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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM 
TO .
 Commission file number: 000-21137 R&G FINANCIAL CORPORATION 
  Puerto Rico
    
    66-0532217(State of incorporation
or organization)
    
    (I.R.S. Employer
Identification No. )
 280 Jesús T. Piñero Avenue
Hato 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 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).
xYes oNo Number of shares of Class B Common Stock outstanding as of June 30, 2004:
29,542,836 (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.)




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R&G FINANCIAL CORPORATION INDEX PagePart I    Financial InformationItem 1.Consolidated Financial Statements
    
    
    3Consolidated Statements of Financial Condition as of
June 30, 2004 (Unaudited) and December 31, 2003
    
    
    3Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2004 and 2003 (Unaudited)
    
    
    4Consolidated Statements of Comprehensive Income for the Three and Six
Months Ended June 30, 2004 and 2003 (Unaudited)
    
    
    5Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2003 (Unaudited)
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2.Managements Discussion and Analysis
    
    
    19Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4.Controls and Procedures
    
    
    31Part II  Other InformationItem 1.Legal Proceedings
    
    
    32Item 2.Changes in Securities
    
    
    32Item 3.Defaults Upon Senior Securities
    
    
    32Item 4.Submission of Matters to a Vote of Security Holders
    
    
    32Item 5.Other Information
    
    
    33Item 6.Exhibits and Reports on Form 8-K
    
    
    33Signatures
    
    
    37EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 cERTIFICATION OF THE CEO AND THE CFO
  2




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##### Table of Contents



PART 1-FINANCIAL INFORMATION 
 ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS R&G FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 June 30, 2004
    
    December 31, 2003(Unaudited)(Dollars in thousands)ASSETSCash and due from banks
    
    $
    120,776
    
    
    $
    114,916Money market investments:Securities purchased under agreements to resell
    

    
    144,221
    
    
    
    85,053Time deposits with other banks
    
    
    79,437
    
    
    
    34,349Mortgage loans held for sale, at lower of cost or market
    
    
    277,025
    
    
    
    315,691Mortgage-backed and investment securities held for trading, at fair value
    
    
    25,232
    
    
    
    31,797Trading securities pledged on repurchase agreements, at fair value
    
    
    5,405
    
    
    
    6,558Mortgage-backed and investment securities available for sale, at fair value
    
    
    1,827,789
    
    
    
    1,805,360Available for sale securities pledged on repurchase agreements, at fair value
    
    
    1,367,387
    
    
    
    1,215,287Mortgage-backed and investment securities held to maturity, at amortized cost
(estimated market value: 2004 - $15,145; 2003 - $14,940)
    
    
    15,073
    
    
    
    14,883Held to maturity securities pledged on repurchase agreements, at amortized cost
(estimated market value: 2004 - $59,931; 2003 - $65,248)
    
    
    58,013
    
    
    
    63,317Federal Home Loan Bank stock, at cost
    
    
    111,092
    
    
    
    100,461Loans receivable, net
    
    
    4,506,621
    
    
    
    4,048,507Accounts receivable, including advances to investors, net
    
    
    48,897
    
    
    
    38,195Accrued interest receivable
    
    
    46,619
    
    
    
    42,527Servicing asset, net
    
    
    117,740
    
    
    
    119,610Premises and equipment, net
    
    
    47,461
    
    
    
    42,782Other assets
    
    
    145,787
    
    
    
    119,587$
    8,944,575
    
    
    $
    8,198,880LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Deposits
    
    $
    3,822,998
    
    
    $
    3,555,764Federal funds purchased
    
    
    40,000
    
    
    
    21,000Securities sold under agreements to repurchase
    
    
    2,488,536
    
    
    
    2,220,795Notes payable
    
    
    136,813
    
    
    
    192,259Advances from FHLB
    
    
    1,238,600
    
    
    
    1,129,600Other borrowings
    
    
    265,281
    
    
    
    157,670Accounts payable and accrued liabilities
    
    
    152,485
    
    
    
