329
    
    
    
    3.24
    
    
    
    399,275
    
    
    
    398,028
    
    
    
    3.02Due from five-ten years
    
    
    19,657
    
    
    
    20,185
    
    
    
    5.12
    
    
    
    79,388
    
    
    
    81,042
    
    
    
    5.43Municipal debt obligationsDue over ten years
    
    
    15,766
    
    
    
    16,087
    
    
    
    4.41
    
    
    
    12,209
    
    
    
    12,339
    
    
    
    4.46Corporate debt obligationsDue within one year
    
    
    10,995
    
    
    
    10,941
    
    
    
    4.71
    
    
    
    14,247
    
    
    
    14,362
    
    
    
    6.67Due from one-five years
    
    
    37,542
    
    
    
    38,672
    
    
    
    6.18
    
    
    
    48,578
    
    
    
    51,376
    
    
    
    5.41Due from five-ten years
    
    
    771
    
    
    
    831
    
    
    
    7.78
    
    
    
    2,123
    
    
    
    2,109
    
    
    
    7.77Due over ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mortgage securities portfolio mutual fund
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,655,759
    
    
    $
    3,649,444
    
    
    
    4.58
    %
    
    $
    2,947,243
    
    
    $
    2,977,580
    
    
    
    5.08
    %Mortgage-backed securities held for trading:GNMA certificates
    
    $
    8,655
    
    
    $
    9,016
    
    
    
    5.50
    %
    
    $
    
    
    
    $
    
    
    
    
    
    %FHLMC certificates
    
    
    23,199
    
    
    
    24,452
    
    
    
    7.65
    
    
    
    32,155
    
    
    
    33,245
    
    
    
    7.64Interest-only strips
    
    
    58,168
    
    
    
    64,111
    
    
    
    6.04
    
    
    
    
    
    
    
    
    
    
    
    Investment securities held for trading:Municipal securities
    
    
    65
    
    
    
    68
    
    
    
    7.00
    
    
    
    451
    
    
    
    446
    
    
    
    4.77Equity securities
    
    
    3,880
    
    
    
    3,959
    
    
    
    6.70
    
    
    
    
    
    
    
    
    
    
    
    Mutual funds
    
    
    587
    
    
    
    608
    
    
    
    2.44
    
    
    
    
    
    
    
    
    
    
    
    Bank issued trust preferred securities
    
    
    2,230
    
    
    
    2,270
    
    
    
    6.12
    
    
    
    4,594
    
    
    
    4,650
    
    
    
    6.70Other
    
    
    68
    
    
    
    69
    
    
    
    3.03
    
    
    
    14
    
    
    
    14
    
    
    
    7.50$
    96,852
    
    
    $
    104,553
    
    
    
    6.38
    %
    
    $
    37,214
    
    
    $
    38,355
    
    
    
    7.49
    %
 39




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##### Table of Contents



December 31,2002WeightedAmortized
    
    
    
    
    
    
    AverageCost
    
    
    Fair Value
    
    
    Yield(Dollars in Thousands)Mortgage-backed securities available for sale:GNMA certificatesDue from one-five years
    
    $
    
    
    
    $
    
    
    
    
    
    %Due from five-ten years
    
    
    16,515
    
    
    
    16,759
    
    
    
    6.34Due over ten years
    
    
    440,767
    
    
    
    446,339
    
    
    
    5.33FNMA certificatesDue from one-five years
    
    
    
    
    
    
    
    
    
    
    Due from five-ten years
    
    
    370
    
    
    
    390
    
    
    
    6.50Due over ten years
    
    
    258,805
    
    
    
    269,367
    
    
    
    6.89FHLMC certificatesDue within one year
    
    
    2
    
    
    
    2
    
    
    
    8.72Due from one-five years
    
    
    20
    
    
    
    21
    
    
    
    9.04Due from five-ten years
    
    
    889
    
    
    
    935
    
    
    
    6.59Due over ten years
    
    
    738,041
    
    
    
    756,228
    
    
    
    6.46Collateralized mortgage obligations (CMOs)Due within one year
    
    
    112
    
    
    
    112
    
    
    
    8.25Due from one-five years
    
    
    17,178
    
    
    
    17,288
    
    
    
    4.74Due from five-ten years
    
    
    31,571
    
    
    
    32,219
    
    
    
    5.48Due over ten years
    
    
    404,981
    
    
    
    409,830
    
    
    
    5.40CMO residuals and other mortgage-backed securitiesDue from one-five years
    
    
    10,862
    
    
    
    12,496
    
    
    
    12.56Due from five-ten years
    
    
    20,102
    
    
    
    20,263
    
    
    
    14.71Investment securities available for sale:U.S. Government & AgenciesDue within one year
    
    
    
    
    
    
    
    
    
    
    Due from one-five years
    
    
    263,632
    
    
    
    267,896
    
    
    
    3.90Due from five-ten years
    
    
    137,756
    
    
    
    143,695
    
    
    
    6.05Municipal debt obligationsDue over ten years
    
    
    4,884
    
    
    
    4,879
    
    
    
    4.57Corporate debt obligationsDue within one year
    
    
    3,205
    
    
    
    3,367
    
    
    
    6.63Due from one-five years
    
    
    52,779
    
    
    
    55,283
    
    
    
    6.54Due from five-ten years
    
    
    2,979
    
    
    
    2,385
    
    
    
    7.76Due over ten years
    
    
    9,805
    
    
    
    9,809
    
    
    
    6.89Mortgage securities portfolio mutual fund.
    
    
    3,266
    
    
    
    2,964
    
    
    
    4.21Other
    
    
    49
    
    
    
    49
    
    
    
    $
    2,418,570
    
    
    $
    2,472,576
    
    
    
    5.89
    %Mortgage-backed securities held for trading:GNMA certificates
    
    $
    9,281
    
    
    $
    9,741
    
    
    
    6.13
    %FHLMC certificates
    
    
    62,550
    
    
    
    65,016
    
    
    
    7.18Interest-only strips
    
    
    
    
    
    
    
    
    
    
    Investment securities held for trading:Municipal securities
    
    
    
    
    
    
    
    
    
    
    Equity securities
    
    
    
    
    
    
    
    
    
    
    Mutual funds
    
    
    
    
    
    
    
    
    
    
    Bank issued trust preferred securities
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    $
    71,831
    
    
    $
    74,757
    
    
    
    7.04
    %
 40




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##### Table of Contents



A substantial portion of R&G Financials securities are held in mortgage-backed
securities. Mortgage-backed securities (which also are known as mortgage participation
certificates or pass-through certificates) represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally U.S.
Government agencies (GNMA) and
government sponsored enterprises) that pool and repackage the participation interests in the form
of securities, to investors such as R&G Financial. Such government
sponsored enterprises, which guarantee the payment of principal and interest to investors,
primarily include the FHLMC, and FNMA. The FHLMC is a public corporation chartered by the U.S. Government and owned by the 12 Federal
Home Loan Banks and federally-insured savings institutions. The FHLMC issues participation
certificates backed principally by conventional mortgage loans. The FHLMC guarantees the timely
payment of interest and the ultimate return of principal within one year. The FNMA is a private
corporation chartered by the U.S. Congress with a mandate to establish a secondary market for
conventional mortgage loans. The FNMA guarantees the timely payment of principal and interest on
FNMA securities. FHLMC and FNMA securities are not backed by the full faith and credit of the
United States, but because the FHLMC and the FNMA are U.S. Government-sponsored enterprises, these
securities are considered to be among the highest quality investments with minimal credit risks.
The GNMA is a government agency within HUD which is intended to help finance government-assisted
housing programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and the
timely payment of principal and interest on GNMA securities are guaranteed by the GNMA and backed
by the full faith and credit of the U.S. Government. Because the FHLMC, the FNMA and the GNMA were
established to provide support for low- and middle-income housing, there are limits to the maximum
size of loans that qualify for these programs. To accommodate larger-sized loans, and loans that,
for other reasons, do not conform to the agency programs, a number of private institutions have
established their own home-loan origination and securitization programs. Mortgage-backed securities typically are issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with interest rates that are within a
range and have varying maturities. The characteristics of the underlying pool of mortgage, i.e.,
fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder.
The life of a mortgage-backed pass-through security thus approximates the life of the underlying
mortgages. Mortgage-backed securities generally increase the quality of R&G Financials assets by
virtue of the insurance or guarantees that back them, are more liquid than individual mortgage
loans and may be used to collateralize borrowings or other obligations of R&G Financial. R&G Financials securities portfolio includes CMOs. CMOs have been developed in response to
investor concerns regarding the uncertainty of cash flows associated with the prepayment option of
the underlying mortgagor and are typically issued by government agencies, government sponsored
enterprises and special purpose entities, such as trusts, corporations or partnerships, established
by financial institutions or other similar institutions. A CMO can be collateralized by loans or
securities that are insured or guaranteed by the FNMA, the FHLMC or the GNMA. In contrast to
pass-through mortgage-backed securities, in which cash flow is received pro rata by all security
holders, the cash flow from the mortgages underlying a CMO is segmented and paid in accordance with
a predetermined priority to investors holding various CMO classes. By allocating the principal and
interest cash flows from the underlying collateral among the separate CMO classes, different
classes of bonds are created, each with its own stated maturity, estimated average life, coupon
rate and prepayment characteristics. In certain financial asset
transfers accounted for as sales, interest-only strips are recognized
which can be contractually prepaid or settled in such a way that the Company may
not recover substantially all of its recorded investment (prepayment risks). The
Company recognizes as retained interests the right to cash flows remaining over
the life of the loans sold after the payment of the related servicing fees and
the contractual payments to the buyer of the loans. If certain
conditions are met, the Company classifies such retained interests as
either held for trading or available for sale securities.
The retained interests are
initially, and thereafter periodically, measured based on different valuation
techniques, principally the present value of estimated future cash flows. Such
techniques incorporate reasonable and supportable assumptions related to the
financial assets transferred, including future revenues and expenses, defaults,
prepayment speeds and interest rates. The FDIC has issued a statement of policy which states, among other things, that mortgage
derivative products (including CMOs and CMO residuals) which possess average life or price
volatility in excess of a benchmark fixed rate 30-year mortgage-backed pass-through security are
high-risk mortgage 41




