##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 (a) OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 (a) OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM TO .
 Commission file number: 000-21137 R&G FINANCIAL CORPORATION    Puerto Rico
    
    66-0532217(State of incorporation
    
    (I.R.S. Employeror organization)
    
    Identification No. )280 Jesús T. Piñero AvenueHato Rey, San Juan, Puerto Rico
    
    00918(Address of principal executive offices)
    
    (Zip Code)
 (787) 758-2424 (Registrants telephone number, including area code) Indicate by checkmark whether Registrant (a) has filed all reports required to
be filed by Section 13 (a) 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 report (s) and (b) has been subject to such filing
requirements for at least 90 days. YES x           NO o Indicate by checkmark whether the registrant
is an accelerated filer (as defined in Rule 12b-2 of the Securities
Exchange Act of 1934).      YES x      NO o Number of shares of Class B Common Stock outstanding as of September 30, 2004:
29,561,190 (Does not include 21,559,584 Class A Shares of Common Stock which
are exchangeable into Class B Shares of Common Stock at the option of the
holder.) 1




---



R&G FINANCIAL CORPORATION INDEX PagePart I    Financial InformationItem 1.Consolidated Financial Statements
    
    
    3Consolidated Statements of Financial Condition as of
September 30, 2004 (Unaudited) and December 31, 2003
    
    
    3Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2004 and 2003 (Unaudited)
    
    
    4Consolidated Statements of Comprehensive Income for the Three and Nine
Months Ended September 30, 2004 and 2003 (Unaudited)
    
    
    5Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2004 and 2003 (Unaudited)
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2.Managements Discussion and Analysis
    
    
    22Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    38Item 4.Controls and Procedures
    
    
    38Part II   Other InformationItem  1. Legal Proceedings
    
    
    39Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3. Defaults Upon Senior Securities
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    39Item 5. Other Information
    
    
    39Item 6. Exhibits
    
    
    39Signatures
    
    
    43EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32 SECTION 906 CERTIFICATION OF CEO AND CFO
  2




---



##### Table of Contents



PART 1-FINANCIAL INFORMATION 
 ITEM 1: CONSOLIDATED
FINANCIAL STATEMENTS R&G FINANCIAL CORPORATION 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 September 30, 2004
    
    December 31, 2003(Unaudited)(Dollars in thousands)ASSETSCash and due from banks
    
    $
    124,135
    
    
    $
    114,916Money market investments:Securities purchased under agreements to resell
    
    
    132,186
    
    
    
    85,053Time deposits with other banks
    
    
    54,724
    
    
    
    34,349Federal funds sold
    
    
    15,000
    
    
    
    Mortgage loans held for sale, at lower of cost or market
    
    
    240,963
    
    
    
    315,691Mortgage-backed and investment securities held for trading, at fair value
    
    
    33,960
    
    
    
    31,797Trading securities pledged on repurchase agreements, at fair value
    
    
    6,303
    
    
    
    6,558Mortgage-backed and investment securities available for sale, at fair value
    
    
    1,318,175
    
    
    
    1,762,293Available for sale securities pledged on repurchase agreements, at fair value
    
    
    1,780,462
    
    
    
    1,215,287Mortgage-backed and investment securities held to maturity, at amortized cost
(estimated market value: 2004 - $19,265; 2003 - $14,940)
    
    
    19,276
    
    
    
    14,883Held to maturity securities pledged on repurchase agreements, at amortized cost
(estimated market value: 2004 - $62,999; 2003 - $65,248)
    
    
    61,447
    
    
    
    63,317Federal Home Loan Bank stock, at cost
    
    
    94,408
    
    
    
    100,461Loans receivable, net of allowance for loan losses $49,209 (2003 - $39,615)
    
    
    4,827,955
    
    
    
    4,048,507Accounts receivable, including advances to investors, net
    
    
    50,895
    
    
    
    38,195Accrued interest receivable
    
    
    48,607
    
    
    
    42,527Servicing asset, net
    
    
    118,569
    
    
    
    119,610Premises and equipment, net
    
    
    50,097
    
    
    
    42,782Other assets
    
    
    211,685
    
    
    
    162,654$
    9,188,847
    
    
    $
    8,198,880LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Deposits:Non-interest bearing deposits
    
    $
    414,108
    
    
    $
    394,273Interest bearing deposits
    
    
    3,729,830
    
    
    
    3,161,491Federal funds purchased
    
    
    15,000
    
    
    
    21,000Securities sold under agreements to repurchase
    
    
    2,539,620
    
    
    
    2,220,795Notes payable
    
    
    98,800
    
    
    
    192,259Advances from FHLB
    
    
    1,110,600
    
    
    
    1,129,600Other borrowings
    
    
    265,228
    
    
    
    157,670Accounts payable and accrued liabilities
    
    
    157,832
    
    
    
    158,006Other liabilities
    
    
    32,076
    
    
    
    13,4338,363,094
    
    
    
    7,448,527Commitments and contingencies (see Note 8)Stockholdersequity:Preferred stock, $.01 par value, 20,000,000 shares authorized:Non-cumulative perpetual Monthly Income Preferred Stock, $25 liquidation value:7.40% Series A, 2,000,000 shares authorized, issued and outstanding
    
    
    50,000
    
    
    
    50,0007.75% Series B, 1,000,000 shares authorized, issued and outstanding
    
    
    25,000
    
    
    
    25,0007.60% Series C, 2,760,000 shares authorized, issued and outstanding
    
    
    69,000
    
    
    
    69,0007.25% Series D, 2,760,000 shares authorized, issued and outstanding
    
    
    69,000
    
    
    
    69,000Common stock:Class A - $.01 par value, 80,000,000 shares authorized in 2004
(2003 - 40,000,000), 21,559,584 issued and outstanding
    
    
    216
    
    
    
    216Class B - $.01 par value, 120,000,000 shares authorized in 2004
(2003 - 60,000,000), 29,561,190 issued and outstanding (2003 - 29,506,715)
    
    
    296
    
    
    
    295Additional paid-in capital
    
    
    115,618
    
    
    
    115,017Retained earnings
    
    
    476,937
    
    
    
    387,036Capital reserves
    
    
    25,103
    
    
    
    25,103Accumulated other comprehensive (loss) income, net of tax
    
    
    (5,417
    )
    
    
    9,686825,753
    
    
    
    750,353$
    9,188,847
    
    
    $
    8,198,880
 The accompanying notes are an integral part of these statements. 3




---



##### Table of Contents



R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME Three month
    
    Nine monthperiod ended
    
    period endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)(Dollars in thousands except for per share data)Interest income:Loans
    
    $
    76,841
    
    
    $
    59,528
    
    
    $
    215,101
    
    
    $
    166,490Money market and other investments
    
    
    7,810
    
    
    
    8,003
    
    
    
    23,016
    
    
    
    24,593Mortgage-backed securities
    
    
    34,872
    
    
    
    27,816
    
    
    
    98,733
    
    
    
    85,078Total interest income
    
    
    119,523
    
    
    
    95,347
    
    
    
    336,850
    
    
    
    276,161Interest expense:Deposits
    
    
    26,188
    
    
    
    23,362
    
    
    
    73,633
    
    
    
    68,023Securities sold under agreements to repurchase
    
    
    15,371
    
    
    
    12,144
    
    
    
    43,003
    
    
    
    37,729Notes payable
    
    
    930
    
    
    
    1,519
    
    
    
    2,949
    
    
    
    5,528Other
    
    
    15,663
    
    
    
    10,579
    
    
    
    44,174
    
    
    
    30,348Total interest expense
    
    
    58,152
    
    
    
    47,604
    
    
    
    163,759
    
    
    
    141,628Net interest income
    
    
    61,371
    
    
    
    47,743
    
    
    
    173,091
    
    
    
    134,533Provision for loan losses
    
    
    (6,265
    )
    
    
    (4,292
    )
    
    
    (19,000
    )
    
    
    (12,956
    )Net interest income after provision for loan losses
    
    
    55,106
    
    
    
    43,451
    
    
    
    154,091
    
    
    
    121,577Non-interest income:Net gain on sale of loans
    
    
    49,169
    
    
    
    29,446
    
    
    
    126,131
    
    
    
    107,226Trading (losses) gains
    
    
    (23,569
    )
    
    
    613
    
    
    
    (23,526
    )
    
    
    (87
    )(Loss) gain on sale of securities available for sale
    
    
    (3,280
    )
    
    
    11
    
    
    
    (3,210
    )
    
    
    831Servicing income
    
    
    8,602
    
    
    
    12,684
    
    
    
    27,708
    
    
    
    38,989Commissions, fees and other
    
    
    8,404
    
    
    
    7,943
    
    
    
    25,412
    
    
    
    20,89039,326
    
    
    
    50,697
    
    
    
    152,515
    
    
    
    167,849Total revenues
    
    
    94,432
    
    
    
    94,148
    
    
    
    306,606
    
    
    
    289,426Non-interest expenses:Employee compensation and benefits
    
    
    18,086
    
    
    
    15,377
    
    
    
    53,625
    
    
    
    45,030Office occupancy and equipment
    
    
    7,336
    
    
    
    6,489
    
    
    
    20,622
    
    
    
    18,265Advertising and promotion
    
    
    4,795
    
    
    
    3,696
    
    
    
    15,037
    
    
    
    10,923Scheduled amortization of servicing asset
    
    
    5,646
    
    
    
    5,889
    
    
    
    16,655
    
    
    
    17,134Impairment
charges on servicing asset
    
    
    1,868
    
    
    

    4,577
    
    
    
    7,811
    
    
    
    32,113Other administrative and general
    
    
    8,587
    
    
    
    12,476
    
    
    
    37,773
    
    
    
    39,71746,318
    
    
    
    48,504
    
    
    
    151,523
    
    
    
    163,182Income before income taxes
    
    
    48,114
    
    
    
    45,644
    
    
    
    155,083
    
    
    
    126,244Income tax expense:Current
    
    
    6,567
    
    
    
    9,179
    
    
    
    29,425
    
    
    
    21,985Deferred
    
    
    4,532
    
    
    
    2,173
    
    
    
    9,356
    
    
    
    9,37611,099
    
    
    
    11,352
    
    
    
    38,781
    
    
    
    31,361Net income
    
    $
    37,015
    
    
    $
    34,292
    
    
    $
    116,302
    
    
    $
    94,883Earnings per common share - Basic
    
    $
    0.65
    
    
    $
    0.59
    
    
    $
    2.04
    
    
    $
    1.63- Diluted
    
    $
    0.64
    
    
    $
    0.59
    
    
    $
    2.03
    
    
    $
    1.62Dividends
declared per share
    
    $
    0.1014
    
    
    $
    0.0760
    
    
    $
    0.2835
    
    
    $
    0.2120Weighted average number of shares outstanding - Basic
    
    
    51,107,120
    
    
    
    51,065,462
    
    
    
    51,099,356
    
    
    
    51,054,845- Diluted
    
    
    51,377,508
    
    
    
    51,290,912
    
    
    
    51,360,408
    
    
    
    51,277,991
 The accompanying notes are an integral part of these statements. 4




---



##### Table of Contents



R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three month
    
    Nine monthperiod
    
    periodended
    
    endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)(Dollars in thousands)Net income
    
    $
    37,015
    
    
    $
    34,292
    
    
    $
    116,302
    
    
    $
    94,883Other comprehensive income, before tax:Unrealized gains (losses):Cash flow hedges
    
    
    (2,157
    )
    
    
    2,482
    
    
    
    2,233
    
    
    
    843Investment securities:Arising during period
    
    
    28,201
    
    
    
    (5,816
    )
    
    
    (30,080
    )
    
    
    (15,477
    )Less: Reclassification
adjustments for net losses (gains) included in net income
    
    
    3,280
    
    
    
    (11
    )
    
    
    3,210
    
    
    
    (831
    )31,481
    
    
    
    (5,827
    )
    
    
    (26,870
    )
    
    
    (16,308
    )Other comprehensive income (loss) before
income taxes
    
    
    29,324
    
    
    
    (3,345
    )
    
    
    (24,637
    )
    
    
    (15,465
    )Income tax (expense) benefit related to items of
other comprehensive income
    
    
    (11,465
    )
    
    
    1,295
    
    
    
    9,534
    
    
    
    6,023Other comprehensive income (loss), net of tax
    
    
    17,859
    
    
    
    (2,050
    )
    
    
    (15,103
    )
    
    
    (9,442
    )Comprehensive income, net of tax
    
    $
    54,874
    
    
    $
    32,242
    
    
    $
    101,199
    
    
    $
    85,441
 The accompanying notes are an integral part of these statements. 5




---



##### Table of Contents



R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS Nine month period ended September 30,2004
    
    2003(Unaudited)(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    116,302
    
    
    $
    94,883Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    7,172
    
    
    
    7,055Amortization of premium on investments and mortgage-backed securities, net
    
    
    6,965
    
    
    
    10,557Servicing asset capitalized
    
    
    (22,854
    )
    
    
    (21,310
    )Scheduled amortization of servicing asset
    
    
    16,655
    
    
    
    17,134Impairment charges on servicing asset, net
    
    
    7,811
    
    
    
    32,113Impairment
charges on interest only strips available for sale
    
    
    8,815
    
    
    
    Provision for loan losses
    
    
    19,000
    
    
    
    12,956Gain on sales of mortgage-backed and investment securities available for sale
    
    
    (5,605
    )
    
    
    (831
    )Unrealized loss on trading securities and derivative instruments, net
    
    
    22,214
    
    
    
    853Decrease (increase) in mortgage loans held for sale
    
    
    56,906
    
    
    
    (13,096
    )Net
(increase) decrease in securities held for trading
    
    
    (1,598
    )
    
    
    33,043Increase in receivables and accrued interest receivable
    
    
    (18,780
    )
    
    
    (10,835
    )Increase in other assets
    
    
    (51,924
    )
    
    
    (27,835
    )(Decrease) increase in notes payable and other borrowings
    
    
    (93,633
    )
    
    
    12,698Increase in accounts payable and accrued liabilities
    
    
    576
    
    
    
    38,534Increase in other liabilities
    
    
    18,643
    
    
    
    5,450Total adjustments
    
    
    (29,637
    )
    
    
    96,486Net cash provided by operating activities
    
    
    86,665
    
    
    