    158,006Other liabilities
    
    
    20,035
    
    
    
    13,4338,164,748
    
    
    
    7,448,527Commitments and contingencies (see Note 7)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), 29,542,836 issued and
outstanding (2003 - 29,506,715)
    
    
    295
    
    
    
    295Additional paid-in capital
    
    
    115,412
    
    
    
    115,017Retained earnings
    
    
    449,077
    
    
    
    387,036Capital reserves
    
    
    25,103
    
    
    
    25,103Accumulated other comprehensive (loss) income, net of tax
    
    


    (23,276
    )
    
    
    9,686779,827
    
    
    
    750,353$
    8,944,575
    
    
    $
    8,198,880
 The accompanying notes are an integral part of these statements. 3




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R&G FINANCIAL CORPORATION 
 CONSOLIDATED STATEMENTS OF INCOME
 Three month
    
    Six monthperiod ended
    
    period endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    
    
    
    
    (Unaudited)(Dollars in thousands except for per share data)Interest income:Loans
    
    $
    70,091
    
    
    $
    55,007
    
    
    $
    138,260
    
    
    $
    106,962Money market and other investments
    
    
    8,112
    
    
    
    7,972
    
    
    
    15,206
    
    
    
    16,590Mortgage-backed securities
    
    
    31,493
    
    
    
    29,579
    
    
    
    63,861
    
    
    
    57,262Total interest income
    
    
    109,696
    
    
    
    92,558
    
    
    
    217,327
    
    
    
    180,814Interest expense:Deposits
    
    
    23,742
    
    
    
    22,968
    
    
    
    47,445
    
    
    
    44,661Securities sold under agreements to repurchase
    
    
    14,119
    
    
    
    12,814
    
    
    
    27,632
    
    
    
    25,585Notes payable
    
    
    550
    
    
    
    2,139
    
    
    
    2,019
    
    
    
    4,009Other
    
    
    15,279
    
    
    
    10,068
    
    
    
    28,511
    
    
    
    19,769Total interest expense
    
    
    53,690
    
    
    
    47,989
    
    
    
    105,607
    
    
    
    94,024Net interest income
    
    
    56,006
    
    
    
    44,569
    
    
    
    111,720
    
    
    
    86,790Provision for loan losses
    
    
    (6,265
    )
    
    
    (4,444
    )
    
    
    (12,735
    )
    
    
    (8,664
    )Net interest income after provision for loan losses
    
    
    49,741
    
    
    
    40,125
    
    
    
    98,985
    
    
    
    78,126Non-interest income:Net gain on origination and sale of loans
    
    
    41,439
    
    
    
    44,883
    
    
    
    81,332
    
    
    
    77,900Loan administration, fee income and other
    
    
    17,885
    
    
    
    20,330
    
    
    
    36,114
    
    
    
    39,25259,324
    
    
    
    65,213
    
    
    
    117,446
    
    
    
    117,152Total revenues
    
    
    109,065
    
    
    
    105,338
    
    
    
    216,431
    
    
    
    195,278Non-interest expenses:Employee compensation and benefits
    
    
    18,839
    
    
    
    14,506
    
    
    
    35,539
    
    
    
    29,653Office occupancy and equipment
    
    
    6,906
    
    
    
    6,074
    
    
    
    13,286
    
    
    
    11,776Other administrative and general
    
    
    29,394
    
    
    
    42,706
    
    
    
    60,637
    
    
    
    73,24955,139
    
    
    
    63,286
    
    
    
    109,462
    
    
    
    114,678Income before income taxes
    
    
    53,926
    
    
    
    42,052
    
    
    
    106,969
    
    
    
    80,600Income tax expense:Current
    
    
    9,353
    
    
    
    6,866
    
    
    
    22,858
    
    
    
    12,806Deferred
    
    
    3,826
    
    
    
    3,736
    
    
    
    4,824
    
    
    
    7,20313,179
    
    
    
    10,602
    
    
    
    27,682
    
    
    
