##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-K [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2003 OR [   ]
    
    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 Jésus T. Piñero Avenue
Hato 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:   
 Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   Yes   [X]   No   [  ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrants knowledge, in definitive proxy or




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information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.   [  ] Indicate by check mark whether Registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2). Yes   [X]   No   [  ] The aggregate value of the 27,751,052 shares of Class B Common Stock of the
Registrant issued and outstanding on June 30, 2003, which excludes 1,754,794
shares held by all directors and officers of the Registrant as a group, was
approximately $549.5 million. This figure is based on the last known trade
price of $19.80 per share (split adjusted) of the Registrants Class B Common Stock on June 30,
2003. Number of shares of Class B Common Stock outstanding as of February 29, 2004:
29,539,115. (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, 2003 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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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. 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 (R&G Financial or the Company) is a Puerto
Rico chartered, financial holding company that operates R&G Mortgage Corp.
(R&G Mortgage), the second largest mortgage company in Puerto Rico, R-G
Premier Bank of Puerto Rico (Premier Bank), a Puerto Rico commercial bank,
and R-G Crown Bank (Crown Bank) (Premier Bank and Crown
Bank hereinafter collectively referred to as banking subsidiaries of R&G
Financial). Through R&G Mortgage, the Company also operates The Mortgage Store
of Puerto Rico, Inc. (The Mortgage Store), a Puerto Rico mortgage company,
and through Crown Bank, the Company operates Continental Capital Corp.
(Continental), a mortgage banking company doing business in New York, New
Jersey, Connecticut, Florida and North Carolina. The Company also operates
Home & Property Insurance Corp., a Puerto Rico insurance agency, and R-G
Investments Corporation, a Puerto-Rico licensed broker-dealer registered with
the National Association of Securities Dealers (NASD). The Company is currently in its 32nd year of operations and operates its
business through its subsidiaries. The Company is primarily engaged in
providing a full range of banking services, including commercial banking
services, corporate real estate and business lending, residential construction
lending, consumer lending and credit cards, offering a diversified range of
deposit products and, to a lesser extent, trust and investment services through
its private banking department and its broker-dealer. The Company is also
engaged in 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 and 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 was organized in 1972 as R&G Mortgage Corp. and completed its
initial public offering in 1996, following its reorganization as a bank holding
company. As of December 31, 2003, the Company had total assets of $8.2
billion, total deposits of $3.6 billion and stockholders equity of $750.4
million. At December 31, 2003, the Company operated 31 bank branches, mainly
located in the northeastern section of Puerto Rico, 14 bank branches in the
continental United States, located in Florida, 47 mortgage offices in Puerto
Rico and 5 mortgage offices in the United States, located in New York, North
Carolina and Florida. 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: (1) emphasizing the growth of its mortgage banking activities,
including the origination and sale of mortgage loans, and growing its loan
servicing operation; (2) expanding its retail banking franchise in order to
achieve increased market presence and to increase core deposits; (3) enhancing
its net interest income by increasing its loans held for investment,
particularly single-family residential loans, and investment securities; (4)
developing new business relationships 3




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through an increased emphasis on commercial real estate and commercial
business lending; (5) diversifying its retail products and services, including
an increase in consumer loan originations; (6) meeting the banking needs of its
customers through, among other things, the offering of trust and investment
services and insurance products; (7) expanding its operations in the United
States; and, (8) emphasizing controlled growth, while pursuing a variety of
acquisition opportunities when appropriate. The senior management of the Company is comprised of five executives with
an average of over 29 years of experience in the financial services industry.
Víctor J. Galán, who owned 42.2% of all of the Companys issued and outstanding
common stock as of December 31, 2003, is the Companys Chairman and Chief
Executive Officer, positions he has held since the Companys incorporation in
1996. Mr. Galán is also the founder and Chairman of R&G Mortgage, a position
he has held since 1972. Ramón Prats is the Companys President and Vice
Chairman, positions he has held since 2001 and 1996, respectively. Mr. Prats
formerly was Executive Vice President of R&G Mortgage, a position he held since
1980. Joseph Sandoval is the Companys Executive Vice President and Chief
Financial Officer, positions he has held since 2003 and 1997, respectively.
Previously, Mr. Sandoval was an accountant with a predecessor to
PriceWaterhouseCoopers LLP. Mario Ruiz has been with R&G Financial
subsidiaries since 1990 and is presently Executive Vice President of Premier
Bank. Mr. Ruiz previously served in various capacities for R&G Mortgage and
The Mortgage Store. Steven Velez has been with R&G Mortgage since 1989 and is
presently Executive Vice President of R&G Mortgage. During the past year, the Company participated in two financing
transactions. In August 2003, the Companys wholly-owned subsidiary, R&G
Acquisition Holdings Corporation (RAC), a Florida
corporation, formed R&G
Capital Trust IV, a Delaware statutory business trust, which issued $15.0
million of trust preferred securities in a private placement. In October 2003,
R&G Capital Trust III, a Delaware statutory business trust wholly-owned by the
Company, issued $100 million of trust preferred securities to the Puerto Rico
Conservation Trust Fund, a Puerto Rico non-affiliated charitable
trust, which
used the trust preferred securities to secure a concurrent offering to the
public of its secured notes. Such securities are included within other
borrowings in the Companys Consolidated Statements of Financial Condition.
The Company has guaranteed certain obligations of RAC to R&G Capital Trust IV
related to the payment of interest by RAC on the trust preferred securities and
the eventual redemption of the trust preferred securities at maturity. 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. 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 4




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Continental originates retail construction and commercial loans in New
York, New Jersey, Connecticut, North Carolina and Florida. Residential Loans. At December 31, 2003, R&G Financials loans
receivable, net, totaled $4.0 billion, that represented 49.4% of R&G
Financials $8.2 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 historically has had a substantial amount of loans secured by first
mortgage liens on existing single-family residences. At December 31, 2003,
$2.4 billion, or 55.3% of R&G Financials total loans held for investment,
consisted of such loans, of which all but $1.5 million consisted of
conventional loans. Construction Loans. At December 31, 2003, retail construction loans
amounted to $170.0 million, or 3.9% of R&G Financials total loans held for
investment, while commercial construction and land acquisition loans amounted
to $595.0 million in the aggregate, or 13.8% 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, 2003,
$728.6 million, or 16.9% 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 leases),
term loans, insurance premium loans and loans guaranteed by the Small Business
Administration and various consumer loans. At December 31, 2003, consumer
loans, some of which are secured by real estate and deposits, amounted to
$210.1 million, or 4.9% of total loans held for investment, and commercial
business loans amounted to $188.7 million, or 4.4% 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, 2003, 2002 and 2001, R&G Financial originated a total of
$2.8 billion, $2.0 billion and $1.8 billion of residential mortgage loans,
respectively. These aggregate originations include loans originated by R&G
Mortgage directly for Premier Bank of $1.3 billion, $811.8 million and $664.8
million during the years ended December 31, 2003, 2002 and 2001, respectively,
or 45%, 41% and 36%, respectively, of total originations. The loans originated
by R&G Mortgage for 5




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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, 2003, R&G Financials servicing
portfolio totaled $10.9 billion and consisted of a total of 147,981 loans.
These amounts include R&G Mortgages servicing portfolio, totaling $7.9
billion, Crown Banks servicing portfolio, totaling $2.5 billion, and
Continentals servicing portfolio, totaling $553.0 million, at December 31,
2003. At December 31, 2003, R&G Financials servicing portfolio included $1.9
billion of loans serviced for Premier Bank and $227.5 million of loans serviced
for Crown Bank, or 17.4% and 2.1%, 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, the
FHA, and Veterans Administration, the 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, the FNMA, and the
Federal Home Loan Mortgage Corporation, the 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, 2003, 2002
and 2001, R&G Financial sold $1.6 billion, $1.2 billion and $1.1 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
Office of the Puerto Rico Commissioner of Financial Institutions, 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
Federal Deposit Insurance Corporation, or 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, 2003, 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. 6




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Lending Activities from Banking Operations General. At December 31, 2003, R&G Financials loans receivable, net
totaled $4.0 billion, which represented 49.4% of R&G Financials $8.2 billion of
total assets. At December 31, 2003, 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 partially guaranteed by the VA.
At December 31, 2003, all but $1.5 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. 7




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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 31,2003
    
    2002
    
    2001Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in Thousands)Residential real estate - first mortgage
    
    $
    2,384,279
    
    
    
    55.30
    %
    
    $
    1,473,051
    
    
    
    50.12
    %
    
    $
    996,885
    
    
    
    52.11
    %Residential real estate - second
mortgage
    
    
    34,999
    
    
    
    0.81
    
    
    
    40,429
    
    
    
    1.37
    
    
    
    33,321
    
    
    
    1.74Retail construction
    
    
    169,963
    
    
    
    3.94
    
    
    
    159,754
    
    
    
    5.44
    
    
    
    50,767
    
    
    
    2.65Commercial construction and land
acquisition(1)
    
    
    595,030
    
    
    
    13.80
    
    
    
    329,932
    
    
    
    11.23
    
    
    
    230,725
    
    
    
    12.06Commercial real estate
    
    
    728,620
    
    
    
    16.90
    
    
    
    582,114
    
    
    
    19.81
    
    
    
    340,139
    
    
    
    17.78Commercial business
    
    
    188,690
    
    
    
    4.38
    
    
    
    152,743
    
    
    
    5.20
    
    
    
    79,909
    
    
    