    191,369Cash flows from investing activities:Purchases of investment securities available for sale and held to maturity
    
    
    (1,166,311
    )
    
    
    (2,043,565
    )Proceeds from sales and redemption of securities available for sale
    
    
    434,970
    
    
    
    121,068Principal repayments on mortgage-backed securities
    
    
    606,679
    
    
    
    1,335,265Proceeds from sales of loans
    
    
    610,287
    
    
    
    129,195Net originations of loans
    
    
    (1,428,587
    )
    
    
    (1,136,501
    )Decrease (increase) in FHLB stock
    
    
    6,053
    
    
    
    (22,820
    )Acquisition of premises and equipment
    
    
    (13,658
    )
    
    
    (7,873
    )Acquisition of servicing rights
    
    
    (571
    )
    
    
    (9,752
    )Net cash used in investing activities
    
    
    (951,138
    )
    
    
    (1,634,983
    )Cash flows from financing activities:Increase in deposits  net
    
    
    588,174
    
    
    
    629,652Decrease (increase) in federal funds purchased
    
    
    (6,000
    )
    
    
    35,000Increase in securities sold under agreements to repurchase  net
    
    
    318,825
    
    
    
    622,624(Repayments to) advances from FHLB, net
    
    
    (19,000
    )
    
    
    158,000Proceeds from issuance of long-term debt
    
    
    100,000
    
    
    
    Proceeds from issuance of common stock
    
    
    602
    
    
    
    227Cash dividends:Common stock
    
    
    (14,488
    )
    
    
    (10,841
    )Preferred stock
    
    
    (11,913
    )
    
    
    (11,913
    )Net cash provided by financing activities
    
    
    956,200
    
    
    
    1,422,749Net increase (decrease) in cash and cash equivalents
    
    
    91,727
    
    
    
    (20,865
    )Cash and cash equivalents at beginning of period
    
    
    234,318
    
    
    
    197,643Cash and cash equivalents at end of period
    
    $
    326,045
    
    
    $
    176,778Cash and cash equivalents include:Cash and due from banks
    
    $
    124,135
    
    
    $
    81,774Federal funds sold
    
    
    15,000
    
    
    
    Securities purchased under agreements to resell
    
    
    132,186
    
    
    
    53,698Time deposits with other banks
    
    
    54,724
    
    
    
    41,306$
    326,045
    
    
    $
    176,778
 The accompanying notes are an integral part of these statements. 6




---



##### Table of Contents



R&G FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1  -REPORTING ENTITY AND BASIS OF PRESENTATION Reporting entity The accompanying unaudited consolidated financial statements include the
accounts of R&G Financial Corporation (the Company), a diversified financial
services company, and its wholly-owned subsidiaries, R-G Premier Bank of Puerto
Rico (Premier Bank), a Puerto Rico commercial bank, R-G Crown Bank (Crown
Bank), a Florida-based federal savings bank, R&G Mortgage Corp. (R&G
Mortgage), Puerto Ricos second largest mortgage banker, R&G International
Corp., a Puerto Rico international banking entity, R-G Investments Corporation,
a Puerto Rico licensed securities broker-dealer, and Home & Property Insurance
Corp., a Puerto Rico insurance agency. The Company, currently in its 32nd year
of operations, operates as a financial holding company pursuant to the
provisions of the Gramm-Leach-Bliley Act of 1999, and is engaged in banking,
mortgage banking, and securities and insurance brokerage through its
subsidiaries. Premier Bank and Crown Bank provide a full range of banking services,
including residential, commercial and personal loans and a variety of deposit
products. Premier Bank operates through thirty-two branches located mainly in
the northeastern part of the Commonwealth of Puerto Rico. Crown Bank operates
in the Orlando and Tampa/St. Petersburg metropolitan areas through fifteen full
service branches and six commercial lending offices. Premier Bank also provides
private banking and trust and other financial services to its customers.
Premier Bank and Crown Bank are subject to the regulations of certain federal
and Puerto Rico agencies, and undergo periodic examinations by those regulatory
agencies. Crown Bank is also engaged in the origination of FHA-insured,
VA-guaranteed and privately insured first and second mortgage loans on
residential real estate (1 to 4 families) in the States of New York, New
Jersey, Connecticut and North Carolina, through its wholly-owned subsidiary,
Continental Capital Corporation (Continental Capital). R&G Mortgage is engaged primarily in the business of originating
FHA-insured, VA- guaranteed, and privately insured first and second mortgage
loans on residential real estate (1 to 4 families), directly and through its
wholly-owned subsidiary, Mortgage Store of Puerto Rico, Inc. R&G Mortgage pools
FHA and VA loans into GNMA mortgage-backed securities and collateralized
mortgage obligation certificates for sale to investors. After selling the
loans, it retains the servicing on the loans. R&G Mortgage is also a FNMA and
FHLMC seller-servicer of conventional loans. On October 11, 2004, the Company and Crown Bank entered into a purchase
and assumption agreement with SouthTrust Bank to acquire 18 SouthTrust branches
located in three banking markets in Florida and one banking market in Georgia
with deposits and other liabilities totaling approximately $600 million. The
acquisition results from the required divestiture of certain SouthTrust
branches, together with the assets, deposits and other liabilities of such
branches, to facilitate regulatory approval of Wachovia Corporations
acquisition of SouthTrust Corporation, the
parent of SouthTrust Bank. The merger of SouthTrust Corporation
and Wachovia Corporation was completed on November 1, 2004. The
Company expects to complete this transaction in February 2005 as
contemplated by the purchase and assumption agreement. Basis of presentation The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles. However, in the opinion of management, the
accompanying unaudited consolidated financial statements include all
adjustments (only consisting of normal recurring accruals) necessary for
a fair presentation of the Companys financial condition as of September 30,
2004 and the results of operations and changes in its cash flows for the three
and nine months ended September 30, 2004 and 2003. The results of operations for the three and nine month periods ended
September 30, 2004 are not necessarily indicative of the results to be expected
for the year ending December 31, 2004. The unaudited consolidated financial
statements and notes thereto should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 2003. Basis of consolidation All significant intercompany balances and transactions have been
eliminated in the accompanying unaudited financial statements. 7




---



##### Table of Contents



Cash and due from banks Cash and due from banks include certain funds that are subject to
withdrawal and usage restrictions. At September 30, 2004, cash and due from
banks include approximately $11.8 million pledged as collateral under various
agreements of the Company, and approximately $10.4 million deposited with the
Federal Reserve Bank to comply with certain reserve maintenance balance
requirements. Reclassifications Certain reclassifications have been made to the 2003 consolidated financial
statements to conform with the 2004 presentation. Recent accounting pronouncements Accounting for Derivative Instruments and Hedging Activities On July 1, 2003, the Company adopted SFAS No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities, which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivatives instruments embedded in other contracts, and for
hedging activities under FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The adoption of this Statement on July 1,
2003 had no significant effect on the consolidated financial condition or
results of operations of the Company. Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity On July 1, 2003 the Company adopted SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 covers a limited number of instruments that are to be classified
as liabilities and specifies that such instruments embody obligations of the
issuer and that, therefore, the issuer must classify them as liabilities. Among the instruments specified by SFAS No. 150, mandatorily redeemable
financial instruments had to be classified as liabilities. The Company had $35
million of guaranteed preferred beneficial interest in company junior
subordinated deferrable interest debentures (trust preferred securities) that
had already been classified as other borrowings in its consolidated statements
of financial condition as of June 30, 2003 and accordingly, the adoption of
this Statement on July 1, 2003 did not have any effect on the Companys
consolidated financial statements. Accounting for Consolidation of Variable Interest Entities In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51 (FIN 46). Under FIN 46,
entities that would be assessed for consolidation are typically referred to as
Special-Purposed Entities (SPEs), although non-SPE-type entities may also be
subject to the guidance. FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entitys activities or entitled to receive a
majority of the entities residual returns, or both. FIN 46 was effective
immediately for variable interest entities created after January 31, 2003. For
variable interest entities created prior to February 1, 2003, the provisions of
FIN 46 became effective October 1, 2003. Under the provisions of FIN 46, effective July 1, 2003, the Company
deconsolidated R&G Capital Trust I and II, which had issued trust preferred
securities prior to February 1, 2003. As discussed above, the Company had
classified its $35 million trust preferred securities as borrowings in its
consolidated statements of financial condition prior to such deconsolidation.
The primary effect of deconsolidating these trusts was to change the balance
sheet classification of the liabilities from guaranteed preferred beneficial
interest in company junior subordinated deferrable interest debentures to
long-term debt. 8




---



##### Table of Contents



The Company did not consolidate R&G Capital Trust IV, which in August 2003
issued $15 million in trust preferred securities in a private placement, R&G
Capital Trust III, which in October 2003 issued $100 million of trust preferred
securities in a public offering, and R&G Capital Trust V, which in March 2004
issued $100 million of trust preferred securities in a public offering. On
May 6, 2004, the Federal Reserve issued proposed rules that would
continue to allow trust preferred securities to be included in Tier I
regulatory capital, subject to stricter quantitative and qualitative
limits. Currently, trust preferred securities
and qualifying perpetual preferred stock are limited in the aggregate to no
more than 25% of a bank holding companys core capital elements.
As proposed, the Federal Reserves rule
would retain trust preferred securities as an element of Tier 1
regulatory capital, but with stricter quantitative limitations
following a three-year transition period. Under the proposed rule, as
of March 31, 2007, the aggregate amount of trust preferred
securities and cumulative perpetual preferred stock, as well as
certain additional elements of Tier 1 capital which are
identified in the proposed rule, may not exceed 25% of a bank holding
companys Tier 1 capital, net of goodwill. As of the date
of this Form 10-Q, the 25% limitation is limited to the aggregate
amount of only trust preferred securities and cumulative perpetual
preferred stock, and is calculated on a basis that includes goodwill.
The Federal Reserve also indicated with respect to its proposal that
it expected internationally active banking organizations
to limit the amount of restricted core capital elements included in
Tier 1 capital to 15% of the sum of all core capital elements, net of
goodwill. The proposed rules do not clarify what constitutes an
internationally active banking organization. Both we and
other Puerto Rico banks through our trade organization,
the Puerto Rico Bankers Association, have asked the Federal Reserve
to clarify that for purposes of this rule, Puerto Rico banks are not
considered internationally active banking organizations.
Whether or not this change is addressed in a final rule, the proposed
rule, if adopted, would effectively limit the amount of trust
preferred securities that may be included in Tier 1 capital. Accounting for Certain Loans and/or Debt Securities Acquired in a Transfer In December 2003, the Accounting Standards Executive Committee issued
Statement of Position (SOP) No. 03-3, Accounting for Certain Loans and/or Debt
Securities Acquired in a Transfer. This SOP addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investors initial investment in loans or debt securities
acquired in a transfer if those differences are attributable to credit quality.
This SOP does not apply to loans originated by the entity, and it prohibits
both the creating and carryover of valuation allowances in the initial
accounting of all loans acquired in a transfer within the scope of this SOP.
The prohibition of the carryover applies to purchase of an individual loan, a
pool of loans, a group of loans, and loans acquired in a purchase business
combination. This SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004. Based on presently available information, management
believes the adoption of this SOP will not have a significant effect on its
consolidated financial statements. Application of Accounting Principles to Loan Commitments On March 9, 2004, the SEC issued Staff Accounting Bulletin 105,
Application of Accounting Principles to Loan Commitments, (SAB 105) to
inform registrants of the Staffs view that the fair value of the recorded loan
commitments should not consider the expected future cash flows related to the
associated servicing of the future loan. The provisions of SAB 105 must be
applied to loan commitments accounted for as derivatives that are entered into
after March 31, 2004. The Staff will not object to the application of existing
accounting practices to loan commitments accounted for as derivatives that are
entered into on or before March 31, 2004, with appropriate disclosures. On
April 1, 2004, the Company adopted the provisions of SAB 105.
The Company records the value of its mortgage loan commitments at fair market value for
mortgages it intends to sell. The Company does not currently include, and was
not including, the value of mortgage servicing or any other
internally-developed intangible assets in the valuation of its mortgage loan
commitments. Therefore, the adoption of SAB 105 did not have an impact on the
Companys financial condition or results of operations. The Meaning of Other-than-Temporary Impairment and its Application to Certain
Investments At its March 2004 meetings, the Emerging Issues Task Force (EITF)
revisited EITF Issue No. 03-1, The Meaning of Other-than-Temporary Impairment
and its Application to Certain Investments (EITF
No. 03-1) regarding the determination of whether an investment
is considered impaired, whether the identified impairment is
considered other-than-temporary, how to measure other-than-temporary
impairment, and how to disclose unrealized losses on investments that
are not other-than-temporarily impaired. Adoption of the new
measurement requirements has been delayed by the FASB pending
reconsideration of implementation guidance relating to debt
securities that are impaired solely due to market interest rate
fluctuations. The contractual cashflows of the Companys
mortgage-backed securities are guaranteed by Fannie Mae, Freddie Mac
or Ginnie Mae. Because a decline in fair value is attributable to
changes in interest rates and not credit quality, and because the
Company has the ability and intent to hold these investments until a
market price recovery or maturity, these investments are not
considered other-than-temporarily impaired. 9




---



##### Table of Contents



NOTE 2 EARNINGS PER SHARE Basic earnings per common share are computed by dividing net income (less
preferred stock dividends) by the weighted average number of shares of common
stock outstanding. The weighted average number of outstanding stock options
granted in connection with the Companys Stock Option Plans (270,388 and 225,450
during the three months ended September 30, 2004 and 2003, respectively, and
261,052 and 223,146 during the nine month periods ended September 30, 2004 and
2003, respectively, after giving effect to stock split paid in January 2004),
is included in the weighted average number of shares for purposes of the
diluted earnings per share computation. No other adjustments are made to the
computation of basic earnings per share to arrive at diluted earnings per
share. The reconciliation of the numerator and denominator of the basic and diluted
earnings-per-share follows: (Dollars in thousands, except per share amounts) Three month period ended
    
    Nine month period endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)Net Income:Net income
    
    $
    37,015
    
    
    $
    34,292
    
    
    $
    116,302
    
    
    $
    94,883Preferred stock dividend
    
    
    (3,971
    )
    
    
    (3,971
    )
    
    
    (11,913
    )
    