    20,009Net income
    
    $
    40,747
    
    
    $

    31,450
    
    
    $
    79,287
    
    
    $
    60,591Earnings per common share  Basic
    
    $
    0.72
    
    
    $
    0.54
    
    
    $
    1.40
    
    
    $
    1.03- Diluted
    
    $
    0.72
    
    
    $
    0.54
    
    
    $
    1.39
    
    
    $
    1.03Weighted average number of shares outstanding  Basic
    
    
    51,101,380
    
    
    
    51,064,650
    
    
    
    51,095,431
    
    
    
    51,049,449- Diluted
    
    
    51,377,157
    
    
    
    51,271,706
    
    
    
    51,351,763
    
    
    
    51,271,424
 The accompanying notes are an integral part of these statements. 4




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R&G FINANCIAL CORPORATION 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 Three month
    
    Six monthperiod ended
    
    period endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)(Dollars in thousands)Net income
    
    $
    40,747
    
    
    $
    31,450
    
    
    $
    79,287
    
    
    $
    60,591Other comprehensive income, before tax:Unrealized gains (losses):Cash flow hedges
    
    
    7,086
    
    
    
    (1,979
    )
    
    
    4,390
    
    
    
    (1,639
    )Investment securities:Arising during period
    
    
    (63,767
    )
    
    
    (4,933
    )
    
    
    (58,281
    )
    
    
    (9,661
    )Less: Reclassification adjustments for gains
included in net income
    
    
    (83
    )
    
    
    (714
    )
    
    
    (70
    )
    
    
    (820
    )(63,850
    )
    
    
    (5,647
    )
    
    
    (58,351
    )
    
    
    (10,481
    )Other comprehensive loss before
income taxes
    
    
    (56,764
    )
    
    
    (7,626
    )
    
    
    (53,961
    )
    
    
    (12,120
    )Income tax benefit related to items of
other comprehensive income
    
    
    22,061
    
    
    
    2,971
    
    
    
    20,999
    
    
    
    4,728Other comprehensive loss, net of tax
    
    
    (34,703
    )
    
    
    (4,655
    )
    
    
    (32,962
    )
    
    
    (7,392
    )Comprehensive income, net of tax
    
    $
    6,044
    
    
    $
    26,795
    
    
    $
    46,325
    
    
    $
    53,199
 The accompanying notes are an integral part of these statements. 5




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R&G FINANCIAL CORPORATION 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six month period ended June 30,2004
    
    2003(Unaudited)(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    79,287
    
    
    $
    60,591Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    4,691
    
    
    
    4,455Amortization of premium on investments and mortgage-backed securities, net
    
    
    4,709
    
    
    
    5,766Scheduled amortization of servicing asset
    
    
    11,009
    
    
    
    11,245Impairment
charges on servicing asset, net
    
    
    5,943
    
    
    
    27,536Provision for loan losses
    
    
    12,735
    
    
    
    8,664Gain on sales of mortgage-backed and investment securities available for sale
    
    
    (70
    )
    
    
    (820
    )Unrealized loss on trading securities and derivative instruments, net
    
    
    1,287
    
    
    
    1,284Decrease (increase) in mortgage loans held for sale
    
    
    38,262
    
    
    
    (7,212
    )Net decrease in securities held for trading
    
    
    7,470
    
    
    
    32,425Increase in receivables
    
    
    (14,794
    )
    
    
    (4,205
    )Increase in other assets
    
    
    (19,033
    )
    
    
    (23,340
    )(Decrease) increase in notes payable and other borrowings
    
    
    (55,567
    )
    
    
    9,149Increase in accounts payable and accrued liabilities
    
    
    18,829
    
    
    
    53,764Increase in other liabilities
    
    
    6,602
    
    
    
    5,721Total adjustments
    
    
    22,073
    
    
    
    124,432Net cash provided by operating activities
    
    
    101,360
    
    
    
    185,023Cash flows from investing activities:Purchases of investment securities available for sale and held to maturity
    