    4.18Consumer loans:Loans secured by deposits
    
    
    24,713
    
    
    
    0.57
    
    
    
    28,070
    
    
    
    0.95
    
    
    
    26,176
    
    
    
    1.37Real estate secured consumer loans
    
    
    53,709
    
    
    
    1.25
    
    
    
    68,156
    
    
    
    2.32
    
    
    
    83,509
    
    
    
    4.37Unsecured consumer loans
    
    
    131,711
    
    
    
    3.05
    
    
    
    104,715
    
    
    
    3.56
    
    
    
    71,507
    
    
    
    3.74Total loans receivable
    
    
    4,311,714
    
    
    
    100.00
    %
    
    
    2,938,964
    
    
    
    100.00
    %
    
    
    1,912,938
    
    
    
    100.00
    %Less:Allowance for loan losses
    
    
    (39,615
    )
    
    
    
    
    
    
    (32,676
    )
    
    
    
    
    
    
    (17,428
    )Loans in process
    
    
    (224,960
    )
    
    
    
    
    
    
    (146,111
    )
    
    
    
    
    
    
    (92,935
    )Deferred loan costs (fees)
    
    
    1,369
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    20Unearned interest
    
    
    (1
    )
    
    
    
    
    
    
    (443
    )
    
    
    
    
    
    
    (207
    )(232,611
    )
    
    
    
    
    
    
    (179,275
    )
    
    
    
    
    
    
    (110,550
    )Loans receivable, net(2)
    
    $
    4,048,507
    
    
    
    
    
    
    $
    2,759,689
    
    
    
    
    
    
    $
    1,802,388
 December 31,2000
    
    1999Amount
    
    Percent
    
    Amount
    
    PercentResidential real estate - first mortgage
    
    $
    998,984
    
    
    
    58.08
    %
    
    $
    1,097,891
    
    
    
    68.35
    %Residential real estate - second mortgage
    
    
    27,419
    
    
    
    1.59
    
    
    
    13,029
    
    
    
    0.81Retail construction
    
    
    47,698
    
    
    
    2.77
    
    
    
    38,950
    
    
    
    2.42Commercial construction and land acquisition(1)
    
    
    143,689
    
    
    
    8.35
    
    
    
    62,989
    
    
    
    3.92Commercial real estate
    
    
    270,459
    
    
    
    15.72
    
    
    
    204,155
    
    
    
    12.71Commercial business
    
    
    59,120
    
    
    
    3.44
    
    
    
    54,231
    
    
    
    3.38Consumer loans:Loans secured by deposits
    
    
    26,926
    
    
    
    1.57
    
    
    
    20,539
    
    
    
    1.28Real estate secured consumer loans
    
    
    100,357
    
    
    
    5.83
    
    
    
    76,944
    
    
    
    4.79Unsecured consumer loans
    
    
    45,563
    
    
    
    2.65
    
    
    
    37,653
    
    
    
    2.34Total loans receivable
    
    
    1,720,215
    
    
    
    100.00
    %
    
    
    1,606,381
    
    
    
    100.00
    %Less:Allowance for loan losses
    
    
    (11,600
    )
    
    
    
    
    
    
    (8,971
    )Loans in process
    
    
    (78,163
    )
    
    
    
    
    
    
    (33,526
    )Deferred loan fees
    
    
    909
    
    
    
    
    
    
    
    (437
    )Unearned interest
    
    
    (85
    )
    
    
    
    
    
    
    (440
    )(88,939
    )
    
    
    
    
    
    
    (43,374
    )Loans receivable, net(2)
    
    $
    1,631,276
    
    
    
    
    
    
    $
    1,563,007
   (1)
    
    Includes $250,000, $665,000, $1.2 million and $545,000 of loans held by
R&G Mortgage at December 31, 2002, 2001, 2000 and 1999, respectively.(2)
    
    Does not include mortgage loans held for sale of $315.7 million, $258.7
million, $236.4 million, $95.7 million and $77.3 million at December 31,
2003, 2002, 2001, 2000 and 1999, respectively. 8




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Contractual Principal Repayments and Interest Rates. The following table
sets forth certain information at December 31, 2003 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 more yearsDue 1 year
    
    years after
    
    after December 31,or less
    
    December 31, 2003
    
    2003
    
    Total(1)(In Thousands)Residential real estate
    
    $
    106,020
    
    
    $
    195,701
    
    
    $
    2,117,557
    
    
    $
    2,419,278Retail construction
    
    
    169,963
    
    
    
    
    
    
    
    
    
    
    
    169,963Commercial real estate(2)
    
    
    618,287
    
    
    
    480,895
    
    
    
    224,468
    
    
    
    1,323,650Commercial business
    
    
    118,906
    
    
    
    55,382
    
    
    
    14,402
    
    
    
    188,690Consumer:Loans on savings
    
    
    14,408
    
    
    
    10,115
    
    
    
    190
    
    
    
    24,713Real estate secured consumer loans
    
    
    12,094
    
    
    
    14,272
    
    
    
    27,343
    
    
    
    53,709Unsecured consumer loans
    
    
    61,822
    
    
    
    58,302
    
    
    
    11,587
    
    
    
    131,711Total(3)
    
    $
    1,101,500
    
    
    $
    814,667
    
    
    $
    2,395,547
    
    
    $
    4,311,714
   (1)
    
    Amounts have not been reduced for the allowance for loan losses, loans in
process, deferred loan fees or unearned interest.(2)
    
    Includes $595.0 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, 2003 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
    
    $
    2,381,081
    
    
    $
    38,197
    
    
    $
    2,419,278Retail construction
    
    
    121,380
    
    
    
    48,583
    
    
    
    169,963Commercial real estate(2)
    
    
    459,531
    
    
    
    864,119
    
    
    
    1,323,650Commercial business
    
    
    98,958
    
    
    
    89,732
    
    
    
    188,690Consumer:Loans on savings
    
    
    24,713
    
    
    
    
    
    
    
    24,713Real estate secured consumer loans
    
    
    43,539
    
    
    
    10,170
    
    
    
    53,709Unsecured consumer loans
    
    
    130,755
    
    
    
    956
    
    
    
    131,711Total(3)
    
    $
    3,259,957
    
    
    $
    1,051,757
    
    
    $
    4,311,714
   (1)
    
    Amounts have not been reduced for the allowance for loan losses, loans in
process, deferred loan fees or unearned interest.(2)
    
    Includes $595.0 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 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 9




---



##### 



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 31,2003
    
    2002
    
    2001(Dollars in Thousands)Loan originations:Loans originated by R&G Mortgage:Residential mortgages
    
    $
    1,235,935
    
    
    $
    764,115
    
    
    $
    625,798Commercial mortgages
    
    
    
    
    
    
    
    
    
    
    Residential construction
    
    
    45,388
    
    
    
    45,026
    
    
    
    29,353Consumer loans
    
    
    1,985
    
    
    
    2,632
    
    
    
    9,658Total loans originated by R&G Mortgage
    
    
    1,283,308
    
    
    
    811,773
    
    
    
    664,809Other loans originated:Residential real estate(1)
    
    
    63,695
    
    
    
    26,163
    
    
    
    Commercial real estate
    
    
    534,544
    
    
    
    357,718
    
    
    
    213,215Commercial business
    
    
    100,224
    
    
    
    62,965
    
    
    
    59,074Construction and development(2)
    
    
    320,027
    
    
    
    143,356
    
    
    
    171,026Consumer loans:Loans on deposit
    
    
    32,553
    
    
    
    40,061
    
    
    
    48,730Real estate secured consumer loans
    
    
    10,560
    
    
    
    4,191
    
    
    
    Unsecured consumer loans
    
    
    112,182
    
    
    
    90,431
    
    
    
    63,702Total other loans originated
    
    
    1,173,785
    
    
    
    724,885
    
    
    
    555,747Loans purchased
    
    
    430,826
    
    
    
    236,181
    
    
    
    61,359Total loans originated and purchased
    
    
    2,887,919
    
    
    
    1,772,839
    
    
    
    1,281,915Loans sold
    
    
    (253,977
    )
    
    
    (35,311
    )
    
    
    (130,716
    )Loan participations sold
    
    
    (63,452
    )
    
    
    (43,301
    )
    
    
    (52,886
    )Loan principal reductions
    
    
    (1,109,788
    )
    
    
    (691,013
    )
    
    
    (486,410
    )Net increase before other items, net
    
    
    1,460,702
    
    
    
    1,003,214
    
    
    
    611,903Loans acquired in connection with acquisition of
Crown Bank
    
    
    
    
    
    
    486,958
    
    
    
    Loans securitized and transferred to
mortgage-backed securities
    
    
    
    
    
    
    (534,656
    )
    
    
    (421,645
    )Net increase in loans
    
    $
    1,460,702
    
    
    $
    955,516
    
    
    $
    190,258
   (1)
    
    All of such loans were conventional loans.(2)
    
    Includes $29.7 million, $32.2 million and $34.6 million originated by Continental in 2003, 2002 and
2001, respectively. 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. 10




---



##### 



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, 2003, 2002 and 2001, R&G Mortgage received
$15.6 million, $11.6 million and $10.3 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, 2003, 2002 and 2001,
Premier Bank purchased $7.1 million, $236.2 million and $61.4 million of loans,
respectively, and Crown Bank purchased $423.7 million during the year ended
December 31, 2003. Crown Bank did not purchase any such loans during the year
ended December 31, 2002. During the years ended December 31, 2003, 2002 and 2001, loans sold from
banking operations were $254.0 million, $35.3 million and $130.7 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. 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, 2003, $2.4 billion or 55.3% of R&G Financials total loans held
for investment consisted of such loans, of which all but $1.5 million consisted
of conventional loans. Premier Banks first mortgage single-family residential
loans consist exclusively of fixed-rate loans with 11