    
    (11,913
    )Net income attributable to common stock
    
    $
    33,044
    
    
    $
    30,321
    
    
    $
    104,389
    
    
    $
    82,970Weighted Average Shares:Basic weighted average number of
common shares outstanding
    
    
    51,107,120
    
    
    
    51,065,462
    
    
    
    51,099,356
    
    
    
    51,054,845Incremental shares issuable upon
exercise of stock options
    
    
    270,388
    
    
    
    225,450
    
    
    
    261,052
    
    
    
    223,146Diluted weighted average number of
common shares outstanding
    
    
    51,377,508
    
    
    
    51,290,912
    
    
    
    51,360,408
    
    
    
    51,277,991Net income per common share:Basic
    
    $
    0.65
    
    
    $
    0.59
    
    
    $
    2.04
    
    
    $
    1.63Diluted
    
    $
    0.64
    
    
    $
    0.59
    
    
    $
    2.03
    
    
    $
    1.62
 Dividends per share on common stock declared and paid by the Company were as
follows: Three month
    
    Nine monthperiod ended
    
    period endedSeptember 30,

    
    September 30,2004
    
    2003
    
    2004
    
    2003$
    0.1014
    
    
    $
    0.0760
    
    
    $
    0.2835
    
    
    $
    0.2120
 10




---



##### Table of Contents



NOTE 3  INVESTMENT AND MORTGAGE-BACKED SECURITIES The carrying value and estimated fair value of investment and
mortgage-backed securities by category are shown below. The fair value of
investment securities is based on quoted market prices and dealer quotes. September 30,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Mortgage-backed securities held for trading:FHLMC certificates
    
    $
    26,893
    
    
    $
    33,245Interest only strips
    
    
    13,268
    
    
    
    40,161
    
    
    
    33,245Investment securities held for trading:Puerto Rico government and agencies obligations
    
    
    57
    
    
    
    Municipal securities
    
    
    
    
    
    
    446Bank issued trust preferred securities
    
    
    
    
    
    
    4,650Other
    
    
    45
    
    
    
    14102
    
    
    
    5,110$
    40,263
    
    
    $
    38,355
 11




---



##### Table of Contents



September 30, 2004
    
    December 31, 2003Amortized
    
    Fair
    
    Amortized
    
    Faircost
    
    value
    
    cost
    
    value(Unaudited)(Dollars in thousands)Mortgage-backed securities
available for sale:Collateralized mortgage obligations (CMO):Due from one to five years
    
    $
    2,232
    
    
    $
    2,256
    
    
    $
    5,939
    
    
    $
    6,019Due from five to ten years
    
    
    59,355
    
    
    
    58,679
    
    
    
    20,889
    
    
    
    20,873Due over ten years
    
    
    975,877
    
    
    
    968,601
    
    
    
    941,970
    
    
    
    939,7571,037,464
    
    
    
    1,029,536
    
    
    
    968,798
    
    
    
    966,649CMO residuals (interest only), and
interest only strips (IOs)
    
    
    69,731
    
    
    
    60,582
    
    
    
    63,991
    
    
    
    64,890FNMA certificates:Due from one to five years
    
    
    186
    
    
    
    196
    
    
    
    71
    
    
    
    72Due from five to ten years
    
    
    218,499
    
    
    
    219,399
    
    
    
    87,989
    
    
    
    87,101Due over ten years
    
    
    311,023
    
    
    
    315,009
    
    
    
    388,687
    
    
    
    405,193529,708
    
    
    
    534,604
    
    
    
    476,747
    
    
    
    492,366FHLMC certificates:Due from one to five years
    
    
    1,072
    
    
    
    1,091
    
    
    
    3
    
    
    
    3Due from five to ten years
    
    
    60,674
    
    
    
    60,589
    
    
    
    20,308
    
    
    
    19,955Due over ten years
    
    
    300,097
    
    
    
    306,649
    
    
    
    439,876
    
    
    
    448,161361,843
    
    
    
    368,329
    
    
    
    460,187
    
    
    
    468,119GNMA certificates:Due from one to five years
    
    
    3,097
    
    
    
    3,213
    
    
    
    50
    
    
    
    52Due from five to ten years
    
    
    8,539
    
    
    
    8,735
    
    
    
    12,563
    
    
    
    12,918Due over ten years
    
    
    301,581
    
    
    
    302,123
    
    
    
    346,568
    
    
    
    350,217313,217
    
    
    
    314,071
    
    
    
    359,181
    
    
    
    363,1872,311,963
    
    
    
    2,307,122
    
    
    
    2,328,904
    
    
    
    2,355,211Investment securities available for sale:U.S. Government and Agencies securities:Due within one year
    
    
    13,667
    
    
    
    13,706
    
    
    
    62,519
    
    
    
    63,113Due from one to five years
    
    
    689,138
    
    
    
    685,867
    
    
    
    399,275
    
    
    
    398,028Due from five to ten years
    
    
    24,593
    
    
    
    25,288
    
    
    
    79,388
    
    
    
    81,042727,398
    
    
    
    724,861
    
    
    
    541,182
    
    
    
    542,183Corporate debt obligations:Due within one year
    
    
    10,000
    
    
    
    9,919
    
    
    
    14,247
    
    
    
    14,362Due from one to five years
    
    
    38,547
    
    
    
    40,222
    
    
    
    48,578

    
    
    
    51,376Due from five to ten years
    
    
    1,027
    
    
    
    1,122
    
    
    
    2,123
    
    
    
    2,10949,574
    
    
    
    51,263
    
    
    
    64,948
    
    
    
    67,847US Municipal debt obligations-Due over ten years
    
    
    15,047
    
    
    
    15,391
    
    
    
    12,209
    
    
    
    12,339792,019
    
    
    
    791,515
    
    
    
    618,339
    
    
    
    622,369$
    3,103,982
    
    
    $
    3,098,637
    
    
    $
    2,947,243
    
    
    $
    2,977,580
 12




---



##### Table of Contents



September 30, 2004
    
    December 31, 2003Amortized
    
    Fair
    
    Amortized
    
    Faircost
    
    value
    
    cost
    
    value(Unaudited)(Dollars in thousands)Mortgage-backed securities held
to maturity:GNMA certificates:Due from one to five years
    
    $
    2,716
    
    
    $
    2,763
    
    
    $
    3,497
    
    
    $
    3,581Due from five to ten years
    
    
    363
    
    
    
    359
    
    
    
    463
    
    
    
    469Due over ten years
    
    
    19,391
    
    
    
    19,852
    
    
    
    25,475
    
    
    
    26,07922,470
    
    
    
    22,974
    
    
    
    29,435
    
    
    
    30,129FNMA certificates-Due over ten years
    
    
    4,105
    
    
    
    4,387
    
    
    
    4,785
    
    
    
    4,999FHLMC certificates-Due over ten years
    
    
    67
    
    
    
    65
    
    
    
    81
    
    
    
    7926,642
    
    
    
    27,426
    
    
    
    34,301
    
    
    
    35,207Investment securities held to
maturity:United States Government and
Agencies obligations-Due from one to five years
    
    
    2,500
    
    
    
    2,500
    
    
    
    1,997
    
    
    
    1,997Puerto Rico Government and
Agencies obligations:
    
    
    10,549
    
    
    
    10,711
    
    
    
    558
    
    
    
    567Due within one year
    
    
    38,932
    
    
    
    39,523
    
    
    
    31,846
    
    
    
    33,088Due from one to five years
    
    
    2,000
    
    
    
    2,004
    
    
    
    9,398
    
    
    
    9,230Due from five to ten years
    
    
    51,481
    
    
    
    52,238
    
    
    
    41,802
    
    
    
    42,885100
    
    
    
    100
    
    
    
    100
    
    
    
    100Other - Due from one to five years
    
    
    54,081
    
    
    
    54,838
    
    
    
    43,899
    
    
    
    44,982$
    80,723
    
    
    $
    82,264
    
    
    $
    78,200
    
    
    $
    80,189
 In addition to the investment and mortgage-backed securities pledged on
repurchase agreements and reported as pledged assets in the
consolidated statements of
financial condition, at September 30, 2004 the Company had investment and
mortgage-backed securities pledged as collateral on repurchase agreements where
the counterparties do not have the right to sell or repledge the assets as
follows: Carrying Amount(Unaudited)(Dollars in thousands)Mortgage-backed and investment
securities available for sale, at fair value
    
    $
    718,382Mortgage-backed
and investment securities held for trading, at fair value
    
    
    2,222Mortgage-backed and investment securities held to maturity,
at amortized cost
    
    
    378$
    720,982
 Prior
to the quarter ended September 30, 2004, residual interests
retained by the Company on financial assets transfers accounted for as
sales were reported by the Company at fair value as interest-only
strips (IOs) and classified as available for sale securities.
As of September 30, 2004, the Company has reclassified
approximately $80.9 million from its available for sale
securities to other assets following the guidance contained in SFAS
No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133). Under SFAS No. 133,
such residual interests must be recorded as trading
derivatives and reported at fair value, with unrealized
marked-to-market gains or losses recorded in results of operations
of the Company. A corresponding reclassification of
$43.1 million was made as of December 31, 2003 for
consistency purposes. Following the guidance contained in SFAS
No. 133, the Company recorded a trading loss of approximately
$11.5 million related to the trading derivatives. The amount of
unrealized gains or losses recorded in other comprehensive income related to
the retained interests prior to the quarter ended September 30, 2004 were not
material since the level of short-term interest rates had been relatively
constant from the time the residual interest were originally recognized. As a
result, management has determined that the application of the guidance
contained on SFAS No. 133 to prior periods has no material impact on the
consolidated financial statements of the Company. For additional information on this matter, see
Managements Discussion and Analysis  Results of
Operations. 13




---



##### Table of Contents



NOTE 4  LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consist of the following: September 30,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Real estate loans:Residential  first mortgage
    
    $
    2,793,611
    
    
    $
    2,384,279Residential  second
mortgage
    
    
    38,858
    
    
    
    34,999Land
    
    
    218,637
    
    
    
    96,796Construction
    
    
    798,419
    
    
    
    603,867Commercial
    
    
    880,162
    
    
    
    792,9504,729,687
    
    
    
    3,912,891Undisbursed portion of loans in
process
    
    
    (356,468
    )
    
    
    (224,960
    )Net deferred loan costs
    
    
    1,123
    
    
    
    1,3694,374,342
    
    
    
    3,689,300Other loans:Commercial business
    
    
    195,091
    
    
    
    126,019Commercial leases
    
    
    98,242
    
    
    
    62,671Consumer:Secured by deposits
    
    
    23,650
    
    
    
    24,713Secured by real estate
    

    
    46,979
    
    
    
    53,709Other
    
    
    138,860
    
    
    
    131,711Unearned interest
    
    
    
    
    
    
    (1
    )502,822
    
    
    
    398,822Total loans
    
    
    4,877,164
    
    
    
    4,088,122Allowance for loan losses
    
    
    (49,209
    )
    
    
    (39,615
    )$
    4,827,955
    
    
    $
    4,048,507
 The changes in the allowance for loan losses follow: Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)(Dollars in thousands)Balance, beginning of period
    
    $
    46,799
    
    
    $
    34,315
    
    
    $
    39,615
    
    
    $
    32,675Provision for loan losses
    
    
    6,265
    
    
    
    4,292
    
    
    
    19,000
    
    
    
    12,956Loans charged-off
    
    
    (4,896
    )
    
    
    (3,497
    )
    
    
    (12,067
    )
    
    
    (11,284
    )Recoveries
    
    
    1,041
    
    
    
    619
    
    
    
    2,661
    
    
    
    1,382Balance, end of period
    
    $
    49,209
    
    
    $
    35,729
    
    
    $
    49,209
    
    
    $
    35,729
 14




---



##### Table of Contents



The following table sets forth the amounts and categories of R&G Financials
non-performing assets at the dates indicated. September 30,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Non-accruing loans:Residential real estate (1)
    
    $
    75,719
    
    
    $
    57,031Residential construction
    
    
    2,079
    
    
    
    2,424Commercial real estate
    
    
    19,810
    
    
    
    22,589Commercial business
    
    
    1,809
    
    
    
    1,733Consumer unsecured
    
    
    623
    
    
    
    833Total
    
    
    100,040
    
    
    
    84,610Accruing loans greater than 90 days
delinquent:Residential real estate (1)
    
    
    
    
    
    
    Residential construction
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    Commercial business
    
    
    652
    
    
    
    382Consumer
    
    
    354
    
    
    
    422Total accruing loans greater than
90 days delinquent
    
    
    1,006
    
    
    
    804Total non-performing loans
    
    
    101,046
    
    
    
    85,414Real estate owned (2)
    
    
    19,898
    
    
    
    19,954Other repossessed assets
    
    
    126
    
    
    
    22020,024
    
    
    
    20,174Total non-performing assets
    
    $
    121,070
    
    
    $
    105,588Total non-performing loans as a
percentage of total loans
    
    
    1.93
    %
    
    
    1.98
    %Total non-performing assets as a
percentage of total assets
    
    
    1.32
    %
    
    
    1.29
    %Allowance for loan losses as a percentage
of total non-performing loans
    
    
    48.70
    %
    
    
    46.38
    %Allowance for loan losses as a percentage
of total loans outstanding
    
    
    0.94
    %
    
    
    0.92
    %Net charge-offs to average loans
outstanding
    
    
    0.27
    %
    
    
    0.32
    %
  (1)
    
    R&G Financials historical charge-offs with respect to residential
real estate loans have been low. As a result, R&G Financials
aggregate charge-offs as a percentage of total average loans
outstanding amounted to 0.27% during the nine months ended September
30, 2004 and 0.32% during the year ended December 31, 2003.  (2)
    
    Consist primarily of residential real estate foreclosed by the
Company. During the quarter ended June 30, 2004, the Company sold approximately $28.2
million of non-performing residential mortgage loans on a recourse basis. 15




---



##### Table of Contents



NOTE 5 - SERVICING ASSET The changes in the servicing asset of the Company follows: Three months
    
    Nine monthsperiod ended
    
    period endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)(Dollars in thousands)Balance at beginning of period
    
    $
    117,740
    
    
    $
    127,146
    
    
    $
    119,610
    
    
    $
    142,334Rights originated
    
    
    8,212
    
    
    
    7,227
    
    
    
    22,854
    
    
    