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##### Table of Contents



securities, are not suitable investments for depository institutions, and if considered high
risk at purchase must be carried in the institutions trading account or as assets held for sale,
and must be marked to market on a regular basis. In addition, if a security was not considered
high risk at purchase but was later found to be high risk based on the tests, it may remain in
the held-to-maturity portfolio as long as the institution has positive intent to hold the security
to maturity and has a documented plan in place to manage the high
risk. At December 31, 2004, CMOs, residuals and interest-only securities of the Companys banking subsidiaries, which had a fair
value of $24.8 million,were designated as high-risk mortgage securities and classified as
available for sale, increasing from $21.8 million as of December 31, 2003. Most of such securities
have been internally generated by the Company. The Company expects to continue generating such
securities in the future. Sources of Funds General. R&G Financial will consider various sources of funds to fund its investment
and lending activities and evaluates the available sources of funds in order to reduce R&G
Financials overall funding costs. Deposits, reverse repurchase agreements, warehouse lines of
credit, notes payable, FHLB advances, subordinated capital notes and sales, maturities and
principal repayments on loans and securities have been the major sources of funds for use in R&G
Financials lending and investing activities and for other general business purposes. Deposits. Deposits are the major sources of funds for R&G Financials lending and
other investment purposes. Consumer and commercial deposits are attracted principally from within
the Companys primary market area through the offering of a broad selection of deposit instruments,
including passbook, NOW and Super NOW, checking and commercial checking and certificates of deposit
ranging in terms from 7 days to 10 years. Included among these deposit products are $1.9 billion
of certificates of deposit with balances of $100,000 or more, which
amounted to 45.8% of R&G
Financials total deposits at December 31, 2004. Deposit account terms vary according to the
minimum balance required, the time periods the funds must remain on deposit and the interest rate,
among other factors. The Company attempts to price its deposits in order to promote deposit growth. The Company
regularly evaluates its internal costs of funds, surveys rates offered by competing institutions,
reviews cash flow requirements for lending and liquidity and executes rate changes when deemed
appropriate. The Company does not obtain funds through brokers on a regular basis, although at
December 31, 2004, the Company held $799.4 million of deposits acquired from money desks in the
United States. The principal methods currently used by the Company to attract deposit accounts include
offering a wide variety of services and accounts and competitive interest rates. The Company
utilizes traditional marketing methods to attract new customers and savings deposits, including
advertising. 42




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##### Table of Contents



The following table presents for the banking subsidiaries the average balance of each deposit
type and the average rate paid on each deposit type for the periods indicated. December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate Paid
    
    
    Balance
    
    
    Rate Paid
    
    
    Balance
    
    
    Rate Paid(Dollars in Thousands)Passbook
    
    $
    358,693
    
    
    
    1.72
    %
    
    $
    336,577
    
    
    
    1.72
    %
    
    $
    283,497
    
    
    
    2.84
    %NOW and Super NOW accounts
    
    
    616,661
    
    
    
    1.78
    
    
    
    503,155
    
    
    
    1.82
    
    
    
    360,596
    
    
    
    2.84Checking
    
    
    47,303
    
    
    
    
    
    
    
    39,388
    
    
    
    
    
    
    
    78,626
    
    
    
    Commercial checking(1)
    
    
    365,824
    
    
    
    
    
    
    
    417,928
    
    
    
    
    
    
    
    266,869
    
    
    
    Certificates of deposit
    
    
    2,485,082
    
    
    
    3.40
    
    
    
    1,951,697
    
    
    
    3.94
    
    
    
    1,481,449
    
    
    
    4.18Total deposits
    
    $
    3,873,563
    
    
    
    2.62
    %
    
    $
    3,248,745
    
    
    
    2.83
    %
    
    $
    2,471,037
    
    
    
    3.58
    %
   (1)
    
    Includes $150.2 million, $159.0 million and $220.0 million of escrow funds of the Company
at December 31, 2004, 2003 and 2002, respectively, maintained with the Companys banking
subsidiaries. The following table sets forth the maturities of certificates of deposit having principal
amounts of $100,000 or more at December 31, 2004. Amount(In Thousands)Certificates of deposit maturing:Three months or less
    
    $
    383,607Over three through six months
    
    
    227,199Over six through twelve months
    
    
    447,074Over twelve months
    
    
    884,710Total
    
    $
    1,942,590
 Borrowings. R&G Financials business requires continuous access to various
funding sources, both short and long-term. R&G Mortgages primary source of short-term funds is
through sales of securities to investment dealers under agreements to repurchase (reverse
repurchase agreements). The Company also uses reverse repurchase agreements to fund a majority of
its investment securities portfolio. In a reverse repurchase agreement transaction, R&G Financial will generally sell a
mortgage-backed security agreeing to repurchase either the same or a substantially identical
security on a specified later date (generally not more than 90 days) at a price less than the
original sales price. The difference in the sale price and purchase price is the cost of the use
of the proceeds. The mortgage-backed securities underlying the agreements are delivered to the
dealers who arrange the transactions. For agreements in which R&G Financial has agreed to
repurchase substantially identical securities, the dealers may sell, loan or otherwise dispose of
R&G Financials securities in the normal course of their operations; however, such dealers or third
party custodians safe-keep the securities which are to be specifically repurchased by R&G
Financial. Reverse repurchase agreements represent a competitive cost funding source for R&G
Financial. Nevertheless, R&G Financial is subject to the risk that the lender may default at
maturity and not return the collateral. The amount at risk is the value of the collateral that
exceeds the balance of the borrowing. In order to minimize this potential risk, R&G Financial only
deals with large, established investment brokerage firms when entering into these transactions. 43




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##### Table of Contents



Reverse repurchase transactions are accounted for as financing arrangements rather than as
sales of such securities, and the obligations to repurchase such securities are reflected as a
liability in R&G Financials consolidated financial statements. As of December 31, 2004, R&G
Financial had $3.0 billion of reverse repurchase agreements outstanding, with a weighted average
interest rate of 2.70%. R&G Financials loan originations are also funded by borrowings under various warehouse lines
of credit provided by various commercial banks, which we refer to as
Warehouse Lines. At December 31, 2004, R&G
Financial was permitted to borrow under such Warehouse Lines up to $283.4 million, $100.2 million
of which was drawn upon and outstanding as of such date. The Warehouse Lines are used by R&G
Financial to fund loan commitments and must generally be repaid within 180 days after the loan is
closed or when payment from the sale of the funded loan is received, whichever occurs first. Until
such sale closes, the Warehouse Lines provide that the funded loan is pledged to secure the
outstanding borrowings. The Warehouse Lines are also collateralized by a general assignment of
mortgage payments receivable and an assignment of certain mortgage servicing rights. Certain of
these warehousing lines of credit impose restrictions with respect to the maintenance of minimum
levels of net worth and working capital and limitations on the amount of indebtedness and dividends
which may be declared. For the quarters ended September 30, and December 31, 2004, R&G Mortgage breached a covenant not to pay in excess of 50% of its net income for the fiscal year. The breach was occasioned primarily due to the previously disclosed trading losses during
the last two quarters of 2004. See Managements Discussion and Analysis of Financial Condition and
 Results of Operations in Item 7 hereof. R&G
Mortgages lender has agreed to waive the breach of covenant for
each of the quarters in question. Except as disclosed herein,
management of R&G Financial believes that as of December 31, 2004, it was
in compliance with all of such covenants and restrictions and does not anticipate that such
covenants and restrictions will limit its operations. The interest rate on funds borrowed pursuant to the Warehouse Lines is based on Libor rates
plus a negotiated amount. At December 31, 2004, the weighted average interest rate being paid by R&G Financial under its
Warehouse Lines amounted to 3.63%. Although R&G Financials primary sources of funds are deposits, it also borrows funds on both
a short and long-term basis. The Company obtains both fixed-rate and variable-rate short-term and
long-term advances from the FHLB of New York and Atlanta through its banking subsidiaries upon the
security of certain of their residential first mortgage loans, securities and cash deposits,
provided certain standards related to the credit-worthiness of the banking subsidiaries have been
met. FHLB advances are available for general business purposes to expand lending and investing
activities. Advances from the FHLB are made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. At December 31, 2004, the Company had
access to $2.8 billion in advances from the FHLB and had $1.3 billion outstanding as of such date,
which mature at various dates commencing in January 1, 2005 through March 2, 2011 and have a
weighted average interest rate of 3.63%. At December 31, 2004, the Company had pledged
investment securities and loans aggregating $1.6 billion to the FHLB as collateral for the
advances. The Company maintains collateral with the FHLB in excess of applicable requirements in
order to facilitate any necessary future borrowings. 44




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##### Table of Contents



The following table sets forth certain information regarding the short-term borrowings of R&G
Financial at or for the dates indicated. At or For the Year EndedDecember 31,2004
    
    
    2003
    
    
    2002(Dollars in Thousands)Securities sold under agreements to repurchase:Average balance outstanding
    
    $
    2,444,198
    
    
    $
    1,884,191
    
    
    $
    1,437,089Maximum amount outstanding at any month-end
during the period
    
    
    2,994,658
    
    
    