---



##### 



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, 2003, $35.0 million or
0.8% 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, 2003, retail construction (spot)
loans amounted to $170.0 million or 3.9% of R&G Financials total loans held
for investment, while commercial construction and land acquisition loans
amounted to $595.0 million or 13.8% 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, 2003, R&G Financial had
residential construction loans to develop single-family residences with an
aggregate principal balance of $339.5 million. Commitments for future funding
included in such amount approximate $116.2 million. In addition, R&G Financial
had loans to develop commercial properties with an aggregate principal balance
of $86.7 million. All loans were performing in accordance with their terms at
December 31, 2003. In addition to the foregoing, at December 31, 2003, R&G Financial had land
acquisition loans with an aggregate balance of $168.8 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 has also made a working
capital/pre-development loan with an outstanding principal balance of $1.0
million at December 31, 2003 that is secured by land. R&G Financial intends to continue to increase their involvement in
single-family residential construction lending. Such loans afford the Company
the opportunity to increase the interest rate 12




---



##### 



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,
2003, $1.7 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, 2003, $728.6 million or
16.9% of R&G Financials total loans held for investment consisted of such
loans. At December 31, 2003, $22.6 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. 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 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 13




---



##### 



designated prime rate, plus a
margin. The Company also generally obtains personal guarantees from the
principals of the borrowers. At December 31, 2003, commercial business loans
amounted to $188.7 million or 4.4% 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, 2003, $210.1 million or 4.9% 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, 2003, credit card
receivables, all held by Premier Bank, totaled $57.9 million, and personal
loans amounted to $73.8 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 $24.7 million at December 31, 2003. 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, 2003, real estate secured consumer loans
totaled $53.7 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. At December 31, 2003, $4.8 million of consumer loans
were classified as non-performing, of which $3.5 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 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. 14




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##### 



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. 15




---



##### 



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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in Thousands)Non-accruing loans:Residential real estate(1)
    
    $
    57,031
    
    
    $
    43,281
    
    
    $
    50,358
    
    
    $
    79,234
    
    
    $
    47,413Residential construction
    
    
    2,424
    
    
    
    1,512
    
    
    
    871
    
    
    
    487
    
    
    
    478Commercial real estate
    
    
    22,589
    
    
    
    29,375
    
    
    
    16,945
    
    
    
    11,881
    
    
    
    9,005Commercial business
    
    
    1,733
    
    
    
    2,197
    
    
    
    3,105
    
    
    
    1,414
    
    
    
    1,255Consumer unsecured
    
    
    833
    
    
    
    802
    
    
    
    303
    
    
    
    1,186
    
    
    
    802Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61Total
    
    
    84,610
    
    
    
    77,167
    
    
    
    71,582
    
    
    
    94,202
    
    
    
    59,014Accruing loans greater than 90 days delinquent:Residential real estate
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    Residential construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial business
    
    
    382
    
    
    
    261
    
    
    
    462
    
    
    
    420
    
    
    
    63Consumer
    
    
    422
    
    
    
    667
    
    
    
    428
    
    
    
    360
    
    
    
    274Total accruing loans greater than
90 days delinquent
    
    
    804
    
    
    
    1,032
    
    
    
    890
    
    
    
    780
    
    
    
    337Total non-performing loans
    
    
    85,414
    
    
    
    78,199
    
    
    
    72,472
    
    
    
    94,982
    
    
    
    59,351Real estate owned, net
    
    
    19,954
    
    
    
    15,544
    (2)
    
    
    10,061
    
    
    
    9,056
    
    
    
    5,852Other repossessed assets
    
    
    220
    
    
    
    292
    
    
    
    362
    
    
    
    583
    
    
    
    46620,174
    
    
    
    15,836
    
    
    
    10,423
    
    
    
    9,639
    
    
    
    6,318Total non-performing assets
    
    $
    105,588
    
    
    $
    94,035
    
    
    $
    82,895
    
    
    $
    104,621
    
    
    $
    65,669Total non-performing loans as a
percentage of totalloans(3)
    
    
    1.98
    %
    
    
    2.66
    %
    
    
    3.79
    %
    
    
    5.52
    %
    
    
    3.66
    %Total non-performing assets as a
percentage of total assets
    
    
    1.29
    %
    
    
    1.50
    %
    
    
    1.78
    %
    
    
    2.96
    %
    
    
    2.26
    %
   (1)
    
    Includes $3.5 million, $4.5 million, $5.8 million, $6.2 million and $6.1
million consumer loans, respectively, held by Premier Bank secured by
first and second mortgages on residential real estate at December 31,
2003, 2002, 2001, 2000 and 1999, respectively. Also includes $6.4
million, $6.5 million, $7.3 million, $17.6 million and $5.9 million
residential real estate loans secured by first mortgages held by R&G
Mortgage at December 31, 2003, 2002, 2001, 2000 and 1999, 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
2.66% to 1.98% from December 31, 2002 to December 31, 2003, 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. 16




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##### 



Non-performing loans amounted to $85.4 million at December 31, 2003, as
compared to $78.2 million at December 31, 2002. The increase in the aggregate
amount of non-performing loans during 2003 is due primarily to an increase in
residential real estate non-performing loans in the process of being foreclosed
of $13.8 million, partially offset by a decrease of $6.8 million in
non-performing commercial real estate loans. An aggregate of $57.0 million or
66.8% of non-performing loans held at December 31, 2003 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 0.32% during 2003, as compared to
0.41% during 2002. 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 $13.8 million or 31.8% from
December 31, 2002 to December 31, 2003. The average loan balance on
non-performing mortgage loans amounted to $68,000 at December 31, 2003. As of
such date, 436 loans with an aggregate balance of $29.3 million (including 116
consumer loans secured by real estate with an aggregate balance of $2.1
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,
decreased from 4.13% in 2002 to 3.39% in 2003. The Companys loss experience
on such portfolio has been minimal over the last several years. Non-performing commercial real estate loans decreased by $6.8 million or
23.1% from $29.4 million at December 31, 2002 to $22.6 million at December 31,
2003. The decrease in non-performing commercial real estate loans is
attributable to a decrease of $3.4 million and $3.4 million of such loans in
Premier Bank and Crown Bank, respectively, as certain borrowers brought their
loans current during the year ended December 31, 2003. The number of loans
delinquent over 90 days amounted to 170 loans at December 31, 2003, with an
average balance of $133,000. The largest non-performing commercial real estate
loan as of December 31, 2003 had a balance of $2.4 million. Non-performing commercial business loans consist of 31 loans. Such loans
include 13 loans with an aggregate balance of $1.3 million which are 90%
guaranteed by the Small Business Administration, 14 commercial leases amounting
to $241,000 and four other commercial business loan with an aggregate balance
of $177,000. These loans have a combined average loan size of $56,000. The
largest non-performing commercial business loan as of December 31, 2003 had a
$786,000 balance. At December 31, 2003, R&G Financials five largest loans-to-one borrower
and their related entities amounted to $40.8 million, $39.7 million, $33.2
million, $30.9 million and $21.3 million. All of such loan concentrations were
performing at December 31, 2003. At December 31, 2003, R&G Financials allowance for loan losses totaled
$39.6 million, which represented a $6.9 million or 21.2% increase from the
level maintained at December 31, 2002. The allowance for loan losses at
December 31, 2002 includes $7.5 million of acquired reserves in connection with
the acquisition of Crown Bank in June 2002. At December 31, 2003, R&G
Financials allowance represented approximately 0.92% of the total loan
portfolio and 46.38% of total non-performing loans, as compared to
1.11% and
41.79% at December 31, 2002. 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 mix of
loans and collateral values. Quantitative factors used to assess the adequacy
of the allowance for 17




---



##### 



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. 18




---



##### 



The following table sets forth an analysis of R&G Financials allowance
for loan losses during the periods indicated, of which $17.9 million is
maintained against the loan portfolios of the banking subsidiaries at December
31, 2003: At and For the Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in Thousands)Balance at beginning of period
    
    $
    32,676
    
    
    $
    17,428
    
    
    $
    11,600
    
    
    $
    8,971
    
    
    $
    8,056Charge-offs:Residential real estate
    
    
    1,989
    
    
    
    959
    
    
    
    72
    
    
    
    38
    
    
    
    17Commercial real estate
    
    
    3,555
    
    
    
    3,263
    
    
    
    1,090
    
    
    
    468
    
    
    
    353Commercial business
    
    
    3,457
    
    
    
    3,547
    
    
    
    2,899
    
    
    
    1,539
    
    
    
    1,548Consumer
    
    
    4,940
    
    
    
    3,924
    
    
    
    2,566
    
    
    
    1,940
    
    
    
    2,518Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Total charge-offs
    
    
    13,941
    
    
    
    11,693
    
    
    
    6,627
    
    
    
    3,985
    
    
    
    4,440Recoveries:Residential real estate
    
    
    371
    
    
    
    135
    
    
    
    
    
    
    
    
    
    
    
    Commercial real estate
    
    
    366
    
    
    
    15
    
    
    
    11
    
    
    
    80
    
    
    
    69Commercial business
    
    
    1,120
    
    
    
    709
    
    
    
    131
    
    
    
    381
    
    
    
    332Consumer
    
    
    467
    
    
    