    21,310Rights purchased
    
    
    131
    
    
    
    242
    
    
    
    571
    
    
    
    9,752Scheduled amortization
    
    
    (5,646
    )
    
    
    (5,889
    )
    
    
    (16,655
    )
    
    
    (17,134
    )Impairment charges:Unscheduled amortization
    
    
    (2,321
    )
    
    
    (6,142
    )
    
    
    (5,471
    )
    
    
    (18,966
    )Reversal (provision) of
valuation reserves
    
    
    453
    
    
    
    1,565
    
    
    
    (2,340
    )
    
    
    (13,147
    )Balance at end of period
    
    $
    118,569
    
    
    $
    124,149
    
    
    $
    118,569
    
    
    $
    124,149
 NOTE 6 - DEPOSITS Deposits are summarized as follows: September 30,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Passbook savings
    
    $
    373,746
    
    
    $
    337,463NOW accounts
    
    
    269,234
    
    
    
    133,201Super NOW accounts
    
    
    385,312
    
    
    
    426,144Regular checking accounts
(non-interest bearing)
    
    
    154,961
    
    
    
    134,659Commercial checking accounts
(primarily non-interest bearing)
    
    
    260,053
    
    
    
    259,6141,069,560
    
    
    
    953,618Certificates of deposit:Under $100,000
    
    
    825,606
    
    
    
    731,655$100,000 and over
    
    
    1,866,636
    
    
    
    1,527,5812,692,242
    
    
    
    2,259,236Accrued interest payable
    
    
    8,390
    
    
    
    5,447$
    4,143,938
    
    
    $
    3,555,764
 Certificates of deposit include $817.7 million and $623.8 million of brokered
deposits at September 30, 2004 and December 31, 2003, respectively. 16




---



##### Table of Contents



NOTE
7 - STOCK OPTION PLANS The
Company accounts for the plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. The Company follows the
disclosure only provisions of SFAS No. 123  Accounting for Stock-Based
Compensation (SFAS 123) and thus, no compensation cost has been recognized for
the Companys Stock Option Plans. Had compensation cost for the Companys Stock
Option Plans been determined based on the fair value of the options at the grant
date consistent with the provisions of SFAS 123, the Companys net earning and
earnings per share for the three and nine month period ended September 30, 2004
would have been reduced to the pro-forma amounts indicated below: Three month period ended
    
    Nine month period endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)(Dollars in thousands)Net earnings - as reported
    
    $
    37,015
    
    
    $
    34,292
    
    
    $
    116,302
    
    
    $
    94,883Net earnings - pro forma
    
    $
    36,980
    
    
    $
    34,273
    
    
    $
    116,200
    
    
    $
    94,829Basic earnings per share - as reported
    
    
    0.65
    
    
    
    0.59
    
    
    
    2.04
    
    
    
    1.63Basic earnings per share - pro forma
    
    
    0.65
    
    
    
    0.59
    
    
    
    2.04
    
    
    
    1.62Diluted earnings per share - as reported
    
    
    0.64
    
    
    
    0.59
    
    
    
    2.03
    
    
    
    1.62Diluted earnings per share - pro forma
    
    
    0.64
    
    
    
    0.59
    
    
    
    2.03
    
    
    
    1.62
 NOTE 8 - COMMITMENTS AND CONTINGENCIES As of September 30, 2004, the Company had open commitments to issue GNMA
certificates of approximately $13.8 million. In addition, the Company had
commitments to sell mortgage loans to third party investors amounting to
approximately $303.6 million. Unrealized gains and losses are recorded in trading activities in the
accompanying consolidated statements of income related to these forward sales
commitments, for the difference between committed prices and market prices at
the balance sheet date. Unrealized trading gains or losses were not significant
during the nine months ended September 30, 2004. Litigation The Company is a defendant in legal proceedings arising from normal business
activities. Even though a number of claims are in their early stages,
management believes, based on presently available information and the opinion
of legal counsel, that the final disposition of these matters will not have a
material adverse effect on the Companys financial position or results of
operations. Lease commitments The Company is obligated under several noncancelable leases for office space
and equipment rentals, all of which are accounted for as operating leases. The
leases expire at various dates with options for renewals. 17




---



##### Table of Contents



Other At September 30, 2004, the Company is liable under limited recourse provisions
resulting from the sale of loans to several investors, principally FHLMC. The
principal balance of these loans, which are serviced by the Company, amounts to
approximately $1.7 billion at September 30, 2004. At September 30, 2004, the
Company has an allowance for recourse provisions of $1.5 million. Historical
losses on recourse obligations have not been significant. In April 2002, R&G Acquisition Holdings Corporation (a wholly-owned subsidiary
of R&G Financial) (RAC), a Florida corporation and the holding company of
Crown Bank, formed R&G Capital Trust I. R&G Capital Trust I issued $25 million
of trust preferred securities in a private placement. In addition, in August
2003, RAC also formed R&G Capital Trust IV, which issued $15 million of trust
preferred securities in a private placement. In October 2003 and March 2004,
the Company formed R&G Capital Trust III and R&G Capital Trust V, respectively,
each of which issued $100 million of trust preferred securities in public
offerings (see Note 1). The Company has guaranteed certain obligations of RAC
to R&G Capital Trust I and IV, and has guaranteed certain obligations of R&G
Capital Trust III and V. During the second quarter of 2003, the US Internal Revenue Service (IRS)
began an income tax examination of the income tax returns for the year 2001 for
the predecessor thrift holding company of Crown Bank prior to its acquisition
by the Company in June 2002. Management believes that this examination should
not result in any significant adverse effect on the Companys financial
condition or results of operations. During the first quarter of 2004, the Puerto Rico Treasury Department (PRTD)
began an income tax examination of the income tax returns for the year 2001 of
R&G Financial (parent only) and R-G Mortgage. Management believes that this
examination should not result in any significant adverse effect on the
Companys financial condition or results of operations. As
referenced in Note 1 under Reporting Entities, on October
11, 2004, the Company and Crown Bank entered into a purchase and
assumption agreement with SouthTrust Bank to acquire 18 SouthTrust
branches. Pursuant to the agreement, the Company and Crown Bank has
agreed to complete the closing and conversion of all accounts by
March 3, 2005. Crown Bank will pay Wachovia Corporation a fee of $4.5
million if the closing and conversion does not occur by such date,
provided the inability to meet that deadline is caused solely by
Crown Banks action or failure to act. NOTE
9 - SUPPLEMENTAL INCOME STATEMENT INFORMATION Employee costs and other administrative and general expenses are shown in the
Consolidated Statements of Income net of direct loan origination costs. Direct
loan origination costs are capitalized as part of the carrying cost of mortgage
loans and are offset against mortgage loan sales and fees when the loans are
sold, or amortized as a yield adjustment to interest income on loans held for
investment. Total employee costs and other expenses before capitalization
follows: Three month period ended
    
    Nine month period endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)(Dollars in thousands)Employee costs
    
    $
    26,268
    
    
    $
    24,575
    
    
    $
    79,844
    
    
    $
    70,879Other
administrative and
general expenses
    
    $
    8,699
    
    
    $
    14,750
    
    
    $
    40,153
    
    
    $
    44,962
 18




---



##### Table of Contents



NOTE 10  INDUSTRY SEGMENTS The following summarized information presents the results of the Companys
operations for its traditional banking and mortgage banking activities: (Dollars in thousands)Three month period ended September 30,2004
    
    2003(Unaudited)Mortgage
    
    
    
    
    
    Segments
    
    
    
    
    
    Mortgage
    
    
    
    
    
    SegmentsBanking
    
    Banking
    
    Other (1)
    
    Totals
    
    Banking
    
    Banking
    
    Other (1)
    
    TotalsRevenues
    
    $
    65,175
    
    
    $
    26,931
    
    
    $
    4,316
    
    
    $
    96,422
    
    
    $
    56,578
    
    
    $
    34,747
    
    
    $
    4,484
    
    
    $
    95,809Non-interest expenses
    
    
    21,496
    
    
    
    24,796
    
    
    
    1,583
    
    
    
    47,875
    
    
    
    24,174
    
    
    
    23,961
    
    
    
    1,410
    
    
    
    49,545Income
before income taxes
    
    $
    43,679
    
    
    $
    2,135
    
    
    $
    2,733
    
    
    $
    48,547
    
    
    $
    32,404
    
    
    $
    10,786
    
    
    $
    3,074
    
    
    $
    46,264
 Nine month period ended September 30,2004
    
    2003(Unaudited)Mortgage
    
    
    
    
    
    Segments
    
    
    
    
    
    Mortgage
    
    
    
    
    
    SegmentsBanking
    
    Banking
    
    Other (1)
    
    Totals
    
    Banking
    
    Banking
    
    Other (1)
    
    TotalsRevenues
    
    $
    197,987
    
    
    $
    99,107
    
    
    $
    14,187
    
    
    $
    311,281
    
    
    $
    144,367
    
    
    $
    136,106
    
    
    $
    11,682
    
    
    $
    292,155Non-interest expenses
    
    
    75,659
    
    
    
    74,536
    
    
    
    5,042
    
    
    
    155,237
    
    
    
    67,879
    
    
    
    94,153
    
    
    
    3,764
    
    
    
    165,796Income before income taxes
    
    $
    122,328
    
    
    $
    24,571
    
    
    $
    9,145
    
    
    $
    156,044
    
    
    $
    76,488
    
    
    $
    41,953
    
    
    $
    7,918
    
    
    $
    126,359
  (1)
    
    Comprised of broker-dealer and insurance agency operations. 19




---



##### Table of Contents



The following is a reconciliation of reportable segment revenues and income
before income taxes to the Companys consolidated amounts (unaudited): Three month period ended
    
    Nine month period endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Revenues:Total revenues for reportable segments
    
    $
    96,422
    
    
    $
    95,809
    
    
    $
    311,281
    
    
    $
    292,155Elimination of intersegment revenues
    
    
    (2,391
    )
    
    
    (2,029
    )
    
    
    (5,796
    )
    
    
    (4,012
    )Corporate revenues
    
    
    401
    
    
    
    368
    
    
    
    1,121
    
    
    
    1,283Total consolidated revenues
    
    $
    94,432
    
    
    $
    94,148
    
    
    $
    306,606
    
    
    $
    289,426Income before income taxes:Total income before income taxes for
reportable
segments
    
    $
    48,547
    
    
    $
    46,264
    
    
    $
    156,044
    
    
    $
    126,359Elimination of intersegment profits
    
    
    (346
    )
    
    
    (767
    )
    
    
    (473
    )
    
    
    (644
    )Unallocated corporate (expenses) income
    
    
    (87
    )
    
    
    147
    
    
    
    (488
    )
    
    
    529Income before income taxes, consolidated
    
    $
    48,114
    
    
    $
    45,644
    
    
    $
    155,083
    
    
    $
    126,244
 Total assets of the Company among its industry segments and a reconciliation of
reportable segment assets to the Companys consolidated total assets as of
September 30, 2004 and December 31, 2003 follows: September 30,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Assets:Banking
    
    $
    8,551,185
    
    
    $
    7,387,475Mortgage banking
    
    
    812,049
    
    
    
    890,023Other
    
    
    152,277
    
    
    
    168,294Total assets for reportable segments
    
    
    9,515,511
    
    
    
    8,445,792Parent company assets
    
    
    155,305
    
    
    
    66,920Elimination of intersegment balances
    
    
    (481,969
    )
    
    
    (313,832
    )Consolidated total assets
    
    $
    9,188,847
    
    
    $
    8,198,880
 20




---



##### Table of Contents



The following summarized information presents the results of the Companys
operations for its Puerto Rico and mainland U.S. operations for the periods
presented. Three month period September 30,2004
    
    2003Puerto Rico
    
    United States
    
    Total
    
    Puerto Rico
    
    United States
    
    Total(Dollars in thousands)(Unaudited)Revenues
    
    $
    81,369
    
    
    $
    13,063
    
    
    $
    94,432
    
    
    $
    72,386
    
    
    $
    21,762
    
    
    $
    94,148Non-interest expense
    
    
    37,203
    
    
    
    9,115
    
    
    
    46,318

    
    
    
    37,503
    
    
    
    11,001
    
    
    
    48,504Income before income taxes
    
    $
    44,166
    
    
    $
    3,948
    
    
    $
    48,114
    
    
    $
    34,883
    
    
    $
    10,761
    
    
    $
    45,644
 Nine month period September 30,2004
    
    2003Puerto Rico
    
    United States
    
    Total
    
    Puerto Rico
    
    United States
    
    Total(Dollars in thousands)(Unaudited)Revenues
    
    $
    254,662
    
    
    $
    51,944
    
    
    $
    306,606
    
    
    $
    238,804
    
    
    $
    50,622
    
    
    $
    289,426Non-interest expense
    
    
    117,958
    
    
    
    33,565
    
    
    
    151,523
    
    
    
    108,421
    
    
    
    54,761
    
    
    
    163,182Income (loss) before income taxes
    
    $
    136,704
    
    
    $
    18,379
    
    
    $
    155,083
    
    
    $
    130,383
    
    
    $
    (4,139
    )
    
    $
    126,244
 Total assets of the Company among its Puerto Rico and mainland U.S. operations
follow: September 30,
    
    December 31,2004
    
    2003(Dollars in thousands)(Unaudited)Assets:Puerto Rico
    
    $
    7,647,483
    
    
    $
    6,963,535United States
    
    
    1,609,462
    
    
    
    1,285,527Intersegment eliminations
    
    
    (68,098
    )
    
    
    (50,182
    )Total assets
    
    $
    9,188,847
    
    
    $
    8,198,880
 21




---



##### Table of Contents



Item 2: Managements Discussion and Analysis Cautionary Statement Regarding Forward-Looking Statements A number of the presentations and disclosures in this Form 10-Q,
including, without limitation, statements regarding the level of allowance for
loan losses, the rate of delinquencies and amounts of charge-offs, and the
rates of loan growth, and 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 our
markets;  
    
    geopolitical conditions, including acts or threats of
terrorism, actions taken by the United States or other
governments in response to acts or threats of terrorism and/or
military conflicts, which could impact business and economic
conditions in the United States and abroad;  
    
    adverse changes in the local real estate market, as
most of the Companys loans are concentrated in Puerto Rico and
Florida and a substantial portion of these loans have real estate
as collateral;  
    