    2,220,795
    
    
    
    1,602,394Balance outstanding at end of period
    
    
    2,994,658
    
    
    
    2,220,795
    
    
    
    1,489,758Average interest rate during the period
    
    
    2.49
    %
    
    
    2.71
    %
    
    
    3.56
    %Average interest rate at end of period
    
    
    2.70
    %
    
    
    2.26
    %
    
    
    3.16
    %Notes Payable:Average balance outstanding
    
    $
    150,705
    
    
    $
    217,750
    
    
    $
    241,346Maximum amount outstanding at any month-end
during the period
    
    
    166,394
    
    
    
    218,052
    
    
    
    196,330Balance outstanding at end of period
    
    
    100,217
    
    
    
    192,259
    
    
    
    194,607Average interest rate during the period
    
    
    2.41
    %
    
    
    3.15
    %
    
    
    2.81
    %Average interest rate at end of period
    
    
    3.80
    %
    
    
    2.29
    %
    
    
    2.55
    %FHLB advances:Average balance outstanding
    
    $
    1,171,645
    
    
    $
    1,026,279
    
    
    $
    698,170Maximum amount outstanding at any month-end
during the period
    
    
    1,298,600
    
    
    
    1,129,600
    
    
    
    940,725Balance outstanding at end of period
    
    
    1,298,600
    
    
    
    1,129,600
    
    
    
    940,725Average interest rate during the period
    
    
    3.78
    %
    
    
    3.92
    %
    
    
    4.51
    %Average interest rate at end of period
    
    
    3.63
    %
    
    
    3.56
    %
    
    
    4.23
    %
 Trust and Investment Services R&G Financial also provides trust and investment services through Premier Banks Trust
Department. Services offered include custodial services, the administration of IRA accounts and
the sale to investors of mortgage-backed securities guaranteed by GNMA. As of December 31, 2004,
Premier Banks Trust Department administered trust accounts with
aggregate assets of $444.2 million as of such date. Premier Bank receives fees dependent upon the level and type of service
provided. The administration of Premier Banks Trust Department is monitored by the Trust
Committee of the Board of Directors of Premier Bank. Broker-Dealer and Insurance Services R&G Financials wholly-owned licensed broker-dealer subsidiary, R-G Investments Corporation,
is a NASD registered broker-dealer which offers fixed-income and other investment products to its
clients, including customers of sister subsidiaries, R&G Mortgage and Premier Bank. The Company began insurance operations in November 2000 with its acquisition of Home &
Property Insurance Corp., a Puerto Rico insurance agency which provides insurance policies
principally on residential properties to R&G Financials customers and, to a lesser extent, other
parties. Home & Property Insurance Corp. sells primarily
property, title, auto and life insurance to
individuals and commercial entities. 45




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During the years ended December 31, 2004, 2003 and 2002, R-G Investments Corporation and Home
& Property Insurance Corp. together contributed $22.1 million, $16.7 million and $8.3 million of
revenues, respectively, representing 5.1%, 4.2% and 2.9% of total revenues, respectively, for such
periods. In addition, their net income before taxes amounted to $14.7 million, $10.8 million and
$4.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. For additional
information, see Note 27 to R&G Financials Notes to consolidated financial statements,
incorporated by reference into Item 8 hereof. Personnel As
of December 31, 2004, R&G Financial (on a consolidated
basis) had 2,404 full-time
employees and 115 part-time employees. The employees are not represented by a collective
bargaining agreement and R&G Financial believes that it has good relations with its employees. Regulation Set forth below is a brief description of certain laws and regulations which, together with
the descriptions of laws and regulations contained elsewhere herein, are deemed material to an
investors understanding of the extent to which R&G Financial and its subsidiary companies are
regulated. The description of these laws and regulations, as well as descriptions of laws and
regulations contained elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations. The Company General. R&G Financial is a registered financial holding company pursuant to the Bank
Holding Company Act of 1956, as amended, or BHCA. R&G Financial, as a financial holding
company, is subject to regulation and supervision by the Federal Reserve Board and the OCFI. R&G
Financial is required to file annually a report of its operations with, and is subject to
examination by, the Federal Reserve Board and the OCFI. BHCA Activities and Other Limitations. The BHCA prohibits a bank holding company
from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any
bank, or increasing such ownership or control of any bank, without prior approval of the Federal
Reserve Board. No approval under the BHCA is required, however, for a bank holding company already
owning or controlling 50% of the voting shares of a bank to acquire additional shares of such bank. The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring more
than 5% of the voting shares of any company that is not a bank and from engaging in any business
other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve Board is
authorized to approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely related to banking or
to managing or controlling banks as to be a proper incident thereto. In making such
determinations, the Federal Reserve Board is required to weigh the expected benefit to the public,
such as greater convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as undue concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices. The Federal Reserve Board has by regulation determined that certain activities are closely
related to banking within the meaning of the BHCA. These activities include operating a mortgage
company, such a R&G Mortgage, finance company, credit card company, factoring company, trust
company or savings association; performing certain data processing operations; providing limited
securities brokerage 46




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services; acting as an investment or financial advisor; acting as an insurance agent for
certain types of credit-related insurance; leasing personal property on a full-payout,
non-operating basis; providing tax planning and preparation services; operating a collection
agency; and providing certain courier services. The Federal Reserve Board also has determined that
certain other activities, including real estate brokerage and syndication, land development,
property management and underwriting of life insurance not related to credit transactions, are not
closely related to banking and a proper incident thereto. Limitations on Transactions with Affiliates. Transactions between financial
institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act and
Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve
Act and provides interpretative guidance with respect to affiliate transactions. Affiliates of a
financial institution include, among other entities, the financial institutions holding company
(such as R&G Financial) and companies that are under common control with the financial institution.
In general, subject to certain specified exemptions, a financial institution or its subsidiaries
are limited in their ability to engage in covered transactions with affiliates: (i) to an amount
equal to 10% of the financial institutions capital and surplus, in the case of covered
transactions with any one affiliate; and (ii) to an amount equal to 20% of the financial
institutions capital and surplus, in the case of covered transactions with all affiliates. In addition, a financial institution and its subsidiaries may engage in covered transactions
and other specified transactions only on terms and under circumstances that are substantially the
same, or at least as favorable to the financial institution or its subsidiary, as those prevailing
at the time for comparable transactions with nonaffiliated companies. A covered transaction
includes: (i) a loan or extension of credit to an affiliate; (ii) a purchase of, or an investment
in, securities issued by an affiliate; (iii) a purchase of assets from an affiliate, with some
exceptions; (iv) the acceptance of securities issued by an affiliate as collateral for a loan or
extension of credit to any party; and (v) the issuance of a guarantee, acceptance or letter of
credit on behalf of an affiliate. In addition, under Regulation W: (i) a financial institution may not purchase a low-quality
asset from an affiliate; (ii) covered transactions and other specified transactions between a
financial institution or its subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices; and (iii) with some exceptions, each loan or
extension of credit by a financial institution to an affiliate must be secured by collateral with a
market value ranging from 100% to 130%, depending on the type of collateral, of the amount of the
loan or extension of credit. Regulation W exempts from the quantitative limits and collateral requirements transactions
between sister banks. The sister bank exemption covers transactions between a bank and a FDIC
insured depository institution if the same company controls 80% or more of the voting securities of
the bank and the depository institution. In addition, an operating subsidiary of a FDIC depository
institution is treated as part of the depository institution, for purposes of the definition. Pursuant
to this exemption, from time to time,
Premier Bank and Crown Bank buy and sell loans,
including loan participations, and maintain deposits with each other. In addition, Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to
executive officers, directors and principal stockholders. Under Section 22(h), loans to a
director, an executive officer and to a greater than 10% stockholder of a financial institution,
and certain affiliated interests of either, may not exceed, together with all other outstanding
loans to such person and affiliated interests, the financial institutions loans to one borrower
limit (generally equal to 15% of the institutions unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other persons unless the
loans are made pursuant to a benefit or compensation program that (i) is widely available to
employees of the institution and (ii) does not give preference to any director, executive officer
or principal stockholder, or certain affiliated interests of either, over other employees of the
savings institutions. Section 22(h) also requires prior board approval for certain loans. In
addition, the 47