    599
    
    
    
    382
    
    
    
    402
    
    
    
    429Total recoveries
    
    
    2,324
    
    
    
    1,458
    
    
    
    524
    
    
    
    863
    
    
    
    830Net charge-offs
    
    
    11,617
    
    
    
    10,235
    
    
    
    6,103
    
    
    
    3,122
    
    
    
    3,610Transferred reserves from R&G Mortgage
    
    
    
    
    
    
    
    
    
    
    806
    
    
    
    
    
    
    
    Allowance for loan losses acquired
in acquisitions(1)
    
    
    
    
    
    
    7,463
    
    
    
    
    
    
    
    
    
    
    
    Provision for losses on loans
    
    
    18,556
    
    
    
    18,020
    
    
    
    11,125
    
    
    
    5,751
    
    
    
    4,525Balance at end of period
    
    $
    39,615
    
    
    $
    32,676
    
    
    $
    17,428
    
    
    $
    11,600
    
    
    $
    8,971Allowance for loan losses as a
percent of total loans outstanding
    
    
    0.92
    %
    
    
    1.11
    %
    
    
    0.91
    %
    
    
    0.67
    %
    
    
    0.55
    %Allowance for loan losses as a
percent of non-performing loans
    
    
    46.38
    %
    
    
    41.79
    %
    
    
    24.05
    %
    
    
    12.21
    %
    
    
    15.11
    %Ratio of net charge-offs to average
loans outstanding
    
    
    0.32
    %
    
    
    0.41
    %
    
    
    0.32
    %
    
    
    0.17
    %
    
    
    0.25
    %
   (1)
    
    Relates to acquired reserves in connection with the acquisition of Crown
Bank in 2002. 19




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##### 



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 31,2003
    
    2002
    
    2001Percent 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
    
    $
    6,794
    
    
    
    17.15
    %
    
    $
    2,982
    
    
    
    9.13
    %
    
    $
    2,496
    
    
    
    14.32
    %Construction
    
    
    2,280
    
    
    
    5.76
    
    
    
    1,522
    
    
    
    4.66
    
    
    
    800
    
    
    
    4.59Commercial real estate
    
    
    16,109
    
    
    
    40.66
    
    
    
    17,114
    
    
    
    52.37
    
    
    
    7,371
    
    
    
    42.29Commercial business
    
    
    6,162
    
    
    
    15.55
    
    
    
    4,104
    
    
    
    12.56
    
    
    
    2,253
    
    
    
    12.93Consumer
    
    
    8,270
    
    
    
    20.88
    
    
    
    6,954
    
    
    
    21.28
    
    
    
    4,508
    
    
    
    25.87Total
    
    $
    39,615
    
    
    
    100.00
    %
    
    $
    32,676
    
    
    
    100.00
    %
    
    $
    17,428
    
    
    
    100.00
    %
 December 31,2000
    
    1999Percent of Loans
    
    
    
    
    
    Percent of Loansin Each
    
    
    
    
    
    in EachCategory to
    
    
    
    
    
    Category toAmount
    
    Total Loans
    
    Amount
    
    Total Loans(Dollars in Thousands)Residential real estate
    
    $
    1,278
    
    
    
    11.02
    %
    
    $
    1,419
    
    
    
    15.82
    %Construction
    
    
    432
    
    
    
    3.72
    
    
    
    186
    
    
    
    2.07Commercial real estate
    
    
    4,880
    
    
    
    42.07
    
    
    
    3,258
    
    
    
    36.32Commercial business
    
    
    1,321
    
    
    
    11.39
    
    
    
    1,063
    
    
    
    11.85Consumer
    
    
    3,689
    
    
    
    31.80
    
    
    
    3,045
    
    
    
    33.94Total
    
    $
    11,600
    
    
    
    100.00
    %
    
    $
    8,971
    
    
    
    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
unspecified 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 20




---



##### 



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, 2003, 2002 and 2001, R&G Financial originated a total of $2.8 billion, $2.0
billion and $1.8 billion of residential mortgage loans, respectively. These
aggregate originations include loans originated by R&G Mortgage directly for
Premier Bank of $1.3 billion, $811.8 million and $664.8 million during the
years ended December 31, 2003, 2002 and 2001, respectively, of such
originations, or 45%, 41% and 36% 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, 2003, 2002 and 2001, R&G Financial originated $358.9
million, $365.2 million and $482.7 million, respectively, of FHA/VA loans,
which represented 12.7%, 18.6% and 26.4%, 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, 2003, 2002 and 2001, R&G Financial originated $2.5 billion, $1.6 billion
and $1.3 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 21




---



##### 



essentially of the same credit quality as conforming loans. In connection with
mortgage operations,
during the years ended December 31, 2003, 2002 and 2001, non-conforming
conventional loans represented approximately 52%, 54% and 48%, 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, 2003, 2002 and 2001, 96.3%, 94.1% 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 $23.7
million, $21.9 million and $29.3 million of loans from third parties during the
years ended December 31, 2003, 2002 and 2001, respectively. 22




---



##### 



The following table sets forth loan originations, purchases and sales from
its mortgage banking business by R&G Financial for the periods indicated. Year Ended December 31,2003
    
    2002
    
    2001(Dollars in Thousands)Loans Originated For Premier Bank:Conventional loans(1):Number of loans
    
    
    10,674
    
    
    
    7,182
    
    
    
    6,355Volume of loans
    
    $
    1,281,323
    
    
    $
    809,141
    
    
    $
    655,151FHA/VA loans:Number of loans
    
    
    
    
    
    
    
    
    
    
    Volume of loans
    
    
    
    
    
    
    
    
    
    
    Consumer loans(2):Number of loans
    
    
    126
    
    
    
    133
    
    
    
    485Volume of loans
    
    $
    1,985
    
    
    $
    2,632
    
    
    $
    9,658Total loans:Number of loans
    
    
    10,800
    
    
    
    7,315
    
    
    
    6,840Volume of loans
    
    $
    1,283,308
    
    
    $
    811,773
    
    
    $
    664,809Percent of total volume
    
    
    45
    %
    
    
    41
    %
    
    
    36
    %Loans Originated For Third Parties:Conventional loans(1):Number of loans
    
    
    10,179
    
    
    
    7,123
    
    
    
    6,791Volume of loans
    
    $
    1,193,565
    
    
    $
    782,782
    
    
    $
    679,190FHA/VA loans:Number of loans
    
    
    3,271
    
    
    
    3,537
    
    
    
    4,823Volume of loans
    
    $
    358,906
    
    
    $
    365,172
    
    
    $
    482,721Total loans:Number of loans
    
    
    13,450
    
    
    
    10,660
    
    
    
    11,614Volume of loans
    
    $
    1,552,471
    
    
    $
    1,147,954
    
    
    $
    1,161,911Percent of total volume
    
    
    54
    %
    
    
    58
    %
    
    
    63
    %Total loan originations
    
    $
    2,835,779
    
    
    $
    1,959,727
    
    
    $
    1,826,720Loans Purchased For R&G Mortgage:Number of loans
    
    
    315
    
    
    
    283
    
    
    
    371Volume of loans(3)
    
    $
    23,709
    
    
    $
    21,890
    
    
    $
    29,342Percent of total volume
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Total loan originations and purchases
    
    $
    2,859,488
    
    
    $
    1,981,617
    
    
    $
    1,856,062
 23




---



##### 



Year Ended December 31,2003
    
    2002
    
    2001(Dollars in Thousands)Loans Sold To Third Parties(4):Conventional loans(1):Number of loans
    
    
    10,935
    
    
    
    7,114
    
    
    
    6,124Volume of loans
    
    $
    1,255,701
    
    
    $
    794,869
    
    
    $
    603,542FHA/VA loans:Number of loans
    
    
    2,957
    
    
    
    2,668
    
    
    
    3,365Volume of loans
    
    $
    351,162
    
    
    $
    369,449
    
    
    $
    513,366Total loans:Number of loans
    
    
    13,892
    
    
    
    9,782
    
    
    
    9,489Volume of loans(3)
    
    $
    1,606,863
    
    
    $
    1,164,318
    
    
    $
    1,116,908Percent of total volume
    
    
    56
    %
    
    
    59
    %
    
    
    60
    %Adjustments:Loans originated for Premier Bank
    
    $
    (1,283,308
    )
    
    $
    (811,773
    )
    
    $
    (664,809
    )Loan amortization
    
    
    (60,149
    )
    
    
    (44,200
    )
    
    
    (31,802
    )Net (decrease) increase in loans
    
    $
    (90,832
    )
    
    $
    (38,674
    )
    
    $
    42,543Average Initial Loan Origination Balance:Premier Bank:Conventional loans(1)
    
    $
    120
    
    
    $
    113
    
    
    $
    103FHA/VA loans
    
    
    
    
    
    
    
    
    
    
    Third Parties:Conventional loans(1)
    
    $
    117
    
    
    $
    110
    
    
    $
    100FHA/VA loans
    
    
    110
    
    
    
    103
    
    
    
    100TotalConventional loans(1)
    
    $
    119
    
    
    $
    111
    
    
    $
    102FHA/VA loans
    
    
    110
    
    
    
    103
    
    
    
    100Refinancings(5):Premier Bank
    
    
    52
    %
    
    
    50
    %
    
    
    57
    %Third Parties
    
    
    68
    %
    
    
    56
    %
    
    
    50
    %
   (1)
    
    Includes non-conforming loans.(2)
    
    All of such loans were secured by real estate.(3)
    