    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;  
    
    adverse changes in asset quality and the resulting
credit risk-related losses and expenses;  
    
    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-Q.
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. 22




---



##### Table of Contents



General R&G Financial Corporation (the Company) is a Puerto Rico chartered
diversified financial holding company that, through its wholly-owned
subsidiaries, is engaged in banking, mortgage banking, securities and insurance
brokerage activities. The Company, currently in its 32nd year of operations,
operates 32 bank branches mainly located in the northeastern section of Puerto
Rico, 15 bank branches in the Orlando and Tampa/St. Petersburg Florida markets,
5 mortgage and 6 commercial lending offices in the continental United States,
and 55 mortgage offices in Puerto Rico, including 26 facilities located within
Premier Banks branches. The Company is engaged in providing a full range of banking services
through R-G Premier Bank of Puerto Rico (Premier Bank), its Puerto Rico
commercial bank, and R-G Crown Bank (Crown Bank), its Florida-based federal
savings bank acquired in June 2002. Banking activities include commercial
banking services, corporate and construction lending, consumer lending and
credit cards, offering a variety of deposit products and, to a lesser extent,
trust and investment services through private banking. The Company is also engaged in mortgage banking activities. Mortgage
banking activities are conducted through R&G Mortgage Corp., Puerto Ricos
second largest mortgage banker, The Mortgage Store of Puerto Rico, Inc., also a
Puerto Rico mortgage company, and Continental Capital Corporation (Continental
Capital), a New York mortgage banking subsidiary of Crown Bank with offices in
New York and North Carolina. Mortgage banking activities include the
origination, purchase, sale and servicing of mortgage loans on single-family
residences, the issuance and sale of various types of mortgage-backed
securities, the holding of mortgage loans, mortgage-backed securities and other
investment securities for sale or investment, and the purchase and sale of
servicing rights associated with such mortgage loans and, to a lesser extent,
the origination of construction loans and mortgage loans secured by income
producing real estate and land (the mortgage banking business). The Company is also engaged in insurance brokerage through Home & Property
Insurance Corp., a Puerto Rico insurance agency, and securities brokerage
through R-G Investments Corporation, a Puerto Rico licensed broker-dealer. On October 11, 2004, the Company and Crown Bank entered into a purchase
and assumption agreement with SouthTrust Bank to acquire 18 SouthTrust branches
located in three banking markets in Florida and one banking market in Georgia
with deposits and other liabilities totaling approximately $600 million. The
acquisition results from the required divestiture of certain SouthTrust
branches, together with the assets, deposits and other liabilities of such
branches, to facilitate regulatory approval of Wachovia Corporations
acquisition of SouthTrust Corporation, the
parent of SouthTrust Bank. The merger of SouthTrust Corporation
and Wachovia Corporation was completed on November 1, 2004. The
Company expects to complete this transaction in February 2005 as
contemplated by the purchase and assumption agreement. The Company is the second largest mortgage loan originator and servicer of
mortgage loans on single family residences in Puerto Rico. R&G Financials
mortgage servicing portfolio amounted to approximately $11.1 billion as of
September 30, 2004, or essentially the same amount as of the same date a year
ago. While R&G Financials servicing portfolio continues to be affected by a
high level of prepayments due to lower interest rates, R&G Financial continues
to emphasize increasing the size of its mortgage servicing portfolio by relying
principally on internal loan originations. As part of its strategy to maximize net interest income, R&G Financial
maintains a substantial portfolio of mortgage-backed and investment securities.
At September 30, 2004, the Company held securities available for sale with a
fair market value of $3.1 billion, which included $2.3 billion of
mortgage-backed securities, of which $304.5 million consisted of Puerto Rico
GNMA securities, the interest on which is tax-exempt to the Company. These
securities are generally held by the Company for 23




---



##### Table of Contents



longer periods prior to sale
in order to maximize the tax-exempt interest received thereon. R&G
Financials lower effective tax rate compared to the maximum statutory
rate reflects the exemption under Puerto Rico law of the net interest income
derived from such securities. In addition, the Company invests in certain U.S.
agency securities that are exempt from Puerto Rico taxation and are not subject
to federal income taxation. Finally, the Company may invest in various U.S. securities, the income on
which is exempt from Puerto Rico income taxation and is also not subject to
federal income taxation. A substantial portion of R&G Financials total mortgage loan originations
has been comprised of refinance loans. R&G Financials future results could be
adversely affected by a significant increase in mortgage interest rates that
reduces refinancing activity. However, the Company believes that refinancing
activity is less sensitive to interest rate changes in Puerto Rico than in the
mainland United States because a significant amount of refinance loans are made
for debt consolidation purposes. R&G Financial customarily sells or securitizes into mortgage-backed
securities substantially all the loans it originates, except for certain
non-conforming conventional mortgage loans and certain consumer, construction,
land, and commercial loans which are held for investment and classified as
loans receivable. Financial Condition At September 30, 2004, total assets amounted to $9.2 billion, as compared
to $8.2 billion at December 31, 2003. The
$990.0 million or 12.1% increase in
total assets since the beginning of the year was primarily the result of a $779.4 million or 19.3% increase in loans receivable,
net, due to continued strong loan production during the nine months ended
September 30, 2004 and a
$121.1 million or 4.1% increase in mortgage-backed and investment securities
available for sale. Total loan production for the nine months ended September
30, 2004 was $3.4 billion, essentially the same amount when compared to the
corresponding period in 2003. Although the Companys loan production during
the nine months ended September 30, 2004 was affected by decreased refinancings
in its U.S. mortgage subsidiary, Continental Capital, the Companys loan
production continues to be driven principally by the Companys ongoing
expansion in commercial and residential lending in Central Florida and Puerto
Rico, as well as refinancings in Puerto Rico, which continue to be consistent
with R&G Financials historical experience. At September 30, 2004, R&G Financial had $4.0 billion of borrowings
(consisting of securities sold under agreements to repurchase, notes payable,
FHLB advances and other borrowings), compared to $3.7 billion at December 31,
2003. R&G Financial utilized repurchase agreements and deposits to fund its
growth during the period; total deposits grew 16.5% from $3.6 billion at
December 31, 2003 to $4.1 billion at September 30, 2004, whereas repurchase
agreements increased by $318.8 million or 14.4%. At September 30, 2004, R&G Financials allowance for loan losses totaled
$49.2 million, which represented a $9.6 million or 24.2% increase from the
level maintained at December 31, 2003. At September 30, 2004, R&G Financials
allowance represented approximately 0.94% of the total loan portfolio and
48.70% of total non-performing loans. However, excluding R&G Financials
residential loan portfolio, which has minimal charge-off experience, the
allowance for loan losses to total loans and to total non-performing loans
would have been 2.05% and 194.29%, respectively, at September 30, 2004,
compared to 2.09% and 139.57% at December 31, 2003. 24




---



##### Table of Contents



The
reconciliation of non-performing loans to non-performing loans
excluding residential real estate follows: September 30, 2004
    
    December 31, 2003(Unaudited)(Dollars in thousands)Allowance for loan losses
    
    $
    49,209
    
    
    $
    39,615Total non-performing loans
    
    $
    101,046
    
    
    $
    85,414Less: Residential real estate
    
    
    (75,719
    )
    
    
    (57,031
    )$
    25,327
    
    
    $
    28,383Total loans
    
    $
    5,232,509
    
    
    $
    4,311,714Less: Residential real estate
    
    
    (2,832,469
    )
    
    
    (2,419,278
    )$
    2,400,040
    
    
    $
    1,892,436Allowance for loan losses as
a percentage of total
non-performing loans
    
    
    48.70
    %
    
    
    46.38
    %Allowance for loan losses as
a percentage of total
non-performing loans
(excluding residential real
estate)
    
    
    194.29
    %
    
    
    139.57
    %Allowance for loan losses as
a percentage of total
loans
    
    
    0.94
    %
    
    
    0.92
    %Allowance for loan losses as
a percentage of total loans
(excluding residential real
estate)
    
    
    2.05
    %
    
    
    2.09
    %
 Non-performing loans amounted to $101.0 million at September 30, 2004, an
increase of $15.6 million or 18.3% when compared to $85.4 million at December
31, 2003. The increase is primarily related to a $18.7 million increase in
delinquent residential real estate loans over 90 days past due. The Company
regularly repurchases certain residential mortgage loans pursuant to recourse
provisions in existing sale contracts. On certain contracts made prior to 2001,
the Company is required to repurchase any loans sold that become delinquent
over 120 days. During the quarter ended June 30, 2004, the Company sold
approximately $28.2 million of non-performing residential mortgage loans on a
recourse basis, mostly comprised of loans previously repurchased during the
year. Under the recourse provisions made for the loans sold during the second
quarter, the Company guarantees the timely payment of principal and interest on
the mortgage loans. A reserve was made for the Companys estimated liability
under the recourse provisions at the time of sale. At September 30, 2004, $77.8 million or 77.0% of non-performing loans
consisted of residential mortgage loans (including residential
construction), as to which R&G Financial has historically
experienced a low level of loan charge-offs. R&G Financials aggregate net
charge-offs as a percentage of total average loans outstanding amounted to
0.27% during the nine months ended September 30, 2004 and 0.32% during the year
ended December 31, 2003. Although loan delinquencies have historically been
higher in Puerto Rico than in the United States, actual foreclosures and the
resulting loan charge-offs have historically been lower than in the United
States. Stockholders
equity increased from $750.4 million at December 31, 2003 to
$825.8 million at September 30, 2004. The
$75.4 million or 10.0% increase was
due primarily to the net income recognized during the period, net of dividends
paid and a $15.1 million change in other comprehensive income,
from a $9.7 million gain at December 31, 2003 to a $5.4 million
accumulated loss at September 30, 2004. The change is due
primarily to a $26.9 million decrease in the fair value of available
for sale securities as a result of increases in interest rates during the
period. Results of Operations During
the three and nine months ended September 30, 2004, R&G Financial
reported net income of $37.0 million and $116.3 million or
$0.64 and $2.03 of
earnings per diluted share, respectively, compared to net income of $34.3
million and $94.9 million or $0.59 and $1.62 of earnings per diluted share for
the comparative periods in 2003. These results reflect an increase in earnings
per diluted share of 8.5% and 25.3% for the three and nine month period ended September 30, 2004
over the comparable period in 2003. Net interest income increased by $38.6 million or 28.7% during the nine
month period ended September 30, 2004 to $173.1 million,
due to a $1.7 billion
increase in the average balance of interest-earning assets, together
with a 6 basis
point increase in the Companys net interest margin from 2.75% 25




---



##### Table of Contents



to 2.81%.
The increase in the average balance of interest earning assets is
primarily related with a $1.3 billion
or 36.9% increase
in the average balance of loans
receivable as a result of strong loan production. Total loan production during
the nine months ended September 30, 2004 amounted to $3.4 billion compared to
$3.4 billion during the prior comparable period. The provision for loan losses amounted to $19.0 million during the nine
months ended September 30, 2004, a 46.7% increase over the prior comparable
period, reflecting the continuing increase in the Companys commercial real
estate and construction loan portfolios, which have higher credit risk compared
to residential loans. Non-interest
income during the nine months ended September 30, 2004
decreased $15.3 million or 9.1% to $152.5 million as compared to
$167.8 million during the nine months ended September
30, 2003. The decrease in non-interest income during the nine months ended
September 30, 2004 is primarily due to trading losses
aggregating $21.5 million
recorded during the third quarter of 2004 related to derivative instruments
held by the Company. Such trading losses include a $10.0 million trading loss
on derivative instruments held by the Company for interest rate risk management purposes to
hedge a portion of the Companys residual beneficial interests
retained in financial asset transfers accounted for as sales. This loss is mainly attributable to the flattening of the yield
curve during the period. The fair value of hedging
instruments employed by the Company increases with increases in
interest rates, and decreases with decreases in interest rates.
However, the Companys expectation as to the likelihood of future increases
in interest rates, which was consistent with the financial market
place at the time the hedges were made, did not materialize during
the third quarter of 2004. As a result, the fair value of the hedging instruments decreased,
and the purpose of the hedge was not accomplished. Trading
losses during the third quarter of 2004 also
include a $11.5 million trading loss on certain beneficial interests held by
the Company resulting from past and ongoing financial asset transfers accounted for as sales
which are due principally to increases in short-term interest rates during the period.
These trading losses were recorded following the guidance contained in SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities(SFAS No.
133). Under SFAS No. 133, such beneficial interests must be recorded as
trading derivatives and reported at fair value, with unrealized
marked-to-market gains or losses recorded in the results of operations of the
Company. Prior to the quarter ended September 30, 2004, the
residual interests retained by the Company were reported
at fair value as interest-only strips
and classified as available for sale securities, with unrealized
marked-to-market gains or losses recorded in other comprehensive
income in the Companys consolidated financial statements.
As of September 30, 2004, these derivatives amount to approximately
$80.9 million and are reported in other assets. A corresponding
reclassification of $43.1
million was made as of December 31, 2003 for consistency purposes. The amount of
unrealized gains or losses recorded in other comprehensive income related to
the retained interests prior to the quarter ended September 30, 2004 were not
material since the level of short-term interest rates had been relatively
constant from the time the residual interest were originally recognized. As a
result, management has determined that the application of the guidance
contained on SFAS No. 133 to prior periods has no material impact on the
consolidated financial statements of the Company. As
discussed above and under Interest Rate Risk Management 
Derivatives below,
the Company employs a variety of instruments to hedge the fair value
of its beneficial residual interests retained in financial asset transfers accounted for as sales. During the third quarter of 2004, such hedging
techniques did not work effectively as they were designed for an
increasing interest rate scenario and not for the flattening yield curve
environment which occurred.
While the Company believes its hedging techniques will be successful
in an increasing rate scenario, there can be no assurance that these
hedging techniques will be successful. To the extent they are not
successful, the Companys profitability may be adversely
affected. In addition, as the result of the application of SFAS
No. 133 to some of its loan sale transactions, the Company is
negotiating revisions to some of its form of sales contracts for future
transactions. While the Company
believes that it will be able to negotiate changes prospectively
which will permit it to consummate such transactions, no assurance
can be given that it will be successful in this endeavor, in whole or
in part. If it is not successful in this endeavor, the Companys sale
of loan production would be reduced, which could adversely affect the
Companys
future earnings. The decrease in non-interest income during the nine months ended September
30, 2004 was also due to an $11.3 million or 28.9% decrease in servicing income,
due principally to a decrease in the Companys weighted average servicing fee
during the period, which is mainly attributable to a higher allocation of
servicing fee collections to residual interests retained and a $4.0
million decrease on gains on securities available for sale. During the
third quarter of 2004, the Company determined
that certain interest-only strips that are classified as available
for sale securities in its consolidated financial statements were
impaired during the quarter in accordance with EITF 99-20,
Recognition of Interest Income and Impairment on Purchased and
Retained Interests in Securitized Financial Assets. As a
result, the Company recorded an $8.8 million impairment charge on
interest-only strips against its gains on securities available for sale.
Such decreases in non-interest income were partially offset
by a $18.9 million or 17.6% increase in net gain on sale of loans over the
prior comparable period, as a result of strong loan production within the
Companys Puerto Rico mortgage operations and an increase in the volume of
loans sold during the period and a $4.5 million or 21.6% increase in
fee and other income. Net interest income increased by $13.6 million or 28.5% to $61.4 million
during the quarter ended September 30, 2004 over the prior comparable period,
due to a $1.5 billion increase in the average balance of interest-earning
assets together with a 15 basis points increase in the Companys
net interest margin from 2.72% to 2.87%. Non-interest
income during the quarter ended September 30, 2004 decreased
$11.5 million or 23.6% to $39.3 million as compared to $50.7
million during the quarter ended September 30, 2003. The
decrease in non-interest income during the quarter is mostly attributable to
trading losses on derivative instruments and impairment charges on
securities available for sale of $21.5 million and $8.8 million,
respectively, recognized by the Company during the third
quarter of 2004 as discussed above, together with a $4.1 million or
32.2% decrease in loan servicing income. Such 26