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aggregate amount of extensions of credit by a financial institution to all insiders cannot
exceed the institutions unimpaired capital and surplus. Furthermore, Section 22(g) places
additional restrictions on loans to executive officers. R&G Mortgage and Premier Bank are parties to various agreements that address how each would
conduct itself in specifically delineated affiliated transactions,
which we refer to as the Affiliated Transaction
Agreements. The Affiliated Transaction Agreements include a Master Purchase, Servicing and
Collections Agreement, which we refer to as the Master Purchase Agreement, a Master Custodian Agreement, a Master
Production Agreement, a Securitization Agreement and a Data Processing Computer Service Agreement.
The terms of these agreements were negotiated at arms length on the basis that they are
substantially the same, or at least as favorable to Premier Bank, as those prevailing for
comparable transactions with, or involving, other nonaffiliated companies. Pursuant to the Master Production Agreement, Premier Bank, on a monthly basis, determines its
loan production targets and goals, which we refer to as the Loan Production Goals and R&G Mortgage assists Premier
Bank to reach its Loan Production Goals by, among other things: (i) advertising, promoting and
marketing to the general public; (ii) interviewing prospective borrowers and initial processing of
loan applications, consistent with Premier Banks underwriting guidelines and Loan Production Goals
previously established; and (iii) providing personnel and facilities with respect to the execution
of any loan agreement approved by Premier Bank. In exchange for these services, Premier Bank
remits to R&G Mortgage a percentage of the processing or originating fees charged to the borrowers
under loan agreements, as set forth in the agreements. See
Lending Activities from Banking
Operations  Originations, Purchases and Sales of Loans. Until January 1, 2001, the Master Purchase Agreement provided for the sale by Premier Bank to
R&G Mortgage of the servicing rights to all first and second mortgage loans secured by residential
properties which become part of Premier Banks loan portfolio once the related loans are sold.
Effective January 1, 2001, Premier Bank retains servicing rights on loans sold or secured into
mortgage-backed securities. R&G Mortgage services all other loans held in Premier Banks loan
portfolio (including single-family residential loans retained by Premier Bank and certain
commercial real estate loans), although R&G Mortgage does not actually acquire such servicing
rights. The Master Purchase Agreement further provides that R&G Mortgage exclusively will service
such loans and that Premier Bank will process payments of such loans, all according to a fee
schedule. See   Mortgage Banking Activities  Loan Originations, Purchases and Sales of Loans. Under the Securitization Agreement, R&G Mortgage renders securitization services with respect
to the pooling of some of Premier Banks mortgage loans into mortgage-backed securities. With
respect to securitization services rendered, Premier Bank pays a securitization fee of 25 basis
points. The Master Custodian Agreement provides that Premier Bank shall be the custodial agent for
R&G Mortgage of certain documentation related to the issuance by R&G Mortgage of GNMA, FNMA or
FHLMC mortgage-backed certificates. In consideration of these services, Premier Bank receives a
fee for each mortgage note included in a mortgage-backed certificate per year for which it acts as
custodian, as set forth in the agreement. See  Mortgage Banking Activities  Loan Originations,
Purchases and Sales of Loans. Capital Requirements. The Federal Reserve Board has adopted capital adequacy
guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a
bank holding company and in analyzing applications to it under the BHCA. The Federal Reserve Board
capital adequacy guidelines generally require bank holding companies to maintain total capital
equal to 8% of total risk-adjusted assets, with at least one-half of that amount consisting of Tier
I or core capital and up to one-half of that amount consisting of Tier II or supplementary capital.
Tier I capital for bank holding 48




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companies generally consists of the sum of common stockholders equity and perpetual preferred
stock (subject in the case of the latter to limitations on the kind and amount of such stocks which
may be included as Tier I capital), less goodwill and, with certain exceptions, intangibles. Tier
II capital generally consists of hybrid capital instruments; perpetual preferred stock which is not
eligible to be included as Tier I capital; term subordinated debt and intermediate-term preferred
stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under
the risk-based guidelines to take into account different risk characteristics, with the categories
ranging from 0% (requiring no additional capital) for assets such as cash to 100% for the bulk of
assets which are typically held by a bank holding company, including multi-family residential and
commercial real estate loans, commercial business loans and consumer loans. Single-family
residential first mortgage loans which are not past-due (90 days or more) or non-performing and
which have been made in accordance with prudent underwriting standards are assigned a 50% level in
the risk-weighing system, as are certain privately-issued mortgage-backed securities representing
indirect ownership of such loans. Off-balance sheet items also are adjusted to take into account
certain risk characteristics. In addition to the risk-based capital requirements, the Federal Reserve Board requires bank
holding companies to maintain a minimum leverage capital ratio of Tier I capital to total assets of
3.0%. Total assets for this purpose does not include goodwill and any other intangible assets and
investments that the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio requirement is the
minimum for the top-rated bank holding companies without any supervisory, financial or operational
weaknesses or deficiencies or those that are not experiencing or anticipating significant growth.
Other bank holding companies are expected to maintain Tier I leverage capital ratios of at least
4.0% to 5.0% or more, depending on their overall condition. On March 1, 2005, the Federal Reserve adopted a final rule that allows the
continued limited inclusion of trust preferred securities as Tier I regulatory capital
of bank holding companies. Currently, trust preferred securities and qualifying
perpetual preferred stock are limited in the aggregate to no more than 25% of a
bank holding companys core capital elements. Under the final rule, trust
preferred securities and other restricted core capital elements will be subject
to stricter quantitative limits following a five-year transition period. Under
the final rule, as of March 31, 2009, the aggregate amount of trust preferred
securities and cumulative perpetual preferred stock, as well as certain
additional elements of Tier 1 capital which are identified in the rule, may not
exceed 25% of a bank holding companys Tier 1 capital, net of goodwill less any
associated deferred tax liability. Amounts of restricted core capital elements
in excess of this limit generally may be included in Tier 2 capital. The rule
will effectively limit the amount of trust preferred securities that may be
included in Tier 1 capital. Management believes the adoption of the final rule
will not have a significant effect on the Companys regulatory capital ratios. R&G Financial is in compliance with the above-described Federal Reserve Board regulatory
capital requirements. Financial Support of Affiliated Institutions. Under Federal Reserve Board policy, R&G
Financial will be expected to act as a source of financial strength to its banking subsidiaries and
to commit resources to support them in circumstances when it might not do so absent such policy.
The legality and precise scope of this policy is unclear, however, in light of recent judicial
precedent. In addition, any capital loans by a bank holding company to a subsidiary bank are
subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary
bank. In the event of a bank holding companys bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment. Bank
Secrecy Act and USA Patriot Act of 2001. The BSA
and its implementing regulation is a tool the U.S.
government uses to fight drug trafficking, money
laundering and other crimes. Under the BSA, financial institutions
are required to file certain reports, including suspicious activities
reports,
with the Financial Crimes Enforcement Network under certain
circumstances. Financial institutions are also required to have
policies and
procedures in place to ensure compliance with the BSA. If a financial
institution fails to timely file a report or fails to implement its
BSA
policies and procedures, it could subject the institution to
enforcement action or civil money penalties. In
October 2001, the
Patriot Act was enacted in
response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. that occurred on
September 11, 2001. The Patriot Act amended the BSA and
broadened the application of anti-money laundering regulations to
apply to additional types of financial institutions, such as
broker-dealers, and strengthened the ability of the U.S. government
to detect and prosecute international money laundering and the
financing of terrorism. The Patriot Act is intended to strengthen U.S. law enforcements and the
intelligence communities abilities to work cohesively to combat terrorism on a variety of fronts.
The potential impact of the Patriot Act on financial institutions of all kinds is significant and
wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency
laws and imposes various regulations, including standards for verifying client identification at
account opening, and rules to promote cooperation among financial institutions, regulators and law
enforcement entities in identifying parties that may be involved in terrorism or money laundering. In
connection with the BSA, as a result of an examination of Premier
Bank as of June 2004, in December 2004 the FDIC, the OCFI
and Premier Bank entered into a MOU to correct and strengthen
perceived deficiencies in Premier
Banks BSA and anti-money laundering programs. Premier Bank is
required, among other things, to
enhance monitoring, reporting, and documentation, strengthen
controls, revise policies, increase its audits
and enhance the training of its personnel. Premier Bank has taken
certain measures in accordance with a
corrective action plan submitted to the FDIC and OCFI, and believes
that it is in substantial compliance with the MOU. Financial Services Modernization Legislation. The Gramm-Leach-Bliley Act, signed into
law in November 1999, revises and expands the existing provisions of the BHCA by including a new
section that permits a bank holding company to elect to become a financial holding company, which
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in a full range of financial activities. The qualification requirements and the process for a
bank holding company that elects to be treated as a financial holding company requires that all the
subsidiary banks controlled by the bank holding company at the time of election to become a
financial holding company must be and remain at all times well capitalized and well managed. R&G
Financial applied for and became a financial holding company in 2000. Financial holding companies may engage, directly or indirectly, in any activity that is
determined to be (i) financial in nature, (ii) incidental to such financial activity, or (iii)
complementary to a financial activity and which does not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally. The Gramm-Leach-Bliley Act
specifically provides that the following activities have been determined to be financial in
nature: (a) lending, trust and other banking activities; (b) insurance activities; (c) financial
or economic advice or services; (d) pooled investments; (e) securities underwriting and dealing;
(f) existing bank holding company domestic activities; (g) existing bank holding company foreign
activities; and (h) merchant banking activities. In addition, the Gramm-Leach-Bliley Act specifically gives the Federal Reserve Board the
authority, by regulation or order, to expand the list of financial or incidental activities,
but requires consultation with the U.S. Treasury, and gives the Federal Reserve Board authority to
allow a financial holding company to engage in any activity that is complementary to a financial
activity and does not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally. Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act was signed into
law in July 2002. The Sarbanes-Oxley Act implements legislative reforms intended to address corporate and
accounting improprieties. The Sarbanes-Oxley Act generally applies to all companies, both U.S. and non-U.S., that
file or are required to file periodic reports with the SEC,
under the Securities Exchange Act of 1934, or Exchange Act. The
Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate governance
rules, requires the SEC and securities exchanges to adopt extensive additional disclosure,
corporate governance and other related rules and mandates further studies of specified issues by
the SEC and the Comptroller General. The Sarbanes-Oxley Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the accounting
profession, and to state corporate law, such as the relationship between a board of directors and
management and between a board of directors and its committees. The
Sarbanes-Oxley Act addresses, among other matters: (i) audit committees; (ii) certification of financial
statements by the chief executive officer and the chief financial officer; (iii) the forfeiture of
bonuses or other incentive-based compensation and profits from the sale of an issuers securities
by directors and senior officers in the twelve month period following initial publication of any
financial statements that later require restatement; (iv) a prohibition on insider trading during
pension plan black out periods; (v) disclosure of off-balance sheet transactions; (vi) a
prohibition on personal loans to directors and officers; (vii) expedited filing requirements for
Forms 4s; (viii) disclosure of a code of ethics and filing a Form 8-K for a change or waiver of
such code; (ix) real time filing of periodic reports; (x) the formation of a public accounting
oversight board; (xi) auditor independence; and (xii) various increased criminal penalties for
violations of securities laws. Banking Subsidiaries General. Premier Bank is incorporated under the Puerto Rico Banking Act of 1933, as
amended, or the Puerto Rico Banking Law, and is subject to extensive regulation and examination by
the OCFI, the 50