    Includes $23.7 million, $21.8 million and $27.1 million of loans
purchased from another institution, and securitized and sold to the same
financial institution during 2003, 2002 and 2001, 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. 24




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##### 



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
(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 and amortized using the interest method,
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, 2003, 2002 and 2001, R&G Financial sold $1.6 billion, $1.2
billion and $1.1 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, $211.8 million or 13.2%, $253.1 million or 21.7%
and $375.1 million or 33.6%, 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, 2003, R&G Financial had loans in its servicing
portfolio with provisions for recourse in the principal amount of approximately
$1.1 billion, as compared to $762.3 million and $552.4 million as of December
31, 2002 and 2001, respectively. Of the recourse loans existing at December
31, 2003, approximately $224.0 million in principal amount consisted of loans
sold to FNMA and FHLMC and converted into mortgage-backed securities of such
agencies, and approximately $851.8 million in principal amount consisted of
non-conforming loans sold to other financial institutions and/or private
investors. As of December 31, 25




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##### 



2003, R&G Financial had reserves for possible losses related to its recourse
obligations of $4.0 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, 2003, R&G Financials servicing portfolio
totaled $10.9 billion and consisted of a total of 147,981 loans. These amounts
include R&G Mortgages servicing portfolio totaling $7.9 billion, Crown Banks
servicing portfolio totaling $2.5 billion and Continentals servicing portfolio
totaling $553.0 million at December 31, 2003. At December 31, 2003, R&G
Financials servicing portfolio included $1.9 billion of loans serviced for
Premier Bank and $227.5 million of loans serviced for Crown Bank, or 17.4% and
2.1%, respectively, of the total servicing portfolio. Substantially all of the
mortgage loans in R&G Financials servicing portfolio are secured by single
(one-to-four) family residences. At December 31, 2003, approximately 72.0% 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. 26




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##### 



The following table sets forth certain information regarding the total
loan servicing portfolio of R&G Financial for the periods indicated. Year Ended December 31,2003
    
    2002
    
    2001(Dollars in Thousands)Composition of Servicing Portfolio at End of
Period:Conventional and other mortgage loans(1)
    
    $
    8,317,318
    
    
    $
    8,035,208
    
    
    $
    4,070,074FHA/VA loans
    
    
    2,625,503
    
    
    
    2,956,736
    
    
    
    3,154,497Total servicing portfolio
    
    $
    10,942,821
    
    
    $
    10,991,944
    
    
    $
    7,224,571Activity in the Servicing Portfolio:Beginning servicing portfolio
    
    $
    10,991,944
    
    
    $
    7,224,571
    
    
    $
    6,634,059Add: Loan originations and purchases
    
    
    2,935,327
    
    
    
    2,204,275
    
    
    
    1,887,582Servicing of portfolio loans acquired(2)
    
    
    1,008,231
    
    
    
    4,325,499
    
    
    
    4,936Less: Sale of servicing rights(3)
    
    
    (255,814
    )
    
    
    (229,587
    )
    
    
    (211,603
    )Run-offs(4)
    
    
    (3,736,867
    )
    
    
    (2,532,814
    )
    
    
    (1,090,403
    )Ending servicing portfolio
    
    $
    10,942,821
    
    
    $
    10,991,944
    
    
    $
    7,224,571Number of loans serviced
    
    
    147,981
    
    
    
    158,659
    
    
    
    113,070Average loan size
    
    $
    74
    
    
    $
    69
    
    
    $
    64Average servicing fee rate
    
    
    0.467
    %
    
    
    0.508
    %
    
    
    0.499
    %
   (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 $255.8
million, $229.6 million and $211.6 million in 2003, 2002 and 2001,
respectively.(4)
    
    Run-off refers to regular amortization of loans, prepayments and
foreclosures. The following table sets forth certain information at December 31, 2003
regarding the number of, 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, 2003Portfolio
    
    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 7.00%
    
    
    12,695
    
    
    $
    1,678,325
    
    
    
    45,229
    
    
    $
    4,148,220
    
    
    
    57,924
    
    
    $
    5,826,5457.00% - 7.49%
    
    
    2,883
    
    
    
    279,084
    
    
    
    23,971
    
    
    
    1,739,345
    
    
    
    26,854
    
    
    
    2,018,4297.50% - 7.99%
    
    
    1,365
    
    
    
    112,938
    
    
    
    23,943
    
    
    
    1,405,174
    
    
    
    25,308
    
    
    
    1,518,1128.00% - 8.49%
    
    
    601
    
    
    
    44,297
    
    
    
    11,461
    
    
    
    601,983
    
    
    
    12,062
    
    
    
    646,2808.50% - 8.99%
    
    
    753
    
    
    
    36,475
    
    
    
    10,790
    
    
    
    478,584
    
    
    
    11,543
    
    
    
    515,0599.00% - 9.49%
    
    
    356
    
    
    
    13,341
    
    
    
    4,069
    
    
    
    152,260
    
    
    
    4,425
    
    
    
    165,6019.50% - 9.99%
    
    
    331
    
    
    
    10,422
    
    
    
    3,249
    
    
    
    90,474
    
    
    
    3,580
    
    
    
    100,89610.00% - 10.49%
    
    
    172
    
    
    
    4,262
    
    
    
    1,268
    
    
    
    41,105
    
    
    
    1,440
    
    
    
    45,36710.50% - 10.99%
    
    
    254
    
    
    
    6,357
    
    
    
    931
    
    
    
    29,147
    
    
    
    1,185
    
    
    
    35,50411.00% or more
    
    
    160
    
    
    
    2,364
    
    
    
    3,239
    
    
    
    68,661
    
    
    
    3,399
    
    
    
    71,02519,570
    
    
    $
    2,187,865
    
    
    
    128,150
    
    
    $
    8,754,953
    
    
    
    147,720
    
    
    $
    10,942,818
 27




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##### 



The amount of principal prepayments on mortgage loans serviced by R&G
Financial was $356.9 million, $288.2 million and $180.3 million for the years
ended December 31, 2003, 2002 and 2001,
respectively. This represented approximately 3.3%, 3.1% and 2.5% 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, 2003, 2002 and 2001, the monthly average amount of
funds advanced by R&G Financial under such servicing agreements was $26.7
million, $24.4 million and $7.4 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, 2003, R&G Financial
held $163.2 million of such escrow funds, $97.8 million of which were deposited
in Premier Bank, $61.2 million of which were deposited in Crown Bank and $4.2
million 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, 2003, R&G
Financial was servicing mortgage loans with an aggregate principal amount of
$1.1 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 28




---



##### 



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 31,2003
    
    2002
    
    2001Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofNumber of
    
    Servicing
    
    Number of
    
    Servicing
    
    Number of
    
    ServicingLoans
    
    Portfolio
    
    Loans
    
    Portfolio
    
    Loans
    
    PortfolioLoans delinquent for:30-59 days
    
    
    5,106
    
    
    
    3.45
    %
    
    
    5,708
    
    
    
    3.60
    %
    
    
    5,995
    
    
    
    5.30
    %60-89 days
    
    
    1,672
    
    
    
    1.13
    
    
    
    1,696
    
    
    
    1.07
    
    
    
    1,746
    
    
    
    1.5490 days or more
    
    
    3,559
    
    
    
    2.41
    
    
    
    3,298
    
    
    
    2.08
    
    
    
    2,678
    
    
    
    2.37Total delinquencies(1)
    
    
    10,337
    
    
    
    6.99
    %
    
    
    10,702
    
    
    
    6.75
    %
    
    
    10,419
    
    
    
    9.21
    %Foreclosures pending(2)
    
    
    2,345
    
    
    
    1.58
    %
    
    
    2,199
    
    
    
    1.39
    %
    
    
    2,056
    
    
    
    1.82
    %
   (1)
    
    Includes at December 31, 2003 an aggregate of $92.6 million of delinquent
loans serviced for Premier Bank, or 0.85% of the total servicing
portfolio, $7.2 million of delinquent loans held by Crown Bank, or 0.07%
of the total servicing portfolio, and $18.1 million of delinquent loans
held by R&G Mortgage, or 0.16% of the total servicing portfolio.(2)
    
    At December 31, 2003, Premier Bank had foreclosures pending on $26.1
million of loans being serviced by R&G Mortgage, which constituted 0.24%
of the servicing portfolio. Crown Bank had foreclosures pending on $1.1
million of loans it is servicing for its own portfolio, and R&G Mortgage
had foreclosures pending on $10.9 million of loans it is servicing for its
own portfolio at December 31, 2003. 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 (REO) related to R&G Financials mortgage banking business arise
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, 2003, 2002 and 2001, R&G Financial
held REO related to servicing activities with a book value of approximately
$13.0 million, $9.6 million and $3.0 million, respectively. Sales of REO
resulted in losses to R&G Financial of $3.5 million, $1.5 million and $442,000
during the years ended December 31, 2003, 2002 and 2001, 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, 2003. 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, 2003, 2002 and 2001, total expenses related to
FHA or VA loans foreclosed amounted to $983,000, $797,000 and $337,000, 29




---



##### 





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 recouped. Such nonrecouped 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 (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 such date, R&G Mortgage held tax-exempt GNMA mortgage-backed securities
with a fair value of $296.3 million, which are classified as available for
sale. At December 31, 2003, R&G Mortgages CMO interest-only residuals and
interest only strips, which are classified as available for sale, had an
amortized cost of $63.7 million and a fair value of $61.7 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 Federal Home Loan Bank
(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, 2003, the securities portfolios of the Companys banking
subsidiaries included $51.4 million of securities held for investment,
consisting principally of $4.7 million of GNMA mortgage-backed securities, $4.9
million of FHLMC and FNMA mortgage backed securities, and $41.8 million of
certain Puerto Rico Government obligations and other Puerto Rico securities,
all held by Premier Bank. In addition, at December 31, 2003, the securities
portfolios of the Companys banking subsidiaries classified as available for
sale had a fair value of $2.8 billion, consisting principally of $66.7 million
of GNMA mortgage-backed securities, $960.5 million of FHLMC and FNMA
mortgage-backed securities, $100.5 million of FHLB stock, $966.6 million of
CMOs, $46.2 million of CMO interest-only residuals and interest only strips,
$67.8 million corporate debt obligations and $542.2 million of U.S. Government
and Agency securities. A substantial amount of securities held by Premier Bank
are tax-exempt.