---



##### Table of Contents



decreases were partially offset
by a $19.7 million or 67.0% increase in net gain on sale of loans. Total
non-interest expenses decreased by $11.7 million or 7.1% to
$151.5 million during the nine months
ended September 30, 2004 as compared to $163.2 million during the nine months ended September 30,
2003, mainly due to a $24.3 million or 75.7% decrease in impairment charges on
the Companys servicing asset due to lower prepayments as a
result of higher interest rates during the period, partially offset by a $8.6 million or 19.1%
increase in employee compensation and benefits associated with general growth
in Puerto Rico
and Florida operations and an increase in advertising and promotion
expenses of $4.1 million or 37.7%. Office occupancy and equipment expenses
also increased by $2.4 million or 12.9%. Total
non-interest expenses decreased by $2.2 million or 4.5% to $46.3
million during the three month
period ended September 30, 2004 as compared to $48.5 million
during the three months ended September
30, 2003, due to a $2.7 million or 17.6% increase in employee compensation
and benefits, a $847,000 or 13.1% increase in occupancy expenses, and
a $1.1 million or 29.7% increase in advertising and promotion.
Such increases were partially offset by a $3.9 million or 31.2% decrease in other general and
administrative expenses due to reductions in certain banking
operational expenses and a $2.7 million decrease in expenses associated with
impairment charges on the Companys servicing asset. Interest Rate Risk Management General.Interest rate fluctuation is the primary market risk affecting
R&G Financial. The effect of changes in interest rates on the volume of
mortgage loan originations, the net interest income earned on the Companys
portfolio of loans and securities, the amount of gain on sale of loans, and the
value of R&G Financials loan servicing portfolio and its investment securities
portfolio, as well as R&G Financials strategies to manage such effects, are
discussed in R&G Financials Annual Report to Shareholders, which information
is also incorporated by reference into the Companys Annual Report on Form 10-K
for the year ended December 31, 2003 under Managements Discussion and
Analysis of Financial Condition and Results of Operations  Asset and Liability
Management. In the future, the Company may use alternative hedging techniques
including futures, options, interest rate swap agreements or other hedge
instruments to help mitigate interest rate and market risk. However, there can
be no assurance that any of the above hedging techniques will be successful.
To the extent they are not successful, R&G Financials profitability may be
adversely affected. For additional information on the use of derivatives to
manage interest rate risk, see Derivatives below. Interest Rate Sensitivity Analysis.R&G Financial employs a variety of
measurement techniques to identify and manage its interest rate risk, including
the use of an earnings simulation model to analyze net interest income
sensitivity to changing interest rates. The model is based on actual cash
flows and repricing characteristics for on-balance and certain off-balance
sheet instruments and incorporates market-based assumptions regarding the
effect of changing interest rates on the prepayment rates of certain assets and
liabilities. Assumptions based on the historical behavior of deposit rates and
balances in relation to changes in interest rates are also incorporated into
the model. This sensitivity analysis is limited by the fact that it is
performed at a particular point in time, is subject to the accuracy of various
assumptions, including prepayment forecasts, and does not incorporate other
factors that could impact R&G Financials overall performance in each scenario.
Accordingly, the estimates resulting from the use of the model should not be
viewed as an earnings forecast. Actual results will differ from simulated
results due to timing, magnitude, and frequency of interest rate changes as
well as changes in market conditions and management strategies. The Companys Risk Management Committee, which comprises members of senior
management and reports to R&G Financials Board of Directors, monitors interest
rate risk within Board-approved policy limits. R&G Financials current
interest rate risk policy limits are primarily determined by measuring the
anticipated change in net interest income over a 12-month horizon assuming a
100- and 200- basis point linear increase or decrease in interest rates. The
current policy limits this exposure to a 15% reduction in net interest income
for a 12-month horizon under a 200-basis point increase or decrease in interest
rates. 27




---



##### Table of Contents



The following table shows R&G Financials net interest income sensitivity
profile as of September 30, 2004, and December 31, 2003: Interest Rate Sensitivity  (Dollars
in thousands) As of September 30, 2004 Change in Interest Rates (Basis
    
    Expected
    
    Percentage Change in 12-monthPoints) (1)
    
    Net Interest Income (2)
    
    Net Interest Income+200
    
    
    212,630
    
    
    
    -1.8
    %+100
    
    
    214,988
    
    
    
    -0.7
    %Base Scenario
    
    
    216,604
    
    
    
    ---100
    
    
    215,592
    
    
    
    -0.5
    %
 As of December 31, 2003 Change in Interest Rates (Basis
    
    Expected
    
    Percentage Change in 12-monthPoints) (1)
    
    Net Interest Income (2)
    
    Net Interest Income+200
    
    
    206,059
    
    
    
    -1.4
    %+100
    
    
    207,783
    
    
    
    -0.6
    %Base Scenario
    
    
    209,074
    
    
    
    -100
    
    
    208,261
    
    
    
    -0.4
    %
   (1)
    
    Assumes an instantaneous uniform change in interest rates at all
maturities.(2)
    
    Net interest income amounts exclude amortization of deferred loan
fees. At September 30, 2004, given a linear 100 and 200 basis point increase in
the yield curve used in the simulation model, it is estimated net interest
income for R&G Financial would decrease by 0.7% and 1.8%, respectively, over
one year. A 100 basis point linear decrease in interest rates would reduce net
interest income by 0.5% over one year. All these estimated changes in net
interest income are within the policy guidelines established by R&G Financials
Board of Directors. The model does not assume a full 200 basis point decrease
in rates for short-term assets and liabilities, principally due to the
historical low level of short-term interest rates. While the sensitivity model serves as a useful tool for measuring
short-term risk to future net interest income, it does not measure the
sensitivity of the market value of R&G Financials assets or other sources of
income such as trading activities and mortgage loan sales to changes in
interest rates. The following table summarizes the anticipated maturities or repricing of
R&G Financials interest-earning assets and interest-bearing liabilities as of
September 30, 2004, based on the information and assumptions set forth in the
notes below. For purposes of this presentation, the interest earning components
of loans held for sale and mortgage-backed securities held in connection with
the Companys mortgage banking business, as well as all securities held for
trading, are assumed to mature within one year. In addition, investments held
by the Company which have call features are presented according to their
contractual maturity date. 28




---



##### Table of Contents



Within
    
    Four to
    
    More than
    
    More thanThree
    
    Twelve
    
    One Year to
    
    Three Years
    
    Over Five(Dollars in Thousands)
    
    Months
    
    Months
    
    Three Years
    
    to Five years
    
    Years
    
    TotalInterest-earnings assets(1):Loans receivable
    
    $
    1,466,056
    
    
    $
    755,310
    
    
    $
    1,121,078
    
    
    $
    580,754
    
    
    $
    952,837
    
    
    $
    4,876,035Mortgage loans held for sale
    
    
    94,399
    
    
    
    25,470
    
    
    
    53,052
    
    
    
    36,262
    
    
    
    31,780
    
    
    
    240,963Mortgage-backed securities (2)(3)
    
    
    105,065
    
    
    
    539,257
    
    
    
    524,417
    
    
    
    346,288
    
    
    
    858,894
    
    
    
    2,373,921Investment Securities (3)
    
    
    133,653
    
    
    
    43,999
    
    
    
    618,983
    
    
    
    142,784
    
    
    
    692
    
    
    
    940,111Other interest-earning assets (4)
    
    
    201,309
    
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201,909Total
    
    $
    2,000,482
    
    
    $
    1,364,636
    
    
    $
    2,317,530
    
    
    $
    1,106,088
    
    
    $
    1,844,203
    
    
    $
    8,632,939Interest bearing liabilities:Deposits (5)NOW and Super NOW accounts
    
    $
    37,800
    
    
    $
    90,889
    
    
    $
    99,913
    
    
    $
    80,929
    
    
    $
    345,015
    
    
    $
    654,546Passbook saving accounts
    
    
    9,345
    
    
    
    27,095
    
    
    
    67,461
    
    
    
    53,969
    
    
    
    215,876
    
    
    
    373,746Regular and commercial checking
    
    
    20,751
    
    
    
    58,103
    
    
    
    63,871
    
    
    
    51,735
    
    
    
    220,554
    
    
    
    415,014Certificates of Deposit
    
    
    339,152
    
    
    
    1,218,439
    
    
    
    740,308
    
    
    
    390,279
    
    
    
    4,063
    
    
    
    2,692,241FHLB Advances
    
    
    130,000
    
    
    
    247,600
    
    
    
    441,000
    
    
    
    152,000
    
    
    
    140,000
    
    
    
    1,110,600Securities sold under agreements to repurchase (6)
    
    
    1,691,512
    
    
    
    100,453
    
    
    
    624,455
    
    
    
    
    
    
    
    138,200
    
    
    
    2,554,620Other borrowings (7)
    
    
    54,273
    
    
    
    77,796
    
    
    
    
    
    
    
    
    
    
    
    231,959
    
    
    
    364,028Total
    
    
    2,282,833
    
    
    
    1,820,375
    
    
    
    2,037,008
    
    
    
    728,912
    
    
    
    1,295,667
    
    
    
    8,164,795Effect of hedging instruments
    
    
    170,000
    
    
    
    174,600
    
    
    
    (94,100
    )
    
    
    (170,500
    )
    
    
    (80,000
    )
    
    
    Excess (deficiency) of interest-earnings assets over
interest-bearing liabilities
    
    $
    (112,351
    )
    
    $
    (281,139
    )
    
    $
    186,422
    
    
    $
    206,676
    
    
    $
    468,536
    
    
    $
    468,144Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities
    
    $
    (112,351
    )
    
    $
    (393,490
    )
    
    $
    (207,068
    )
    
    $
    (392
    )
    
    $
    468,144Cumulative excess (deficiency) of interest-earning
assets over interest-bearing liabilities as a percent of
total assets
    
    
    -1.22
    %
    
    
    -4.28
    %
    
    
    -2.25
    %
    
    
    -0.00
    %
    
    
    5.09
    %
  (1)
    
    Adjustable-rate loans are included in the period in which interest rates
are next scheduled to adjust rather that in the period in which they are
due, and fixed-rate loans are included in the periods in which they are
scheduled to be repaid, based on scheduled amortization, in each case as
adjusted to take into account estimated prepayments.(2)
    
    Reflects estimated prepayments in the current interest rate environment.(3)
    
    Includes securities held for trading, available for sale and held to
maturity.(4)
    
    Includes securities purchased under agreement to resell, time deposits
with other banks and federal funds sold.(5)
    
    Does not include non-interest-bearing deposit accounts. Although
negotiable order of withdrawal (NOW) and Super NOW accounts, passbook
savings accounts and checking accounts are subject to immediate
withdrawal, management considers a substantial amount of such accounts to
be core deposits having significantly longer effective maturities based on
the retention of such deposits in changing interest rate environments.
The table assumes that funds will be withdrawn from at annual 29




---



##### Table of Contents



rates for
NOW accounts and for regular and commercial checking accounts, ranging
from 10% for 0-12 months, 19% for 1-5 years, 41% for 5-10 years, 65% for
10-20 years and 100% thereafter; and, for passbook savings accounts,
ranging from 5% for 0-12 months, 20% for 1-5 years, 40% for 5-10 years,
65% for 10-20 years and 100% thereafter. The percentages used were
computed based on actual experience for new accounts and the percentage
retained over time.(6)
    
    Includes federal funds purchased, if any.(7)
    