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FDIC and certain requirements established by the Federal Reserve Board. Crown Bank is subject
to extensive regulation by the OTS and the FDIC. The federal and Puerto Rico laws and regulations
which are applicable to banks and thrift institutions regulate, among other things, the scope of
their business, their investments, their reserves against deposits, the timing of the availability
of deposited funds and the nature and amount of and collateral for certain loans. There are
periodic examinations by the aforementioned regulatory authorities to test Premier Bank and Crown
Banks compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can engage and is
intended 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 and examination policies, including policies with respect to
the classification of assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulation, whether by the OCFI, the FDIC, the OTS or the U.S.
Congress or Puerto Rico legislature could have a material adverse impact on R&G Financial and its
operations. FDIC Insurance Premiums. The banking subsidiaries of the Company currently pay
deposit insurance premiums to the FDIC based on a risk-based assessment system established by the
FDIC for all Savings Association Insurance Fund, or SAIF, member institutions, such as Crown Bank
and Bank Insurance Fund, or BIF, member institutions, such as Premier Bank. Under applicable
regulations, institutions are assigned to one of three capital groups that is based solely on the
level on an institutions capital: well capitalized, adequately capitalized and
undercapitalized. These three groups are then divided into three subgroups that reflect varying
levels of supervisory concern, from those that are considered to be healthy to those that are
considered to be of substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates ranging from 0.0% for well capitalized, healthy
institutions to 0.27% for undercapitalized institutions with substantial supervisory concerns.
Each of Premier Bank and Crown Bank was classified as a well-capitalized institution as of
December 31, 2004. The FDIC may terminate the deposit insurance of any insured depository institution, including
Premier Bank or Crown Bank, if it determines after a hearing that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, order or any condition imposed by an
agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, shall continue to be insured for a period of six months
to two years, as determined by the FDIC. Management is aware of no existing circumstances which
would result in termination of Premier Banks or Crown Banks deposit insurance. From time to time, new laws are proposed that, if enacted, could have an effect on the
financial institutions industry. For example, deposit insurance reform legislation is currently
pending in Congress that would: (i) merge the BIF and the SAIF; (ii) increase the
current deposit insurance coverage limit for insured deposits to $130,000 and index future coverage
limits to inflation; (iii) double deposit insurance coverage limits for individual retirement
accounts; and (iv) replace the current fixed 1.25 designated reserve ratio with a reserve range,
giving the FDIC discretion in determining a level adequate within this range. If any of these
proposals eventually become law, they could have an effect on R&G Financials operations and the
way it conducts business. Capital Requirements. The FDIC has promulgated regulations and adopted a statement of
policy regarding the capital adequacy of state-chartered banks that, like Premier Bank, will not be
members of 51




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the Federal Reserve System. These requirements are substantially similar to those adopted by
the Federal Reserve Board regarding bank holding companies, as described above. The FDICs capital regulations establish a minimum 3.0% Tier I leverage capital requirement
for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least
100 to 200 basis points for all other state-chartered, non-member banks, which effectively
increases the minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under
the FDICs regulation, the highest-rated banks are those that the FDIC determines are not
anticipating or experiencing significant growth and have well diversified risk, including no undue
interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in
general, which are considered a strong banking organization and are rated composite 1 under the
Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of
common stockholders equity (including retained earnings), noncumulative perpetual preferred stock
and related surplus, and minority interests in consolidated subsidiaries, minus all intangible
assets other than certain qualifying supervisory goodwill and certain purchased mortgage servicing
rights. The FDIC also requires that banks meet a risk-based capital standard. The risk-based capital
standard for banks requires the maintenance of total capital (which is defined as Tier I capital
and supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of
risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset
or item. The components of Tier I capital are equivalent to those discussed above under the 3%
leverage capital standard. The components of supplementary capital include certain perpetual
preferred stock, certain mandatory convertible securities, certain subordinated debt and
intermediate preferred stock and general allowances for loan and lease losses. Allowance for loan
and lease losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot
exceed 100% of core capital. At December 31, 2004, Premier Bank met each of its capital
requirements. The FDIC and the other federal banking agencies have published a joint policy statement that
describes the process the banking agencies will use to measure and assess the exposure of a banks
net economic value to changes in interest rates. The FDIC and other federal banking agencies have
also adopted a joint policy statement on interest rate risk policy. Because market conditions,
bank structure, and bank activities vary, the agencies concluded that each bank needs to develop
its own interest rate risk management program tailored to its needs and circumstances. The policy
statement describes prudent principles and practices that are fundamental to sound interest rate
risk management, including appropriate board and senior management oversight and a comprehensive
risk management process that effectively identifies, measures, monitors and controls risks. Under OTS capital regulations, an institution is well capitalized if it has a total risk-based
capital ratio of at least 10.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a leverage
ratio of at least 5.0%. An institution is adequately capitalized if it has a total risk-based
capital ratio of at least 8.0%, a Tier 1 risk-based capital ratio of at least 4.0% and a leverage
ratio of at least 4.0% (or 3.0% if it has a composite rating of 1 and is not experiencing or
anticipating significant growth). The regulation also establishes three categories for
institutions with lower ratios: undercapitalized, significantly undercapitalized and critically
undercapitalized. At December 31, 2004, Crown Bank met the capital requirements of a
well-capitalized institution under applicable OTS regulations. OTS capital regulations also require savings associations to meet three additional capital
standards: (i) tangible capital equal to at least 1.5% of total adjusted assets, (ii) leverage
capital (core capital) equal to 4.0% of total adjusted assets, and (iii) risk-based capital equal
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weighted assets. These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the minimum. In addition, the
OTS regulations provide that minimum capital levels higher than those provided in the regulations
may be established by the OTS for individual savings associations, upon a determination that the
savings associations capital is or may become inadequate in view of its circumstances. Crown Bank
is not subject to any such individual minimum regulatory capital requirement and Crown Banks
regulatory capital exceeded all minimum regulatory capital requirements as of December 31, 2004. Activities and Investments. The activities and equity investments of FDIC-insured,
state-chartered banks (which under the Federal Deposit Insurance Act include banking institutions
incorporated under the laws of Puerto Rico) are generally limited to those that are permissible for
national banks. Under regulations dealing with equity investments, an insured state bank generally
may not directly or indirectly acquire or retain any equity investment of a type, or in an amount,
that is not permissible for a national bank. An insured state bank is not prohibited from, among
other things, (i) acquiring or retaining a majority interest in a subsidiary or (ii) acquiring or
retaining the voting shares of a depository institution if certain requirements are met. In
addition, an insured state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as principal in any activity that is not permissible for a national bank unless the FDIC
has determined that such activities would pose no risk to the insurance fund of which it is a
member and the bank is in compliance with applicable regulatory capital requirements. Any insured
state-chartered bank directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity. Puerto Rico Banking Law. As a commercial bank organized under the laws of the
Commonwealth, Premier Bank is subject to supervision, examination and regulation by the OCFI
pursuant to the Puerto Rico Banking Law. The Puerto Rico Banking Law requires that at least ten percent (10%) of the yearly net income
of Premier Bank be credited annually to a reserve fund. This apportionment shall be done every
year until the reserve fund shall be equal to the sum of Premier Banks paid-in common and
preferred stock capital. As of December 31, 2004, Premier Bank had credited $37.5 million to such
reserve fund. The Puerto Rico Banking Law also provides that when the expenditures of a bank are greater
than the receipts, the excess of the former over the latter shall be charged against the
undistributed profits of such bank, and the balance, if any, shall be charged against the reserve
fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in
whole or in part, the outstanding amount shall be charged against the capital account and no
dividend shall be declared until said capital has been restored to its original amount and the
reserve fund to 20% of the original capital. In addition, every bank is required by the Puerto
Rico Banking Law to maintain a legal reserve which shall not be less than 20% of its demand
liabilities, except government deposits (federal, state and municipal) which are secured by actual
collateral. The reserve is required to be made up of any of the following instruments or any
combination of them: (i) legal tender of the United States; (ii) checks on banks or trust companies
located in any part of Puerto Rico, to be presented for collection during the day following that on
which they are received; (iii) money deposited in other banks provided said deposits are authorized
by the Commissioner, subject to immediate collection; and (iv) federal funds sold and securities
purchased under agreements to resell, provided such funds are repaid on or prior to the close of
the next business day. Under the Puerto Rico Banking Law, Premier Bank is permitted to make loans to any one person,
firm, partnership or corporation, up to an aggregate amount of fifteen percent (15%) of the paid-in
capital and reserve fund of Premier Bank, plus 15% of 50% of undistributed earnings for
well-capitalized institutions. As of December 31, 2004, the legal lending limit for Premier Bank
under these provisions was approximately $61.8 million. If such loans are secured by
collateral worth at least twenty-five 53