30



---



##### 





Premier Banks Treasury Department from time to time conducts certain
trading. At December 31, 2003, securities for trading held by Premier Bank
totaled $33.2 million, consisting of FHLMC mortgage-backed securities.

At December 31, 2003, $439.6 million or 13.6% 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 31,2003
    
    2002Weighted
    
    
    
    
    
    
    
    
    
    WeightedCarrying
    
    Market
    
    Average
    
    Carrying
    
    Market
    
    AverageValue
    
    Value
    
    Yield
    
    Value
    
    Value
    
    Yield(Dollars in Thousands)Mortgage-backed securities:GNMA(1)Due from one-five years
    
    $
    3,497
    
    
    $
    3,581
    
    
    
    5.78
    %
    
    $
    
    
    
    $
    
    
    
    
    
    %Due from five-ten years
    
    
    463
    
    
    
    469
    
    
    
    6.17
    
    
    
    5,457
    
    
    
    5,513
    
    
    
    5.82Due over ten years
    
    
    25,475
    
    
    
    26,079
    
    
    
    6.28
    
    
    
    33,521
    
    
    
    34,091
    
    
    
    6.30FNMADue over ten years
    
    
    4,785
    
    
    
    4,999
    
    
    
    7.08
    
    
    
    6,328
    
    
    
    6,698
    
    
    
    7.06FHLMCDue over ten years
    
    
    81
    
    
    
    79
    
    
    
    5.20
    
    
    
    102
    
    
    
    102
    
    
    
    5.35Investment securities:United States Government and
Agencies obligations:Due within one year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    997
    
    
    
    997
    
    
    
    1.75Due from one-five years
    
    
    1,997
    
    
    
    1,997
    
    
    
    1.03
    
    
    
    1,500
    
    
    
    1,500
    
    
    
    2.38Puerto Rico Government and
Agencies obligations:Due within one year
    
    
    558
    
    
    
    567
    
    
    
    5.85
    
    
    
    
    
    
    
    
    
    
    
    Due from one-five years
    
    
    31,846
    
    
    
    33,088
    
    
    
    4.91
    
    
    
    26,586
    
    
    
    26,804
    
    
    
    5.40Due from five-ten years
    
    
    9,398
    
    
    
    9,230
    
    
    
    3.78
    
    
    
    1,000
    
    
    
    1,005
    
    
    
    5.05OtherDue from one-five years
    
    
    100
    
    
    
    100
    
    
    
    6.20
    
    
    
    100
    
    
    
    100
    
    
    
    6.20Total securities held for
investment
    
    $
    78,200
    
    
    $
    80,189
    
    
    
    5.31
    %
    
    $
    75,591
    
    
    $
    76,810
    
    
    
    5.86
    %


(1) Includes $24.8 million held by R&G Financial at the parent company level at December 31, 2003.

31



---



##### 





December 31,2001WeightedCarrying
    
    Market
    
    AverageValue
    
    Value
    
    Yield(Dollars in Thousands)Mortgage-backed securities:GNMA(1)Due from one-five years
    
    $
    
    
    
    $
    
    
    
    
    
    %Due from five-ten years
    
    
    7,180
    
    
    
    7,111
    
    
    
    5.82Due over ten years
    
    
    37,043
    
    
    
    37,092
    
    
    
    6.49FNMADue over ten years
    
    
    7,594
    
    
    
    7,910
    
    
    
    7.05FHLMCDue over ten years
    
    
    128
    
    
    
    125
    
    
    
    5.59Investment securities:United States Government and
Agencies obligations:Due within one year
    
    
    
    
    
    
    
    
    
    
    Due from one-five years
    
    
    
    
    
    
    
    
    
    
    Puerto Rico Government and
Agencies obligations:Due within one year
    
    
    
    
    
    
    
    
    
    
    Due from one-five years
    
    
    12,691
    
    
    
    12,731
    
    
    
    4.99Due from five-ten years
    
    
    10,896
    
    
    
    11,059
    
    
    
    6.00OtherDue from one-five years
    
    
    100
    
    
    
    100
    
    
    
    6.20Total securities held for
investment
    
    $
    75,632
    
    
    $
    76,128
    
    
    
    6.16
    %


32



---



##### 





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 31,2003
    
    2002Weighted
    
    
    
    
    
    
    
    
    
    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
    
    $
    50

    
    
    $
    52
    
    
    
    6.67
    %
    
    $
    
    
    
    $
    
    
    
    
    
    %Due from five-ten years
    
    
    12,563
    
    
    
    12,918
    
    
    
    6.32
    
    
    
    16,515
    
    
    
    16,759
    
    
    
    6.34Due over ten years
    
    
    346,568
    
    
    
    350,217
    
    
    
    6.24
    
    
    
    440,767
    
    
    
    446,339
    
    
    
    5.33FNMA certificatesDue from one-five years
    
    
    71
    
    
    
    72
    
    
    
    3.84
    
    
    
    
    
    
    
    
    
    
    
    Due from five-ten years
    
    
    87,989
    
    
    
    87,101
    
    
    
    4.38
    
    
    
    370
    
    
    
    390
    
    
    
    6.50Due over ten years
    
    
    388,687
    
    
    
    405,193
    
    
    
    5.50
    
    
    
    258,805
    
    
    
    269,367
    
    
    
    6.89FHLMC certificatesDue within one year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2
    
    
    
    8.72Due from one-five years
    
    
    3
    
    
    
    3
    
    
    
    9.06
    
    
    
    20
    
    
    
    21
    
    
    
    9.04Due from five-ten years
    
    
    20,308
    
    
    
    19,955
    
    
    
    4.28
    
    
    
    889
    
    
    
    935
    
    
    
    6.59Due over ten years
    
    
    439,876
    
    
    
    448,161
    
    
    
    6.26
    
    
    
    738,041
    
    
    
    756,228
    
    
    
    6.46Collateralized mortgage obligations (CMOs)Due within one year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112
    
    
    
    112
    
    
    
    8.25Due from one-five years
    
    
    5,939
    
    
    
    6,019
    
    
    
    4.14
    
    
    
    17,178
    
    
    
    17,288
    
    
    
    4.74Due from five-ten years
    
    
    20,889
    
    
    
    20,873
    
    
    
    4.14
    
    
    
    31,571
    
    
    
    32,219
    
    
    
    5.48Due over ten years
    
    
    941,970
    
    
    
    939,757
    
    
    
    4.43
    
    
    
    404,981
    
    
    
    409,830
    
    
    
    5.40CMO residuals and other mortgage-backed
securitiesDue from one-five years
    
    
    5,885
    
    
    
    9,455
    
    
    
    12.44
    
    
    
    10,862
    
    
    
    12,496
    
    
    
    12.56Due from five-ten years
    
    
    101,173
    
    
    
    98,502
    
    
    
    12.00
    
    
    
    20,102
    
    
    
    20,263
    
    
    
    14.71Investment securities available for sale:U.S. Government & AgenciesDue within one year
    
    
    62,519
    
    
    
    63,113
    
    
    
    3.78
    
    
    
    
    
    
    
    
    
    
    
    Due from one-five years
    
    
    399,275
    
    
    
    398,028
    
    
    
    3.02
    
    
    
    263,632
    
    
    
    267,896
    
    
    
    3.90Due from five-ten years
    
    
    79,388
    
    
    
    81,042
    
    
    
    5.43
    
    
    
    137,756
    
    
    
    143,695
    
    
    
    6.05Municipal debt obligationsDue over ten years
    
    
    12,209
    
    
    
    12,339
    
    
    
    4.46
    
    
    
    4,884
    
    
    
    4,879
    
    
    
    4.57Corporate debt obligationsDue within one year
    
    
    14,247
    
    
    
    14,362
    
    
    
    6.67
    
    
    
    3,205
    
    
    
    3,367
    
    
    
    6.63Due from one-five years
    
    
    48,578
    
    
    
    51,376
    
    
    
    5.41
    
    
    
    52,779
    
    
    
    55,283
    
    
    
    6.54Due from five-ten years
    
    
    2,123
    
    
    
    2,109
    
    
    
    7.77
    
    
    
    2,979
    
    
    
    2,385
    
    
    
    7.76Due over ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,805
    
    
    
    9,809
    
    
    
    6.89Mortgage securities portfolio mutual fund
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,266
    
    
    
    2,964
    
    
    
    4.21FHLB stock
    
    
    100,461
    
    
    
    100,461
    
    
    
    1.69
    
    
    
    84,337
    
    
    
    84,337
    
    
    
    5.42Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    49
    
    
    
    $
    3,090,771
    
    
    $
    3,121,108
    
    
    