    Comprised of warehousing lines, notes payable and other borrowings. As
of September 30, 2004, the Company had a one year negative gap of
approximately $393.5 million, which constituted 4.28% of total assets at such
date, compared to a negative gap of approximately $116.2 million or 1.4% of
total assets at December 31, 2003. R&G Financial had a positive gap within one
year until June 30, 2004 due primarily to the Companys emphasis on commercial and construction
lending, which results in a greater amount of adjustable rate loans in the
Companys loan portfolio, as well as to the continued extension during the
first half of 2004 of the maturity dates of certain borrowings of the Company
into longer-term maturities, taking advantage of the continued low interest
rate environment. Even though the emphasis in commercial lending
continues, R&G Financials negative gap within one year as of
September 30, 2004 is due to the use of an increasing amount of
shorter term funding. The Company estimates that as of September 30, 2004, close to
44.1% of all borrowings of the Company had maturity dates longer than
one year, compared to 50.2% as of June 30, 2004. Management
continues the active management of its gap position in an attempt to
maintain a positive gap. While the Company presents its fixed-rate residential mortgage loans
receivable portfolio held for investment purposes according to its maturity
date, from time to time the Company may negotiate special transactions with
FHLMC and/or FNMA or other third party investors for the sale of such loans.
There can be no assurance, however, that the Company will be successful in
consummating any such transactions. Derivatives.R&G Financial uses derivatives to manage its exposure to
interest rate risk caused by changes in interest rates beyond the control of
management. Derivatives include interest rate swaps, interest rate collars,
futures, forwards and options. Derivatives are generally either
privately-negotiated over-the-counter (OTC) or standard contracts transacted
through regulated exchanges. OTC contracts generally consist of swaps,
collars, forwards and options. Exchange-traded derivatives include futures and
options. From time to time, the Company enters into interest rate swap agreements
to manage its interest rate exposure. Interest rate swap agreements generally
involve the exchange of fixed and floating rate interest payment obligations
without the exchange of the underlying principal. Non-performance by the
counterparty exposes R&G Financial to interest rate risk. At September 30,
2004, the Company has five interest rate swaps agreements outstanding (with an
aggregate notional amount of $170.0 million) that are intended to protect the
Company from the repricing of its short-term liabilities during a rising
interest rate environment as detailed below: notional
    
    
    
    
    
    pay fixed
    
    receive
    
    designation /
    
    CallHedge Item
    
    amount
    
    maturity
    
    rate
    
    rate floating
    
    description
    
    optionRepurchase agreements
    
    $
    15,000,000
    
    
    February 6, 2006
    
    
    4.80
    %
    
    3 month Libor
    
    cash flow hedge
    
    callable quarterly after one yearFHLB Advance
    
    
    50,000,000
    
    
    February 6, 2006
    
    
    4.67
    %
    
    3 month Libor
    
    cash flow hedge
    
    callable quarterly after one yearLong-term debt
    
    
    25,000,000
    
    
    April 22, 2007
    
    
    8.77
    %
    
    6 month Libor
    
    cash flow hedge
    
    
    N/ARepurchase agreements
    
    
    70,000,000
    
    
    December 8, 2009
    
    
    5.60
    %
    
    3 month Libor
    
    cash flow hedge
    
    callable quarterly after one yearN/A
    
    
    10,000,000
    
    
    December 15, 2009
    
    
    5.69
    %
    
    3 month Libor
    
    trading derivative
    
    callable quarterly after one year
 At September 30, 2004, the agreements had an aggregate negative fair value of
approximately $13.2 million which is recorded as a liability in R&G Financials
unaudited consolidated financial statements. 30




---



##### Table of Contents



Although R&G Financial uses derivatives to manage market risk, for
financial reporting purposes, its general policy is to account for such
instruments on a marked-to-market basis with gains or losses charged to current
operations as they occur. Contracts with positive fair value are recorded as
assets and contracts with negative fair values as liabilities, after the
application of netting arrangements, with unrealized gains and losses recorded
either in other comprehensive income or in the results of operations, depending
on the purpose for which the derivative is held. Under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as subsequently
amended, the Company may designate a derivative as a hedge of the fair value of
a recognized fixed rate asset or liability (fair value hedge). Certain
hedging activities related to certain beneficial interests retained on
financial asset transfers accounted for as sales are reported as fair value hedges. In a
qualifying fair value hedge, both the changes in fair value of the hedged item
(in this case beneficial interests retained on financial asset
transfers accounted for as sales) and
changes in fair value of the derivative are included in trading activities in
the statement of income. As a result, any hedge ineffectiveness is reflected
immediately in earnings. At the inception of a hedge transaction, the Company
formally documents the hedge relationship and the risk management objective and
strategy for undertaking the hedge. This process includes identification of
the hedging instrument, hedged item, risk being hedged and the methodology for
measuring effectiveness. During the quarter ended September 30, 2004, the
Company recognized pre-tax losses of $10.0 million on its fair value hedges for
its beneficial interests retained. Fair values of derivatives such as interest rate future contracts or
options are determined by reference to market prices. Fair values of
derivatives purchased in the over-the counter market are determined by prices
provided by external sources or valuation models. The notional amounts of
assets and liabilities related to these derivatives totaled
$375.0 million and $732.5 million, respectively, as of September 30, 2004. Notional amounts indicate the
volume of derivatives activity, but do not represent R&G Financials exposure
to market or credit risk. The
table below summarizes the fair values of R&G Financials derivatives,
as well as the source of the fair values. Fair Value Reconciliation
(Dollars in thousands) Nine months
ended September 30,2004Fair value of contracts outstanding at the beginning of the period
    
    $
    Contracts realized or otherwise settled during the period
    
    
    (2,516
    )Fair value of new contracts entered into during the period
    
    
    12,908Other changes in fair values
    
    
    (10,869
    )Fair value of contracts outstanding at the end of the period
    
    $
    (477
    )
 Source of Fair Value
(Dollars in thousands) As of September 30,
2004Payment due by periodMaturity
    
    
    
    
    
    
    
    
    
    Maturity
    
    TotalLess Than
    
    Maturity
    
    Maturity
    
    In Excess
    
    Fair1 Year
    
    1-3 Years
    
    3-5 Years
    
    of 5 Years
    
    ValuePrices actively quoted
    
    $
    (5,932
    )
    
    $
    5,455
    
    
    $
    
    
    
    $
    
    
    
    $
    (477
    )Prices provided by other external sources
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (5,932
    )
    
    $
    5,455
    
    
    $
    
    
    
    $
    
    
    
    $
    (477
    )
 31




---



##### Table of Contents



The use of derivatives involves market and credit risk. The market risk
of the derivatives arises principally from the potential for changes in the
value of derivative contracts based on changes in interest
rates. R&G Financial generally manages its risks by taking
risk-offsetting positions. The credit risk of derivatives arises from the potential of a counterparty to
default on its contractual obligations. To manage this credit risk, R&G
Financial deals with counterparties of good credit standing, enters into master
netting agreements whenever possible and, when appropriate, obtains collateral.
Master netting agreements incorporate rights of set-off that provide for the
net settlement of contracts with the same counterparty in the event of default.
The credit risk associated with futures contracts is also limited due to daily
cash settlement of the net change in the value of open contracts with the
exchange on which the contract is traded. Average Balances, Net Interest Margin, Yields Earned and Rates Paid The following tables present for the periods indicated R&G Financials
total dollar amount of interest from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities expressed both in dollars and rates, and the net interest margin.
The table does not reflect any effect of income taxes. All average balances are
based on the average of month-end balances for non-banking subsidiaries and
average daily balances for banking subsidiaries in each case during the periods
presented. 32




---



##### Table of Contents



For the three months period ended September 30,2004
    
    2003Average
    
    
    
    
    
    Yield /
    
    Average
    
    
    
    
    
    Yield /(Dollars in thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateInterest-Earning Assets:Cash and cash equivalents(1)
    
    $
    256,610
    
    
    $
    1,085
    
    
    
    1.69
    %
    
    $
    145,879
    
    
    $
    510
    
    
    
    1.40
    %Investment securities held for trading
    
    
    481
    
    
    
    10
    
    
    
    8.32
    
    
    
    4,998
    
    
    
    24
    
    
    
    1.92Investment securities available for sale
    
    
    714,442
    
    
    
    5,078
    
    
    
    2.84
    
    
    
    587,195
    
    
    
    5,836
    
    
    
    3.98Investment securities held to maturity
    
    
    44,777
    
    
    
    604
    
    
    
    5.40
    
    
    
    31,549
    
    
    
    374
    
    
    
    4.74Mortgage-backed securities held for trading
    
    
    36,591
    
    
    
    557
    
    
    
    6.09
    
    
    
    49,189
    
    
    
    800
    
    
    
    6.51Mortgage-backed securities available for sale
    
    
    2,387,514
    
    
    
    33,926
    
    
    
    5.68
    
    
    
    2,248,109
    
    
    
    26,478
    
    
    
    4.71Mortgage-backed securities held to maturity
    
    
    27,698
    
    
    
    390
    
    
    
    5.63
    
    
    
    38,527
    
    
    
    540
    
    
    
    5.61Loans receivable, net (2)
    
    
    4,975,202
    
    
    
    76,841
    
    
    
    6.18
    
    
    
    3,808,755
    
    
    
    59,528
    
    
    
    6.25FHLB Stock
    
    
    105,608
    
    
    
    1,032
    
    
    
    3.91
    
    
    
    103,460
    
    
    
    1,257
    
    
    
    4.86Total interest-earning assets
    
    
    8,548,923
    
    
    $
    119,523
    
    
    
    5.59
    %
    
    
    7,017,661
    
    
    $
    95,347
    
    
    
    5.43
    %Non-interest-earning assets
    
    
    517,788
    
    
    
    
    
    
    
    
    
    
    
    527,905Total assets
    
    $
    9,066,711
    
    
    
    
    
    
    
    
    
    
    $
    7,545,566Interest-Bearing Liabilities:Deposits
    
    $
    3,973,423
    
    
    $
    26,188
    
    
    
    2.64
    %
    
    $
    3,414,109
    
    
    $
    23,362
    
    
    
    2.74
    %Securities sold under agreements to
repurchase (3)
    
    
    2,536,273
    
    
    
    15,371
    
    
    
    2.42
    
    
    
    1,931,273
    
    
    
    12,144
    
    
    
    2.52Notes payable
    
    
    137,012
    
    
    
    930
    
    
    
    2.72
    
    
    
    224,238
    
    
    
    1,519
    
    
    
    2.71Other borrowings(4)
    
    
    1,446,211
    
    
    
    15,663
    
    
    
    4.33
    
    
    
    1,034,100
    
    
    
    10,579
    
    
    
    4.09Total interest-bearing liabilities
    
    
    8,092,919
    
    
    $
    58,152
    
    
    
    2.87
    %
    
    
    6,603,720
    
    
    $
    47,604
    
    
    
    2.88
    %Non-interest-bearing liabilities
    
    
    171,002
    
    
    
    
    
    
    
    
    
    
    
    228,914Total
liabilities
    
    
    8,263,921
    
    
    
    
    
    
    
    
    
    
    
    6,832,634Stockholders equity
    
    
    802,790
    
    
    
    
    
    
    
    
    
    
    
    712,932Total liabilities and stockholders equity
    
    $
    9,066,711
    
    
    
    
    
    
    
    
    
    
    $
    7,545,566Net interest income; interest rate spread (5)
    
    
    
    
    
    $
    61,371
    
    
    
    2.72
    %
    
    
    
    
    
    $
    47,743
    
    
    
    2.55
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.87
    %
    
    
    
    
    
    
    
    
    
    
    2.72
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    105.63
    %
    
    
    
    
    
    
    
    
    
    
    106.27
    %
 (footnotes on the following page) 33




---



##### Table of Contents



For the nine months period ended September 30,2004
    
    2003Average
    
    
    
    
    
    Yield /
    
    Average
    
    
    
    
    
    Yield /(Dollars in thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateInterest-Earning Assets:Cash and cash equivalents(1)
    
    $
    218,048
    
    
    $
    2,522
    
    
    
    1.54
    %
    
    $
    123,614
    
    
    $
    1,093
    
    
    
    1.18
    %Investment securities held for trading
    
    
    1,200
    
    
    
    28
    
    
    
    3.11
    
    
    
    2,117
    
    
    
    24
    
    
    
    1.51Investment securities available for sale
    
    
    654,762
    
    
    
    16,817
    
    
    
    3.42
    
    
    
    581,096
    
    
    
    18,746
    
    
    
    4.30Investment securities held to maturity
    
    
    44,463
    
    
    
    1,702
    
    
    
    5.10
    
    
    
    30,798
    
    
    
    1,142
    
    
    
    4.94Mortgage-backed securities held for trading
    
    
    39,078
    
    
    
    1,848
    
    
    
    6.31
    
    
    
    53,833
    
    
    
    2,731
    
    
    
    6.76Mortgage-backed securities available for sale
    
    
    2,391,642
    
    
    
    95,614
    
    
    
    5.33
    
    
    
    2,135,204
    
    
    
    80,559
    
    
    
    5.03Mortgage-backed securities held to maturity
    
    
    29,895
    
    
    
    1,272
    
    
    
    5.67
    
    
    
    41,731
    
    
    
    1,788
    
    
    
    5.71Loans receivable, net (2)
    
    
    4,714,865
    
    
    
    215,101
    
    
    
    6.08
    
    
    
    3,444,204
    
    
    
    166,490
    
    
    
    6.45FHLB Stock
    
    
    104,639
    
    
    
    1,946
    
    
    
    2.48
    
    
    
    98,917
    
    
    
    3,588
    
    
    
    4.84Total interest-earning assets
    
    
    8,198,592
    
    
    $
    336,850
    
    
    
    5.48
    %
    
    $
    6,511,514
    
    
    $
    276,161
    
    
    
    5.65
    %Non-interest-earning assets
    
    
    530,528
    
    
    
    
    
    
    
    
    
    
    
    553,114Total assets
    
    $
    8,729,120
    
    
    
    
    
    
    
    
    
    
    $
    7,064,628Interest-Bearing Liabilities:Deposits
    
    $
    3,765,363
    
    
    $
    73,633
    
    
    
    2.61
    %
    
    $
    3,129,486
    
    
    $
    68,023
    
    
    
    2.90
    %Securities sold under agreements to
repurchase (3)
    
    
    2,400,317
    
    
    
    43,003
    
    
    
    2.39
    
    
    
    1,801,577
    
    
    
    37,729
    
    
    
    2.79Notes payable
    
    
    167,689
    
    
    
    2,949
    
    
    
    2.34
    
    
    
    228,706
    
    
    
    5,528
    
    
    
    3.22Other borrowings(4)
    
    
    1,386,388
    
    
    
    44,174
    
    
    
    4.25
    
    
    
    1,008,906
    
    
    
    30,348
    
    
    
    4.01Total interest-bearing liabilities
    
    
    7,719,757
    
    
    $
    163,759
    
    
    
    2.83
    %
    
    $
    6,168,675
    
    
    $
    141,628
    
    
    
    3.06
    %Non-interest-bearing liabilities
    
    
    224,747
    
    
    
    
    
    
    
    
    
    
    
    203,559Total
liabilities
    
    
    7,944,504
    
    
    
    
    
    
    
    
    
    
    