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percent (25%) more than the amount of the loan, the aggregate maximum amount may reach
one-third of the paid-in capital of Premier Bank, plus its reserve fund. The legal lending limit
for Premier Bank for loans secured by collateral with at least 25% more than the amount of the loan
was approximately $137.4 million. Premier Banks maximum extension of credit to any one
borrower was $70.6 million at December 31, 2004, which is fully secured with collateral with a
loan to value ratio of less than 80%. There are no restrictions on the amount of loans to
subsidiaries of banks, or loans that are secured by mortgages by real estate, or loans that are
wholly secured by bonds, securities and other evidences of indebtedness of the United States or the
Commonwealth, or by current debt bonds, not in default, of municipalities or instrumentalities of
the Commonwealth. Loans to non-banking affiliates of Premier Bank, are subject however to the
lending limitations set forth in Sections 23A and 23B of the Federal Reserve Act and Regulation W.
The Puerto Rico Banking Law also authorizes Premier Bank to conduct certain financial and related
activities directly or through subsidiaries. The Puerto Rico Banking Law also prohibits Puerto
Rico banks from making loans secured by their own stock, and from purchasing their own stock,
unless such purchase is necessary to prevent losses because of a debt previously contracted in good
faith. The stock so purchased must be sold in a private or public sale within one year from the
date of purchase. Premier Bank may repurchase its own stock for the purpose of reducing its
capital, subject to the approval of the OCFI. The rate of interest that Premier Bank may charge on mortgage and other types of loans to
individuals in Puerto Rico is subject to Puerto Ricos usury laws. Such laws are administered by
the Financing Board, which consists of the Commissioner of Financial Institutions, the President of
the Government Development Bank, the Chairman of the Planning Board and the Puerto Rico Secretaries
of Commerce, Treasury and Consumer Affairs and three representatives from the private sector. The
Financing Board promulgates regulations that specify maximum rates on various types of loans to
individuals. The Financing Board eliminated the regulations that set forth the maximum interest
rates that could be charged on consumer loans, mortgage loans and commercial loans. The
origination charges on residential mortgage loans may not exceed 6% of the loan amount. Regulatory Enforcement Authority. Applicable banking laws include substantial
enforcement powers available to federal and Puerto Rico banking regulators. This enforcement
authority includes, among other things, the ability to assess civil money penalties, to issue
cease-and-desist or removal orders and to initiate injunctive actions against banking organizations
and institution-affiliated parties, as defined. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or
inactions may provide the basis for enforcement action, including misleading or untimely reports
filed with regulatory authorities. Regulations Applicable to Crown Bank. Crown Bank is subject to the lending limits
applicable to national banks. With limited exceptions, the maximum amount that a savings
association or a national bank may lend to any borrower, including related entities of the
borrower, at one time may not exceed 15% of the unimpaired capital and surplus of the institution,
plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily
marketable collateral. At December 31, 2004, Crown Banks loans-to-one-borrower limit was
$19.3 million based upon the 15% of unimpaired capital and surplus measurement. At December
31, 2004, Crown Banks largest single lending relationship had
an outstanding balance of $16.0 million and consisted of four loans secured by real estate, all of which were performing in
accordance with their terms at such date. Savings associations must also meet a qualified thrift lender, or QTL test, which test may
be met either by maintaining a specified level of assets in qualified thrift investments as
specified by the Home Owners Loan Act of 1933, or HOLA, or by meeting the definition of a domestic
building and loan association under the Internal Revenue Code of 1986, as amended, or the Code.
Qualified thrift investments are primarily residential mortgages and related investments, including
mortgage related 54




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securities. The required percentage of investments under the HOLA is 65% of assets while the
Code requires investments of 60% of assets. An association must be in compliance with the QTL test
or the definition of domestic building and loan association on a monthly basis in nine out of every
12 months. Associations that fail to meet the QTL test will generally be prohibited from engaging
in any activity not permitted for both a national bank and a savings association. As of December
31, 2004, Crown Bank was in compliance with its QTL requirement. Community Reinvestment Act and the Fair Lending Laws. Premier Bank and Crown Bank
have a responsibility under the Community Reinvestment Act and related regulations to help meet the
credit needs of their communities, including low- and moderate-income neighborhoods. In addition,
the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those statutes. An
institutions failure to comply with the provisions of the Community Reinvestment Act could, at a
minimum, result in regulatory restrictions on its activities and the denial of applications. In
addition, an institutions failure to comply with the Equal Credit Opportunity Act and the Fair
Housing Act could result in the applicable federal regulatory agencies and/or the Department of
Justice taking enforcement actions against the institution. Based on their most recent
examinations, Premier Bank and Crown Bank each received a satisfactory rating with respect to its
performance pursuant to the Community Reinvestment Act. Federal Home Loan Bank System. Premier Bank and Crown Bank are members of the FHLB
system. Among other benefits, each FHLB serves as a reserve or central bank for its members within
its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of
the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the
policies and procedures established by the board of directors of the individual FHLB. As an FHLB
member, each of Premier Bank and Crown Bank is required to own capital stock in a FHLB in an amount
equal to the greater of: (i) 1% of its aggregate outstanding principal amount of its residential
mortgage loans, home purchase contracts and similar obligations at the beginning of each calendar
year; or (ii) 5% of its FHLB advances or borrowings. At December 31, 2004, Premier Bank and Crown
Bank each met the required investment in FHLB stock, with each holding $94.1 million and $22.4
million of the FHLB of New York and FHLB of Atlanta stock, respectively. Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain noninterest bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW, and Super NOW checking accounts) and non personal time deposits.
At December 31, 2004, Premier Bank and Crown Bank were in compliance with these requirements. Mortgage Banking Subsidiaries The mortgage banking business conducted by R&G Mortgage, The Mortgage Store and Continental is
subject to the rules and regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating,
processing, selling and servicing mortgage loans and the issuance and sale of mortgage-backed
securities. Those rules and regulations, among other things, prohibit discrimination and establish
underwriting guidelines which include provisions for inspections and appraisals, require credit
reports on prospective borrowers and fix maximum loan amounts and, with respect to VA loans, fix
maximum interest rates. Moreover, lenders are required annually to submit to FNMA, FHA, FHLMC,
GNMA and VA audited financial statements, and each regulatory entity has its own financial
requirements. The affairs of these subsidiaries are also subject to supervision and examination by
FNMA, FHA, FHLMC, GNMA, HUD and VA at all times to assure compliance with the applicable
regulations, policies and procedures. Mortgage origination activities are subject to, among
others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real Estate
Settlement Procedures Act and the regulations promulgated thereunder. 55




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Mortgage loan production activities are subject to the Federal Truth-in-Lending Act and
Regulation Z promulgated thereunder. The Truth-in-Lending Act contains disclosure requirements
designed to provide consumers with uniform, understandable information with respect to the terms
and conditions of loans and credit transactions in order to give them the ability to compare credit
terms. The Truth-in-Lending Act provides consumers a three-day right to cancel certain credit
transactions, including any refinance mortgage or junior mortgage loan on a consumers primary
residence. The mortgage subsidiaries are required to comply with the Equal Credit Opportunity Act of
1974, as amended, or ECOA, and Regulation B promulgated thereunder, which prohibit creditors from
discriminating against applicants on the basis of race, color, sex, age or marital status, and
restrict creditors from obtaining certain types of information from loan applicants. It also
requires certain disclosures by lenders regarding consumer rights and requires lenders to advise
applicants of the reasons for any credit denial. In instances where the applicant is denied credit
or the rate or charge for loan increases as a result of information obtained from a consumer credit
agency, another statute, The Fair Credit Reporting Act of 1970, as amended, requires the lenders to
supply the applicant with the name and address of the reporting agency. The Federal Real
Estate Settlement Procedures Act, or RESPA, imposes, among other things,
limits on the amount of funds a borrower can be required to deposit with the mortgage subsidiaries
in any escrow account for the payment of taxes, insurance premiums or other charges. R&G Mortgage and The Mortgage Store are also subject to regulation by the OCFI, with respect
to, among other things, licensing requirements and the recordkeeping, examination and reporting
requirements of the Puerto Rico Mortgage Banking Institutions Law, or Mortgage Banking Law.
R&G Mortgage and The Mortgage Store are licensed by the OCFI as a mortgage banking institution in
Puerto Rico. Such authorization to act as a mortgage banking institution must be renewed as of
January 1 of each year. In the past, neither R&G Mortgage nor The Mortgage Store has not had any
difficulty in renewing its authorization to act as a mortgage banking institution, and management
is unaware of any existing practices, conditions or violations which would result in either company
being unable to receive such authorization in the future. The Mortgage Banking Law requires the prior approval of the OCFI for the acquisition of
control of any mortgage banking institution licensed under the Mortgage Banking Law. For purposes
of the Mortgage Banking Law, the term control means the power to direct or influence decisively,
directly or indirectly, the management or policies of a mortgage banking institution. The Mortgage
Banking Law provides that a transaction that results in the holding of less than 10% of the
outstanding voting securities of a mortgage banking institution shall not be considered a change of
control. Pursuant to the Mortgage Banking Law, upon receipt of notice of a proposed transaction
that may result in change of control, the OCFI is obligated to make such inquires as it deems
necessary to review the transaction. Under the Mortgage Banking Law, the determination of the OCFI
whether or not to authorize a proposed change of control is final and non-appealable. As is the case with Premier Bank, the rate of interest that R&G Mortgage and The Mortgage
Store may charge on mortgage loans to individuals is subject to Puerto Ricos usury laws. Such
laws are administered by the Financing Board that promulgates regulations that specify maximum
rates on various types of loans to individuals. Regulation 26-A promulgated by the Financing Board
fixes the maximum rate (which is adjusted on a weekly basis) that may be charged on residential
first mortgage loans. As a registered broker-dealer, R-G Investments Corporation is subject to regulation and
examination by the SEC and the NASD, which may affect its manner of operation and profitability.
Such regulations cover a broad range of subject matters. Rules and regulations for registered
broker-dealers 56