    5.06
    %
    
    $
    2,502,908
    
    
    $
    2,556,913
    
    
    
    5.87
    %Mortgage-backed securities held for trading:GNMA certificates
    
    $
    
    
    
    $
    
    
    
    
    
    %
    
    $
    9,281
    
    
    $
    9,741
    
    
    
    6.13
    %FHLMC certificates
    
    
    32,155
    
    
    
    33,245
    
    
    
    7.64
    
    
    
    62,550
    
    
    
    65,016
    
    
    
    7.18Investment securities held for trading:Municipal securities
    
    
    451
    
    
    
    446
    
    
    
    4.77
    
    
    
    
    
    
    
    
    
    
    
    Bank issued trust preferred securities
    
    
    4,594
    
    
    
    4,650
    
    
    
    6.70
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    14
    
    
    
    14
    
    
    
    7.50
    
    
    
    
    
    
    
    
    
    
    
    $
    37,214
    
    
    $
    38,355
    
    
    
    7.49
    %
    
    $
    71,831
    
    
    $
    74,757
    
    
    
    7.04
    %


33



---



##### 





December 31,2001WeightedAmortized
    
    
    
    
    
    AverageCost
    
    Fair Value
    
    Yield(Dollars in Thousands)Mortgage-backed securities available for sale:GNMA certificatesDue from one-five years
    
    $
    50
    
    
    $
    50
    
    
    
    8.49
    %Due from five-ten years
    
    
    11,053
    
    
    
    11,172
    
    
    
    5.97Due over ten years
    
    
    513,508
    
    
    
    511,639
    
    
    
    6.50FNMA certificatesDue from one-five years
    
    
    
    
    
    
    
    
    
    
    Due from five-ten years
    
    
    538
    
    
    
    549
    
    
    
    6.50Due over ten years
    
    
    266,495
    
    
    
    270,936
    
    
    
    7.24FHLMC certificatesDue within one year
    
    
    
    
    
    
    
    
    
    
    Due from one-five years
    
    
    73
    
    
    
    74
    
    
    
    8.93Due from five-ten years
    
    
    1,265
    
    
    
    1,292
    
    
    
    6.60Due over ten years
    
    
    435,662
    
    
    
    437,026
    
    
    
    6.74Collateralized mortgage obligations (CMOs)Due from one-five years
    
    
    
    
    
    
    
    
    
    
    Due from five-ten years
    
    
    27,212
    
    
    
    27,316
    
    
    
    6.05Due over ten years
    
    
    202,546
    
    
    
    202,468
    
    
    
    5.98CMO residuals and other mortgage-backed securitiesDue within one year
    
    
    
    
    
    
    
    
    
    
    Due from one-five years
    
    
    9,897
    
    
    
    9,627
    
    
    
    15.00Due from five-ten years
    
    
    9,239
    
    
    
    10,797
    
    
    
    8.08Investment securities available for sale:U.S. Government & AgenciesDue within one year
    
    
    9,600
    
    
    
    9,807
    
    
    
    5.78Due from one-five years
    
    
    156,522
    
    
    
    157,408
    
    
    
    4.82Due from five-ten years
    
    
    307,110
    
    
    
    310,938
    
    
    
    6.21Municipal debt obligations:Due over ten years
    
    
    
    
    
    
    
    
    
    
    Corporate debt obligationsDue within one year
    
    
    
    
    
    
    
    
    
    
    Due from one-five years
    
    
    53,637
    
    
    
    54,503
    
    
    
    6.53Due from five-ten years
    
    
    
    
    
    
    
    
    
    
    Due over ten years
    
    
    
    
    
    
    
    
    
    
    Mortgage securities portfolio mutual fund
    
    
    
    
    
    
    
    
    
    
    FHLB stock
    
    
    66,077
    
    
    
    66,077
    
    
    
    5.20Other
    
    
    
    
    
    
    
    
    
    
    $
    2,070,484
    
    
    $
    2,081,679
    
    
    
    6.42
    %Securities held for trading:GNMA certificates
    
    $
    18,152
    
    
    $
    18,152
    
    
    
    5.80
    %FHLMC certificates
    
    
    73,687
    
    
    
    75,796
    
    
    
    7.29$
    91,839
    
    
    $
    93,948
    
    
    
    6.99
    %


34



---



##### 





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 and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as R&G Financial. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the
FHLMC, the FNMA and the GNMA.

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.

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

35



---



##### 





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, 2003, CMOs and interest-only
securities and residuals of the Companys banking subsidiaries, which had a
fair value of $46.2 million,were designated as high-risk mortgage securities
and classified as available for sale, increasing from $10.7 million as of December 31, 2002. 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 $1.5 billion of certificates of deposit with balances of $100,000
or more, which amounted to 43.0% of R&G Financials total deposits at December
31, 2003. 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, 2003, the Company held $623.8 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.

36



---



##### 





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 31,2003
    
    2002
    
    2001Average
    
    Average
    
    Average
    
    Average
    
    Average
    
    AverageBalance
    
    Rate Paid
    
    Balance
    
    Rate Paid
    
    Balance
    
    Rate Paid(Dollars in Thousands)Passbook
    
    $
    336,577
    
    
    
    1.72
    %
    
    $
    283,497
    
    
    
    2.84
    %
    
    $
    131,729
    
    
    
    3.55
    %NOW and Super NOW accounts
    
    
    503,155
    
    
    
    1.82
    
    
    
    360,596
    
    
    
    2.84
    
    
    
    188,545
    
    
    
    3.75Checking
    
    
    39,388
    
    
    
    
    
    
    
    78,626
    
    
    
    
    
    
    
    43,621
    
    
    
    Commercial checking(1)
    
    
    417,928
    
    
    
    
    
    
    
    266,869
    
    
    
    
    
    
    
    165,541
    
    
    
    Certificates of deposit
    
    
    1,951,697
    
    
    
    3.94
    
    
    
    1,481,449
    
    
    
    4.18
    
    
    
    1,289,193
    
    
    
    5.98Total deposits
    
    $
    3,248,745
    
    
    
    2.83
    %
    
    $
    2,471,037
    
    
    
    3.58
    %
    
    $
    1,818,629
    
    
    
    4.89
    %




---

|(1) |  | Includes $159.0 million, $220.0 million and $101.9 million of escrow
funds of the Company at December 31, 2003, 2002 and 2001, 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, 2003.

Amount(In Thousands)Certificates of deposit maturing:Three months or less
    
    $
    230,425Over three through six months
    
    
    201,454Over six through twelve months
    
    
    223,621Over twelve months
    
    
    872,081Total
    
    $
    1,527,581


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.

37



---



##### 





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, 2003, R&G Financial had
$2.2 billion of reverse repurchase agreements outstanding, with a weighted
average interest rate of 2.26%.

R&G Financials loan originations are also funded by borrowings under
various warehouse lines of credit provided by various commercial banks
(Warehouse Lines). At December 31, 2003, R&G Financial was permitted to
borrow under such Warehouse Lines up to $309.9 million, $170.5 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.Management of R&G Financial believes that as of
December 31, 2003, 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. By maintaining compensating
balances, R&G Financial is able to borrow funds under the Warehouse Lines at a
lower interest rate than would otherwise apply. These compensating balances
are comprised of a portion of the escrow accounts maintained by R&G Financial
for principal and interest payments and related tax and insurance payments on
loans its services. At December 31, 2003, the weighted average interest rate
being paid by R&G Financial under its Warehouse Lines amounted
to 2.26%.

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, 2003, the
Company had access to $2.2 billion in advances from the FHLB and had $1.1
billion outstanding as of such date, which mature at various dates commencing
in January 1, 2004 through March 2, 2011 and have a weighted average interest
rate of 3.56%. At December 31, 2003, the Company had pledged investment
securities and loans aggregating $1.4 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.

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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 31,2003
    
    2002
    
    2001(Dollars in Thousands)Securities sold under agreements to repurchase:Average balance outstanding
    
    $
    1,884,191
    
    
    $
    1,437,089
    
    
    $
    1,035,814Maximum amount outstanding at any month-end
during the period
    
    
    2,220,795
    
    
    
    1,602,394
    
    
    
    1,396,939Balance outstanding at end of period
    
    
    2,220,795
    
    
    
    1,489,758
    
    
    
    1,396,939Average interest rate during the period
    
    
    2.71
    %
    
    
    3.56
    %
    
    
    4.77
    %Average interest rate at end of period
    
    
    2.26
    %
    
    
    3.16
    %
    
    
    3.47
    %Notes Payable:Average balance outstanding
    
    $
    217,750
    
    
    $
    241,346
    
    
    $
    233,462Maximum amount outstanding at any month-end
during the period
    
    
    218,052
    
    
    
    196,330
    
    
    
    258,301Balance outstanding at end of period
    
    
    192,259
    
    
    
    194,607
    
    
    
    195,587Average interest rate during the period
    
    
    3.15
    %
    
    
    2.81
    %
    
    
    4.88
    %Average interest rate at end of period
    
    
    2.29
    %
    
    
    2.55
    %
    
    
    3.04
    %FHLB advances:Average balance outstanding
    
    $
    1,026,279
    
    
    $
    698,170
    
    
    $
    444,422Maximum amount outstanding at any month-end
during the period
    
    
    1,129,600
    
    
    
    940,725
    
    
    
    523,000Balance outstanding at end of period
    
    
    1,129,600
    
    
    
    940,725
    
    
    
    464,125Average interest rate during the period
    
    
    3.92
    %
    
    
    4.51
    %
    
    
    5.36
    %Average interest rate at end of period
    
    
    3.56
    %
    
    
    4.23
    %
    
    
    4.87
    %


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, 2003, Premier Banks Trust
Department administered trust accounts with aggregate assets of $293.0 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
performed 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, auto
and life insurance to individuals and commercial entities. During the
years ended December 31, 2003 and 2002, R-G Investments Corporation and Home & Property Insurance
Corp. together contributed

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$16.7 million and $8.3
million of revenues, respectively, representing 4.2% and 2.9% of
total revenues, respectively, for such periods. In addition, their net income
before taxes amounted to $10.8 million and $8.3 million for
the years ended December 31, 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, 2003, R&G Financial (on a consolidated
basis) had 2,289 full-time employees and 85 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 (the 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 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

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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.