    6,372,234Stockholders equity
    
    
    784,616
    
    
    
    
    
    
    
    
    
    
    
    692,394Total liabilities and stockholders equity
    
    $
    8,729,120
    
    
    
    
    
    
    
    
    
    
    $
    7,064,628Net interest income; interest rate spread (5)
    
    
    
    
    
    $
    173,091
    
    
    
    2.65
    %
    
    
    
    
    
    $
    134,533
    
    
    
    2.59
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.81
    %
    
    
    
    
    
    
    
    
    
    
    2.75
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    106.20
    %
    
    
    
    
    
    
    
    
    
    
    105.56
    %
 (footnotes on the following page) 34




---



##### Table of Contents



(1)
    
    Comprised of cash and due from banks, securities purchased under
agreements to resell, time deposits with other banks and other short term
investments.(2)
    
    Includes mortgage loans held for sale and non-accrual loans.(3)
    
    Includes federal funds purchased, if any.(4)
    
    Comprised of long-term debt, advances from FHLB and other borrowings.(5)
    
    Interest rate spread represents the difference between R&G Financials
weighted average yield on interest-earning assets and the weighted average
rate on interest-bearing liabilities. Net interest margin represents net
interest income as a percent of average interest-earning assets. Mortgage Loan Servicing The following table sets forth certain information regarding the mortgage
loan servicing portfolio of R&G Financial for the periods indicated. At or for the nine months period endedSeptember 30,2004
    
    2003(Dollars in thousands)Composition of Servicing Portfolio at period end:GNMA
    
    $
    2,015,815
    
    
    $
    2,385,047FNMA/FHLMC
    
    
    4,333,084
    
    
    
    5,147,685Other mortgage loans (3)
    
    
    4,766,171
    
    
    
    3,391,531Total servicing portfolio (3)
    
    $
    11,115,070
    
    
    $
    10,924,263Activity in the Servicing Portfolio:Beginning servicing portfolio
    
    $
    10,942,821
    
    
    $
    10,991,945Add: Loan originations and purchases
    
    
    2,027,873
    
    
    
    2,216,772Servicing of portfolio loans acquired
    
    
    3,102
    
    
    
    1,007,374Less: Sale of servicing rights(1)
    
    
    (159,365
    )
    
    
    (209,560
    )Run-offs(2)
    
    
    (1,699,361
    )
    
    
    (3,082,268
    )Ending servicing portfolio(3)
    
    $
    11,115,070
    
    
    $
    10,924,263Number of loans serviced
    
    
    144,756
    
    
    
    150,159Average loan size
    
    $
    77
    
    
    $
    73Average servicing fee rate
    
    
    0.39
    %
    
    
    0.49
    %
 (footnotes on the following page) 35




---



##### Table of Contents



(1)
    
    Corresponds to loans sold, servicing released, by Continental Capital.(2)
    
    Run-off refers to regular amortization of loans, prepayments and
foreclosures.(3)
    
    At the dates shown, included $2.2 billion and $1.8 billion, respectively,
serviced for Premier Bank, which constituted 19.9% and 16.3% of the total
servicing portfolio, and $454.0 million and $120.6 million, respectively,
serviced for Crown Bank, which constituted 4.1% and 1.1%, respectively, of
the total servicing portfolio at such dates. Most of the mortgage loans in R&G Financials servicing portfolio are
secured by single (one-to-four) family residences secured by real estate
located in Puerto Rico. At September 30, 2004, approximately 24.9% of the
Companys mortgage servicing portfolio was related to mortgages secured by real
property located outside Puerto Rico. The Company reduces the sensitivity of its servicing income to increases
in prepayment rates through a strong retail origination network that has
increased or maintained the size of R&G Financials servicing portfolio even
during periods of high prepayments. In addition, a substantial portion of the
Companys servicing portfolio consists of tax-exempt FHA/VA mortgage loans
which carry lower interest rates than those on conventional loans, which tends
to reduce risks related to R&G Financials servicing portfolio. During the nine
month periods ended September 30, 2004 and 2003, the Company recognized $5.5
million and $19.0 million, respectively, of unscheduled amortization on
mortgage servicing rights. Liquidity and Capital Resources Liquidity- Liquidity refers to the Companys ability to generate
sufficient cash to meet the funding needs of current loan demand, savings
deposit withdrawals, principal and interest payments with respect to
outstanding borrowings and to pay operating expenses. It is managements policy
to maintain greater liquidity than required in order to be in a position to
fund loan purchases and originations, to meet withdrawals from deposit
accounts, to make principal and interest payments with respect to outstanding
borrowings and to make investments that take advantage of interest rate
spreads. The Company monitors its liquidity in accordance with guidelines
established by the Company and applicable regulatory requirements. The
Companys need for liquidity is affected by loan demand, net changes in deposit
levels and the scheduled maturities of its borrowings. The Company can minimize
the cash required during the times of heavy loan demand by modifying its credit
policies or reducing its marketing efforts. Liquidity demand caused by net
reductions in deposits are usually caused by factors over which the Company has
limited control. The Company derives its liquidity from both its assets and
liabilities. Liquidity is derived from assets by receipt of interest and
principal payments and prepayments, by the ability to sell assets at market
prices and by utilizing unpledged assets as collateral for borrowings.
Liquidity is derived from liabilities by maintaining a variety of funding
sources, including deposits, advances from the FHLB of New York and Atlanta
(the FHLB) and other short and long-term borrowings. The Companys liquidity management is both a daily and long-term function
of funds management. Liquid assets are generally invested in short-term
investments such as securities purchased under agreements to resell, federal
funds sold and certificates of deposit in other financial institutions. If the
Company requires funds beyond its ability to generate them internally, various
forms of both short and long-term borrowings provide an additional source of
funds. At September 30, 2004, the Company had $211.6 million in borrowing
capacity under unused warehousing and other lines of credit, $1.4 billion in
borrowing capacity under unused lines of credit with the FHLB and $130.0
million available unused fed funds lines of credit. At September 30, 2004, the Company had outstanding commitments to
originate and/or purchase mortgage and non-mortgage loans of $695.2 million
(including unused lines of credit). Certificates of deposit which are scheduled
to mature within one year totaled $1.6 billion at September 30, 2004, and
borrowings that are scheduled to mature within the same period amounted to $2.3
billion. The Company anticipates that it will have sufficient funds available
to meet its current loan commitments and other liquidity needs. 36




---



##### Table of Contents



Capital Resources- 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 will increase the minimum Tier 1 leverage ratio for such other
banks from 4.0% to 5.0% or more. Under the FDICs regulations, 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 items, 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 1 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
September 30, 2004, Premier Bank met each of its capital requirements, with
Tier 1 leverage capital, Tier 1 risk-based capital and total risk-based capital
ratios of 7.23%, 13.71% and 14.81%, respectively. At September 30, 2004, Crown
Bank also met each of its capital requirements, with Tier 1 leverage capital,
Tier 1 risk-based capital and total risk-based capital ratios of 7.82%, 12.11%
and 12.85%, respectively. Thus, at September 30, 2004 both Premier Bank and
Crown Bank were well capitalized institutions under the capital adequacy
regulatory guidelines. In addition, the Federal Reserve Board has promulgated capital adequacy
guidelines for bank holding companies which are substantially similar to those
adopted by FDIC regarding state-chartered banks, as described above. R&G
Financial is currently in compliance with such regulatory capital requirements. On
May 6, 2004, the Federal Reserve issued proposed rules that would
continue to allow trust preferred securities to be included in Tier I
regulatory capital, subject to stricter quantitative and qualitative
limits. Currently, trust preferred securities
and qualifying perpetual preferred stock are limited in the aggregate to no
more than 25% of a bank holding companys core capital elements.
As proposed, the Federal Reserves rule
would retain trust preferred securities as an element of Tier 1
regulatory capital, but with stricter quantitative limitations
following a three-year transition period. Under the proposed rule, as
of March 31, 2007, the aggregate amount of trust preferred securities
and cumulative perpetual preferred stock, as well as certain
additional elements of Tier 1 capital which are identified in the
proposed rule, may not exceed 25% of a bank holding companys
Tier 1 capital, net of goodwill. As of the date of this Form 10-Q,
the 25% limitation is limited to the aggregate amount of only trust
preferred securities and cumulative perpetual preferred stock, and is
calculated on a basis that includes goodwill. The Federal Reserve
also indicated with respect to its proposal that it expected
internationally active banking organizations to limit the
amount of restricted core capital elements included in Tier 1 capital
to 15% of the sum of all core capital elements, net of goodwill. The
proposed rules do not clarify what constitutes an
internationally active banking organization. Both we and
other Puerto Rico bank through our trade organization, the Puerto
Rico Bankers Association, have asked the Federal Reserve to clarify
that for purposes of this rule, Puerto Rico banks are not considered
internationally active banking organizations. Whether or
not this change is addressed in a final rule, the proposed rule, if
adopted, would effectively limit the amount of trust preferred
securities that may be included in Tier 1 capital. Inflation and Changing Prices The unaudited consolidated financial statements and related data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars (except with respect to securities which
are carried at market value), without considering changes in the relative
purchasing power of money over time due to inflation. Unlike most industrial
companies, substantially all of the assets and liabilities of the Company are
monetary in nature. As a result, interest rates have a more significant impact
on the Companys performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. 37




---



##### Table of Contents



Item 3: Quantitative and Qualitative Disclosures about Market Risk Quantitative and qualitative disclosures about market risks at December
31, 2003 are presented in Item 7A of the Companys Annual report on Form 10-K.
Information at September 30, 2004 is presented on page 27 of this Report.
Management believes there have been no material changes in the Companys market
risk since December 31, 2003. 
 Item 4: 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 the Companys Chief Executive Officer along
with the Companys Chief Financial Officer, of the effectiveness of the design
and operation of the Companys disclosure controls and procedures pursuant to
the Securities Exchange Act of 1934 (Exchange Act) Rule 13a-15(b). Based upon
that evaluation, the Companys Chief Executive Officer along with the Companys
Chief Financial Officer concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to
be included in the Companys periodic Securities and Exchange Commission
(SEC) filings. There has not been any change in the Companys internal
control over financial reporting that occurred during the Companys most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting. Disclosure controls and procedures are Company controls and other
procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit 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 us in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure. 38




---



##### Table of Contents



PART II   OTHER INFORMATION 
 Item 1:Legal Proceedings The Registrant is involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition and results of
operations of the Registrant. 
 Item 2:Unregistered Sales of Equity Securities and Use of Proceeds Not applicable. 
 Item 3:Defaults Upon Senior Securities Not applicable. 
 Item 4:Submission of Matters to a Vote of Security Holders Not applicable. 
 Item 5:Other Information Not applicable. 
 Item 6:Exhibits Item 601 Exhibits. No.
    
    Description2.1
    
    Amended and Restated Agreement and Plan of Merger by and between R&G
Financial Corporation, R-G Premier Bank of Puerto Rico and R-G
Interim Premier Bank, dated as of September 27, 1996 (1)2.2.0
    
    Agreement and Plan of Reorganization among R&G Financial
Corporation, R&G Acquisition Holdings Corporation, The Crown Group,
Inc. and Crown Bank, a Federal Savings Bank dated as of December 19, 2001 (2)2.2.1
    
    Amendment No. 2 to Agreement and Plan of Reorganization among R&G
Financial Corporation, R&G Acquisition Holdings Corporation, The
Crown Group, Inc. and Crown Bank, a Federal Savings Bank dated as of
February 27, 2002 (3)2.3.0
    
    Purchase and Assumption Agreement dated as of October 11, 2004 between
R&G Crown Bank, SouthTrust Bank and R&G Financial
Corporation (21)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)
 39




---



##### Table of Contents



No.
    
    Description3.1.7
    
    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)4.6
    
    Form of Indenture dated as of March 31, 2004, between R&G Financial
Corporation and Wilmington Trust Company (20)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)10.3.1
    
    Amendment No. 3 to the Master Production Agreement, dated as of
January 1, 2004 (22)10.4
    
    Data Processing Computer Service Agreement between R&G Mortgage and
R-G Premier Bank of Puerto Rico dated December 1, 1994 (4)10.5
    
    Securitization Agreement by and between R&G Mortgage and R-G
Premier Bank of Puerto Rico, dated as of July 1, 1995 (4)10.6
    
    R&G Financial Corporation Stock Option Plan (4)(*)10.6.1
    
    R&G Financial Corporation 2004 Stock Option Plan (19)(*)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)10.8
    
    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 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)10.11
    
    Form of Guarantee Agreement between R&G Financial Corporation and
Wilmington Trust as Guarantee Trustee with respect to the Capital
Securities issued by R&G Capital Trust dated as of March 31, 2004 (20)10.12
    
    Form of Amended and Restated Declaration of Trust dated as of March
31, 2004, among R&G Financial Corporation, Wilmington Trust Company
and the Administrative Trustees named therein (20)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act32
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
   (1)
    
    Incorporated by reference from the Registration Statement on Form S-4
(Registration No. 333-13199) filed by the Registrant with the Securities
and Exchange Commission (SEC) on October 1, 1996. 40




---



##### Table of Contents



(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
September 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 Registrants Registration Statement on
Form S-3 (Registration No. 333-107365) filed with the SEC on July 25,
2003.(19)
    
    Incorporated by reference from the Registrants Definitive Proxy
Statement for its 2004 Annual Meeting filed with the SEC on April 5, 2004.(20)
    
    Incorporated by reference from the Registrants Registration Statement on
Form S-3 (Registration No. 333-113321) filed with the SEC on March 15,
2004.(21)
    
    Incorporated by reference from the
Registrants Current Report on Form 8-K filed with the SEC
on October 12, 2004.(22)
    
    Incorporated by reference from the
Registrants Form 10-Q filed with the SEC
on May 10, 2004.(*)
    
    Management contract or compensatory plan or arrangement. 41




---



##### Table of Contents



SIGNATURES Pursuant to the requirements 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 CORPORATIONDate:
November 15, 2004
    
    By:
    
    /S/ VICTOR J. GALANVíctor J. Galán, Chairman
   and Chief Executive Officer
(Principal Executive Officer)By:
    
    /S/ JOSEPH R. SANDOVALJoseph R. Sandoval
Executive Vice President
   and Chief Financial Officer
(Principal Financial and
   Accounting Officer)
 42