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cover such issues as: capital requirements; sales and trading practices; use of client funds
and securities; the conduct of directors, officers, and employees; record-keeping and recording;
supervisory procedures to prevent improper trading on material non-public information;
qualification and licensing of sales personnel; and limitations on the extension of credit in
securities transactions. R-G Investments Corporation is subject to the net capital requirements set forth in Rule
15c3-1 of the Exchange Act. The net capital requirements measure the general financial condition
and liquidity of a broker-dealer by specifying a minimum level of net capital that a broker-dealer
must maintain, and by requiring that a significant portion of its assets be kept liquid. If R-G
Investments Corporation failed to maintain its minimum required net capital, it would be required
to cease executing customer transactions until it came back into compliance. This could also
result in R-G Investments Corporation losing its NASD membership, its registration with the SEC, or
require a complete liquidation. The SECs risk assessment rules also apply to R-G Investments Corporation as a registered
broker-dealer. These rules require broker-dealers to maintain and preserve records and certain
information, describe risk management policies and procedures, and report on the financial
condition of affiliates whose financial and securities activities are reasonably likely to have a
material impact on the financial and operational condition of the broker-dealer. In addition to federal registration, state securities commissions require the registration of
certain broker-dealers. Violations of federal, state and NASD rules or regulations may result in the revocation of
broker-dealer licenses, imposition of censures or fines, the issuance of cease and desist orders,
and the suspension or expulsion of officers and employees from the securities business firm. Available Information The Companys Internet address is www.rgonline.com. The Company makes available free of
charge through the Investor Relations section of its website its annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after the Company electronically files these materials with, or furnishes them to, the
SEC. The Company has adopted a Code of Ethics that applies to the Companys directors, officers and
employees, including without limitation the Companys principal executive officer, principal
financial officer, principal accounting officer or controller, and persons performing similar
functions. The Companys Code of Ethics is posted in the Investor Relations section of the
Companys website, and is available in print free of charge to any stockholder who requests it.
Any amendment to, or waiver from, a provision of the Code of Ethics applicable to any director or
executive officer of the Company, including the Companys principal executive officer, principal
financial officer, principal accounting officer or controller, and persons performing similar
functions, will be posted on the Companys website and disclosed in a Form 8-K. Also posted in the Investor Relations section of the Companys website, and available in print
to any stockholder who requests it, are the Companys Audit Committee Charter and Corporate
Governance Guidelines. Written requests for copies of the Companys Code of Ethics, Audit Committee Charter or
Corporate Governance Guidelines should be directed to: Secretary, R&G Financial Corporation, R-G
Plaza, 280 Jesús T. Piñero Avenue, Hato Rey, San Juan, Puerto Rico 00918. 57




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ITEM 2: PROPERTIES. The Companys principal executive office is located at 280 Jesús T. Piñero Avenue, Hato Rey,
San Juan, Puerto Rico 00918. At December 31, 2004, the Company operated its subsidiaries mostly
through leased facilities. All of the Companys subsidiaries, except Crown Bank and Continental,
conduct business in Puerto Rico. Premier Bank operates from 33 offices, R&G Mortgage operates from
46 offices, Crown Bank operates from 15 banking offices and
one mortgage office located in
the State of Florida, The Mortgage Store operates from ten offices, Home & Property Insurance
Corp. operates from one office, R-G Investments Corporation operates
from three offices and
Continental operates from four offices located in the States of New York and North Carolina. 
 ITEM 3: LEGAL PROCEEDINGS. The Company is not involved in any pending legal proceedings other than nonmaterial legal
proceedings occurring in the ordinary course of business. 
 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 
 PART II 
  ITEM 5:
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. The information required herein is incorporated by reference from the
Registrants 2004 Annual Report to Stockholders. 
  ITEM 6:
    SELECTED FINANCIAL DATA. The information required herein is incorporated by reference from   the
Registrants 2004 Annual Report to Stockholders. 
  ITEM 7:
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required herein is incorporated by reference from the
Registrants 2004 Annual Report to Stockholders. 
  ITEM 7A.
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information required herein is incorporated by reference from  the
Registrants 2004 Annual Report to Stockholders. 
  ITEM 8:
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required herein is incorporated by reference from  the
Registrants 2004 Annual Report to Stockholders. 58




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ITEM 9:
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 
  ITEM 9A:
    CONTROLS AND PROCEDURES. As of the end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Companys management, including its Chief
Executive Officer along with its Executive Vice President and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls and procedures
pursuant to the Exchange Act Rule 13a-15(b). Based upon that evaluation, the Companys Chief
Executive Officer along with its Executive Vice President and Chief Financial Officer concluded
that the Companys disclosure controls and procedures are
effective in recording, processing, summarizing and reporting material information relating to the Company (including its consolidated subsidiaries) required
to be included in the Companys periodic SEC filings within the
time periods specified in the SEC rules and forms. There has not been any change in the
Companys internal control over financial reporting that occurred during its most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting. Disclosure controls and procedures are controls and other procedures of the Company that are
designed to ensure that information required to be disclosed by the Company in the reports that the
Company files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that the Company files or submits under the Exchange
Act is accumulated and communicated to the Companys management, including its Chief Executive
Officer and Executive Vice President and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. Managements
Report on Internal Control Over Financial Reporting and the Report of
Independent Registered Public Accounting Firm on Internal Control
Over Financial Reporting are hereby incorporated by reference from the Companys 2004 Annual Report to
Stockholders attached to this Form 10-K as Exhibit 13. 
  ITEM 9B:
    OTHER INFORMATION. Not applicable. 
 PART III 
  ITEM 10:
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required herein is incorporated by reference from the Registrants Proxy
Statement for the 2005 Annual Meeting of Stockholders, which we refer
to as the Proxy Statement, which will be filed with the Securities and
Exchange Commission not later than 120 days after the end of the Registrants fiscal year. Information regarding the Companys Code of Ethics that applies to the Companys directors,
officers and employees is set forth in Part I of this Annual Report on Form 10-K under the heading
Available Information. 59




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ITEM 11:
    EXECUTIVE COMPENSATION. The information required herein is incorporated by reference from the Registrants Proxy
Statement. 
  ITEM 12:
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information required herein is incorporated by reference from the Registrants Proxy
Statement. Equity Compensation Plan Information The following table presents information on the Companys equity compensation plans at
December 31, 2004. (c)Number of securities(a)
    
    
    (b)
    
    
    remaining available forNumber of securities to be
    
    
    Weighted-average
    
    
    future issuance underissued upon exercise of
    
    
    exercise price of
    
    
    equity compensationoutstanding options,
    
    
    outstanding options,
    
    
    plans (excluding securitiesPlan category
    
    warrants and rights
    
    
    warrants and rights
    
    
    reflected in column (a))Equity compensation plans approved by security
holders
    
    
    246,550
    
    
    
    16.99
    
    
    
    915,740Equity compensation plans not approved by
security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    246,550
    
    
    
    16.99
    
    
    
    915,740
 
  ITEM 13:
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required herein is incorporated by reference from the Registrants Proxy
Statement. 
  ITEM 14:
    PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required herein is incorporated by reference from the Registrants Proxy
Statement. 
 PART IV 
  ITEM 15:
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.  (a)
    Documents Filed as Part of this Report  1.
    The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13):Report of Independent Registered Public Accounting Firm.Consolidated Statements of Financial Condition as of December 31, 2004 and
2003.Consolidated Statements of Income for the Years Ended December 31, 2004,
2003 and 2002.Consolidated Statements of Cash Flows for the Years Ended December 31, 2004,
2003 and 2002.Consolidated Statements of Changes in Stockholders Equity for the Years
Ended December 31, 2004, 2003 and 2002.Notes to Consolidated Financial Statements. 60




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2.
    All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information is
included in the consolidated financial statements and related notes thereto.3.
    The following exhibits are filed as part of this Form 10-K, and
this list includes the Exhibit Index. No.
    
    Description2.1
    
    Amended and Restated Agreement and Plan of Merger by and between R&G
Financial Corporation, R-G Premier Bank of Puerto Rico and R-G Interim
Premier Bank, dated as of September 27, 1996 (1)2.2.0
    
    Agreement and Plan of Reorganization among R&G Financial Corporation,
R&G Acquisition Holdings Corporation, The Crown Group, Inc. and Crown
Bank, a Federal Savings Bank, dated as of December 19, 2001 (2)2.2.1
    
    Amendment No. 2 to Agreement and Plan of Reorganization among R&G
Financial Corporation, R&G Acquisition Holdings Corporation, The Crown
Group, Inc. and Crown Bank, a Federal Savings Bank, dated as of
February 27, 2002 (3)2.3
    
    Purchase and Assumption Agreement, dated as of October 11, 2004, by and
among R-G Crown Bank, SouthTrust Bank and R&G Financial Corporation
(19)3.1.0
    
    Certificate of Incorporation of R&G Financial Corporation (4)3.1.1
    
    Certificate of Amendment to Certificate of Incorporation of R&G
Financial Corporation (4)3.1.2
    
    Amended and Restated Certificate of Incorporation of R&G Financial
Corporation (5)3.1.3
    
    Certificate of Amendment to Amended and Restated Certificate of
Incorporation of R&G Financial Corporation (6)3.1.4
    
    Second Certificate of Amendment to Amended and Restated Certificate of
Incorporation of R&G Financial Corporation (15)3.1.5
    
    Third Certificate of Amendment to Amended and Restated Certificate of
Incorporation of R&G Financial Corporation3.1.6
    
    Certificate of Resolution designating the terms of the Series A
Preferred Stock (7)3.1.7
    
    Certificate of Resolution designating the terms of the Series B
Preferred Stock (8)3.1.8
    