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 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.

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R&G Mortgage and Premier Bank are parties to various agreements that
address how each would conduct itself in specifically delineated affiliated
transactions (the Affiliated Transaction Agreements). The Affiliated
Transaction Agreements include a Master Purchase, Servicing and Collections
Agreement (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 (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 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

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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.

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.

USA Patriot Act of 2001. In October 2001, the USA Patriot Act of 2001 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 is
intended is 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.

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 may engage 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

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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 of 2002 (SOA) was
signed into law in July 2002. The SOA implements legislative
reforms intended to address corporate and accounting improprieties. The SOA generally applies to all companies, both U.S. and non-U.S.,
that file or are required to file periodic reports with the Securities and
Exchange Commission (SEC), under the Securities Exchange Act of 1934
(Exchange Act).

The SOA 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 SOA 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 SOA 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.

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Banking Subsidiaries

General. Premier Bank is incorporated under the Puerto Rico Banking Act
of 1933, as amended (the Puerto Rico Banking Law) and is subject to extensive
regulation and examination by the OCFI, the 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s 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 (SAIF) member institutions, such as Crown Bank and Bank Insurance Fund
(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 which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates ranging from .0%
for well capitalized, healthy institutions to .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, 2003.

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
Bank Insurance Fund 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.

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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 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, 2003, 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, 2003, Crown Bank met the capital
requirements of a well capitalized institution under applicable OTS
regulations.

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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 to 8.0% of total
risk-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,
2003.

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, 2003, Premier Bank had credited $25.1 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

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and reserve fund of Premier Bank, plus 15% of 50% of undistributed
earnings for well capitalized institutions. As of December 31, 2003, the
legal lending limit for Premier Bank under these provisions was approximately
$53.6 million. If such loans are secured by collateral worth at least
twenty-five 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 $119.1 million. Premier Banks maximum extension of credit to
any one borrower was $54.6 million at December 31, 2003, 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, 2003, Crown Banks
loans-to-one-borrower limit was $14.3 million based upon the 15% of unimpaired
capital and surplus measurement. At December 31, 2003, Crown Banks largest
single lending relationship had an outstanding balance of $11.6 million, and
consisted of 3 loans secured by real estate.

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

48



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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 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, 2003, 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, 2003,
Premier Bank and Crown Bank each met the required investment in FHLB stock,
with each holding $88.5 million and $12.0 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, 2003,
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

49



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Act, Federal Truth-in-Lending Act and the Real Estate Settlement
Procedures Act and the regulations promulgated thereunder.

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 (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 (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 (the 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.

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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 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.

Website Access to Company Reports

The Company makes available free of charge through its website at
www.rgonline.com its annual, quarterly and current reports, and all amendments
to those reports, as soon as reasonably practicable after the Company files
these materials with, or furnishes them to, the SEC.

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, 2003, 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 31 offices, R&G Mortgage operates from
37 offices, Crown Bank operates from 14 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.

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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

PART II

ITEM 5: MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The
information required herein is incorporated by reference from page 90 of the Registrants 2003 Annual Report.

ITEM 6: SELECTED FINANCIAL DATA.

The information required herein is incorporated by reference from pages 33
to 34 of the Registrants 2003 Annual Report.

ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The information required herein is incorporated by reference from pages 35
to 50 of the Registrants 2003 Annual Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information required herein is incorporated by reference from pages 44
to 48 of the Registrants 2003 Annual Report.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The information required herein is incorporated by reference from pages 51
to 88 of the Registrants 2003 Annual Report.

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 timely alerting the Company to material information
relating to the Company (including its consolidated subsidiaries) required to
be included in the Companys periodic SEC filings. 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.

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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.

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 2004 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of the
Registrants fiscal year, 2004 (Proxy
Statement).

The Registrant has adopted a Code of Ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller or persons performing similar functions. A copy of the Registrants
Code of Ethics is filed as Exhibit 14 to this Annual Report on Form 10-K.

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.

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Equity Compensation Plan Information

The following table presents information on the Companys equity
compensation plans at December 31, 2003.

(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
    
    
    150,300
    
    
    $
    15.49
    
    
    
    740Equity compensation plans not approved by
security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    150,300
    
    
    $
    15.49
    
    
    
    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, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.



|(a)                                                                                                              |  | Documents Filed as Part of this Report                                                               
|---------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------
|                                                                                                                
|(1)                                                                                                              |  | The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13):
|                                                                                                                
|Independent Auditors Report.                                                                                   
|                                                                                                                
|Consolidated Statements of Financial Condition as of December 31, 2003
and 2002.                                
|                                                                                                                
|Consolidated Statements of Income for the Years Ended December 31, 2003,
2002 and 2001.                         
|                                                                                                                
|Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002 and 2001.                     
|                                                                                                                
|Consolidated Statements of Changes in Stockholders Equity for the Years
Ended December 31, 2003, 2002 and 2001.
|                                                                                                                
|Notes to Consolidated Financial Statements.                                                                     

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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)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
    
    Certificate of Resolution designating the terms of the Series A Preferred Stock (7)3.1.6
    
    Certificate of Resolution designating the terms of the Series B Preferred Stock (8)3.1.7
    
    Certificate of Designation for Series C Preferred Stock (12)3.1.8
    
    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, dated as of
October 6, 2003, between R&G Financial Corporation and
Wilmington Trust Company(18)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)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
    
    Master Production Agreement between R&G Mortgage and R-G Premier Bank of
Puerto Rico dated February 16, 1990, as amended on August 30, 1991 and
March 31, 1995 (4)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
    
    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)


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No.
    
    Description10.8
    
    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)10.9
    
    Form of Preferred Securities
Guarantee Agreement, dated as of October 6, 2003, by and between
R&G Financial Corporation and Wilmington Trust Company(18)10.10
    
    Form of Amended and Restated
Declaration of Trust, dated as of October 6, 2003, among R&G
Financial Corporation, Wilmington Trust Company and the
Administrative Trustees named therein(18)13.0
    
    Pages 33 to 88 and
page 90 of the 2003 Annual Report to Stockholders14.0
    
    Code of Ethics21.0
    
    Subsidiaries of the Registrant - Reference is made to Item 1. Business
for the required information31.1
    
    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 Securities
and Exchange Commission (SEC) on October 1, 1996.(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.(*)
    
    Management contract or compensatory plan or arrangement.


56



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##### 





|    |  |                     
|--- |  | --------------------
|(b) |  | Reports on Form 8-K.

The Registrant filed the following Reports on Form 8-K during the quarter
ended December 31, 2003:



|(1) |  | Form 8-K filed on October 7, 2003 with an attached press
release announcing the completion of a $100 million 6.95% trust
preferred securities offering.                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Form 8-K filed on October 14, 2003 with an attached press
release announcing the Registrants earnings for the third quarter
and nine months ended September 30, 2003.          
|   
|(3) |  | Form 8-K filed on October 30, 2003 with an attached
presentation that was to be utilized in meetings with analysts and
investors throughout the quarter ended December 31, 2003.
|   
|(4) |  | Form 8-K filed on November 25, 2003 with an attached press
release announcing the declaration of a three-for-two stock split on
the Registrants common stock.                  

57



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##### 









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 CORPORATION |                                                     
|March 15, 2004 | By:                       | /s/ Víctor J. Galán                                  | 
|               |                           | Víctor J. Galán                                      | 
|               |                           | Chairman 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 15, 2004Víctor J. GalánChairman of the Board andChief Executive Officer(Principal Executive Officer)/s/ Ramón Prats
    
    March 15, 2004Ramón PratsVice Chairman of the Board andPresident/s/ Joseph R. Sandoval
    
    March 15, 2004Joseph R. SandovalExecutive Vice President andChief Financial Officer(Principal Financial andAccounting Officer)/s/ Enrique Umpierre-Suárez
    
    March 15, 2004Enrique Umpierre-SuárezDirector and Secretary/s/ Víctor J. Galán Fundora
    
    March 15, 2004Víctor J. Galán FundoraDirector/s/ Rafael Nin
    
    March 15, 2004Rafael NinDirector






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##### 





/s/ Laureno Carús Abarca
    
    March 15, 2004Laureno Carús AbarcaDirector/s/ Eduardo McCormack
    
    March 15, 2004Eduardo McCormackDirector/s/ Gilberto Rivera-Arreaga
    
    March 15, 2004Gilberto Rivera-ArreagaDirector/s/ Benigno R. Fernández
    
    March 15, 2004Benigno R. FernándezDirector/s/ Ileana M. Colón-Carlo
    
    March 15, 2004Ileana M. Colón-CarloDirector/s/ Robert Gorbea
    
    March 15, 2004Roberto GorbeaDirector