    Certificate of Designation for Series C Preferred Stock (12)3.1.9
    
    Certificate of Designation for Series D Preferred Stock (13)3.2
    
    Bylaws of R&G Financial Corporation (4)4.0
    
    Form of Stock Certificate of R&G Financial Corporation (4)4.1
    
    Form of Series A Preferred Stock Certificate of R&G Financial
Corporation (9)4.2
    
    Form of Series B Preferred Stock Certificate of R&G Financial
Corporation (10)4.3
    
    Form of Series C Preferred Stock Certificate of R&G Financial
Corporation (11)4.4
    
    Form of Series D Preferred Stock Certificate of R&G Financial
Corporation (14)4.5
    
    Form of Indenture for R&G Capital Trust III, dated as of October 6,
2003, between R&G Financial Corporation and Wilmington Trust Company
(18)4.6
    
    Form of Indenture for R&G Capital Trust V, dated as of March 31, 2004,
between R&G Financial Corporation and Wilmington Trust Company (20)4.7.0
    
    Indenture for R&G Capital Trust VI, dated as of November 30, 2004,
between R&G Financial Corporation and Wilmington Trust Company (21)4.7.1
    
    First Supplemental Indenture for R&G Capital Trust VI, dated as of
November 30, 2004, between R&G Financial Corporation and Wilmington
Trust Company (21)10.1
    
    Master Purchase, Servicing and Collection Agreement between R&G
Mortgage Corporation and R-G Premier Bank of Puerto Rico, dated
February 16, 1990, as amended on April 1, 1991, December 1, 1991,
February 1, 1994 and July 1, 1994 (4)
 61




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10.2
    
    Master Custodian Agreement between R&G Mortgage Corporation and R-G
Premier Bank of Puerto Rico, dated February 16, 1990, as amended on
June 27, 1996 (4)10.3.0
    
    Master Production Agreement between R&G Mortgage Corporation and R-G
Premier Bank of Puerto Rico, dated February 16, 1990, as amended on
August 30, 1991 and March 31, 1995 (4)10.3.1
    
    Amendment No. 3 to the Master Production Agreement between R&G Mortgage
Corporation and R-G Premier Bank of Puerto Rico, dated January 1, 2004
(22)10.4
    
    Data Processing Computer Service Agreement between R&G Mortgage and R-G
Premier Bank of Puerto Rico, dated December 1, 1994 (4)10.5
    
    Securitization Agreement by and between R&G Mortgage and R-G Premier
Bank of Puerto Rico, dated as of July 1, 1995 (4)10.6
    
    R&G Financial Corporation Stock Option Plan (4)(*)10.7.0
    
    R&G Financial Corporation 2004 Stock Option Plan (23)(*)10.7.1
    
    Form of Incentive Stock Option Agreement for R&G Financial Corporation
2004 Stock Option Plan (24)10.7.2
    
    Form of Nonqualified Stock Option Agreement for R&G Financial
Corporation 2004 Stock Option Plan (24)10.8
    
    Guarantee Agreement between R&G Financial Corporation, R&G Acquisition
Holdings Corporation and Wilmington Trust as Guarantee Trustee with
respect to the Capital Securities issued by R&G Capital Trust I, dated
as of April 10, 2002 (16)10.9
    
    Guarantee Agreement between R&G Financial Corporation and U.S. Bank
National Association as Guarantee Trustee with respect to the Capital
Securities issued by R&G Capital Trust IV, LLT, dated as of August 8,
2003 (17)10.10
    
    Form of Preferred Securities Guarantee Agreement for R&G Capital Trust
III, dated as of October 6, 2003, by and between R&G Financial
Corporation and Wilmington Trust Company (18)10.11
    
    Form of Amended and Restated Declaration of Trust of R&G Capital Trust
III, dated as of October 6, 2003, among R&G Financial Corporation,
Wilmington Trust Company and the Administrative Trustees named therein
(18)10.12
    
    Form of Preferred Securities Guarantee Agreement for R&G Capital Trust
V, dated as of March 31, 2004, by and between R&G Financial Corporation
and Wilmington Trust Company (20)10.13
    
    Form of Amended and Restated Declaration of Trust of R&G Capital Trust
V, dated as of March 31, 2004, among R&G Financial Corporation,
Wilmington Trust Company and the Administrative Trustees named therein
(20)10.14
    
    Trust Preferred Securities Guarantee Agreement for R&G Capital Trust
VI, dated as of November 30, 2004, by and between R&G Financial
Corporation and Wilmington Trust Company (21)10.15
    
    Amended and Restated Declaration of Trust of R&G Capital Trust VI,
dated as of November 30, 2004, among R&G Financial Corporation,
Wilmington Trust Company and the Administrative Trustees named therein
(21)13
    
    Portions of the 2004 Annual Report to Stockholders14
    
    Code of Ethics (25)21
    
    Subsidiaries of the Registrant  Reference is made to Item 1.
Business for the required information23
    
    Consent of PricewaterhouseCoopers
LLP.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act32
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
   (1)
    
    Incorporated by reference from the Registration Statement on Form S-4 (Registration No.
333-13199) filed by the Registrant with the SEC on
October 1, 1996. 62




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(2)
    
    Incorporated by reference from the Registrants Current Report on Form 8-K filed with the SEC
on December 20, 2001.(3)
    
    Incorporated by reference from the Registrants Current Report on Form 8-K filed with the SEC
on February 28, 2002.(4)
    
    Incorporated by reference from the Registration Statement on Form S-1 (Registration No.
333-06245) filed by the Registrant with the SEC on June 18, 1996, as amended.(5)
    
    Incorporated by reference from the Registrants Current Report on Form 8-K filed with the SEC
on November 19, 1999.(6)
    
    Incorporated by reference from the Registrants Current Report on Form 8-K filed with the SEC
on June 12, 2001.(7)
    
    Incorporated by reference from the Registrants Current Report on Form 8-K filed with the SEC
on August 31, 1998.(8)
    
    Incorporated by reference from the Registrants Form 10-K filed with the SEC on April 13,
2000.(9)
    
    Incorporated by reference from the Registrants Registration Statement on Form S-3
(Registration No. 333-60923) filed with the SEC on August 7, 1998.(10)
    
    Incorporated by reference from the Registrants Registration Statement on Form S-3
(Registration No. 333-90463) filed with the SEC on November 5, 1999.(11)
    
    Incorporated by reference from the Registrants Registration Statement on Form S-3 (File No.
333-55834) filed with the SEC on February 16, 2001.(12)
    
    Incorporated by reference from the Registrants Form 10-K filed with the SEC on April 2,
2001.(13)
    
    Incorporated by reference from the Registrants Current Report on Form 8-K filed with the SEC
on March 7, 2002.(14)
    
    Incorporated by reference from the Registrants Registration Statement on Form S-3 (File No.
333-81214) filed with the SEC on January 22, 2002.(15)
    
    Incorporated by reference from the Registrants Current Report on Form 8-K filed with the SEC
on June 18, 2002.(16)
    
    Incorporated by reference from the Registrants Form 10-Q filed with the SEC on November 14,
2002.(17)
    
    Incorporated by reference from the Registrants Form 10-Q filed with the SEC on November 14,
2003.(18)
    
    Incorporated by reference from the Registration Statement on Form S-3 (Registration No.
333-107365) filed with the SEC on July 25, 2003.(19)
    
    Incorporated by reference from the Registrants Current Report on Form 8-K filed with the SEC
on October 12, 2004.(20)
    
    Incorporated by reference from the Registrants Registration Statement on Form S-3
(Registration No. 333-113321) filed with the SEC on March 5, 2004.(21)
    
    Incorporated by reference from the Registrants Current Report on Form 8-K filed with the SEC
on December 2, 2004.(22)
    
    Incorporated by reference from the Registrants Form 10-Q filed with the SEC on May 10, 2004.(23)
    
    Incorporated by reference from the Registrants Definitive Proxy Statement for the 2004
Annual Meeting of Stockholders filed with the SEC on April 5, 2004.(24)
    
    Incorporated by reference from the Registrants Registration Statement on Form S-8
(Registration No. 333-118785) filed with the SEC on September 3, 2004.(25)
    
    Incorporated by reference from the Registrants Form 10-K filed with the SEC on March 15,
2004.(*)
    
    Management contract or compensatory plan or arrangement. 63




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##### Table of Contents



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. R&G FINANCIAL CORPORATIONMarch 16, 2005
    By:
    /s/ Víctor J. GalánVíctor J. GalánChairman of the Board and
Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated. /s/ Víctor J. Galán
    
    March 16, 2005Víctor J. Galán
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)/s/ Ramón Prats
    
    March 16, 2005Ramón Prats
Vice Chairman of the Board and
President/s/ Joseph R. Sandoval
    
    March 16, 2005Joseph R. Sandoval
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)/s/ Enrique Umpierre-Suárez
    
    March 16, 2005Enrique Umpierre-Suárez
Director and Secretary/s/ Víctor L. Galán
    
    March 16, 2005Víctor L. Galán
Director




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##### Table of Contents



/s/ Rafael Nin
    
    March 16, 2005Rafael Nin
Director/s/ Laureno Carús Abarca
    
    March 16, 2005Laureno Carús Abarca
Director/s/ Eduardo McCormack
    
    March 16, 2005Eduardo McCormack
Director/s/ Gilberto Rivera-Arreaga
    
    March 16, 2005Gilberto Rivera-Arreaga
Director/s/ Benigno R. Fernández
    
    March 16, 2005Benigno R. Fernández
Director/s/ Ileana M. Colón-Carlo
    
    March 16, 2005Ileana M. Colón-Carlo
Director/s/ Roberto Gorbea
    
    March 16, 2005Roberto Gorbea
Director/s/ Melba Figueroa
    
    March 16, 2005Melba Figueroa
Director