    
    (915,432
    )
    
    
    (1,431,196
    )Proceeds from sales and redemption of securities available for sale
    
    
    281,580
    
    
    
    109,908Principal repayments on mortgage-backed securities
    
    
    422,628
    
    
    
    877,984Proceeds from sales of loans
    
    
    346,490
    
    
    
    52,312Net originations of loans
    
    
    (838,108
    )
    
    
    (588,032
    )Purchases of FHLB stock, net
    
    
    (10,631
    )
    
    
    (18,604
    )Acquisition of premises and equipment
    
    
    (8,813
    )
    
    
    (5,890
    )Acquisition of servicing rights
    
    
    (15,082
    )
    
    
    (23,593
    )Net cash used in investing activities
    
    
    (737,368
    )
    
    
    (1,027,111

    )Cash flows from financing activities:Increase in deposits  net
    
    
    267,234
    
    
    
    438,283Increase in federal funds purchased
    
    
    19,000
    
    
    
    5,000Increase in securities sold under agreements to repurchase  net
    
    
    267,741
    
    
    
    355,730Advances from FHLB, net
    
    
    109,000
    
    
    
    76,000Proceeds from issuance of long-term debt
    
    
    100,000
    
    
    
    Proceeds from issuance of common stock
    
    
    395
    
    
    
    218Cash dividends:Common stock
    
    
    (9,304
    )
    
    
    (6,961
    )Preferred stock
    
    
    (7,942
    )
    
    
    (7,942
    )Net cash provided by financing activities
    
    
    746,124
    
    
    
    860,328Net increase in cash and cash equivalents
    
    
    110,116
    
    
    
    18,240Cash and cash equivalents at beginning of period
    
    
    234,318
    
    
    
    197,643Cash and cash equivalents at end of period
    
    $
    344,434
    
    
    $
    215,883Cash and cash equivalents include:Cash and due from banks
    
    $
    120,776
    
    
    $
    144,380Short-term investments
    
    
    
    
    
    
    15,000Securities purchased under agreements to resell
    
    
    144,221
    
    
    
    34,726Time deposits with other banks
    
    
    79,437
    
    
    
    21,777$
    344,434
    
    
    $
    215,883
 The accompanying notes are an integral part of these statements. 6




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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. 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 (principally consisting of normal recurring accruals) necessary for
a fair presentation of the Companys financial condition as of June 30, 2004
and the results of operations and changes in its cash flows for the three and
six months ended June 30, 2004 and 2003. The results of operations for the three and six month periods ended June
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




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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. 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 a proposed rule that
would continue to allow trust preferred securities issued by variable
interest entities to constitute Tier I capital for bank holding
companies. The proposed rules would impose stricter quantitative and
qualitative limits on the Tier I measurement of trust preferred
securities. Currently, trust preferred securities and qualifying
perpetual preferred stock are limited in the aggregate to no more
than 25% of a holding companys core capital elements. The proposed
rule would amend the existing limit by providing that restricted core
capital elements (including trust preferred securities and qualifying
perpetual preferred stock) can be no more than 25% of core capital,
net of goodwill. It is possible that the Federal Reserve rules will
not be adopted as proposed and that the Federal Reserve will conclude
that trust preferred securities should no longer be treated as
Tier I regulatory capital. 8




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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 carry over of valuation allowances in the initial
accounting of all loans acquired in a transfer within the scope of this SOP.
The prohibition of the carry over 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, R&G Financial adopted the provisions of SAB 105. R&G Financial
records the value of its mortgage loan commitments at fair market value for
mortgages it intends to sell. R&G Financial 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). Effective with
reporting periods beginning after June 15, 2004, companies carrying certain
types of debt and equity securities whose amortized cost is higher than the
securities fair values will have to use more detailed criteria to evaluate
whether to record a loss and will have to disclose additional information about
unrealized losses. The Company has reviewed the revised EITF No. 03-1 and
plans to implement these additional procedures effective with the quarter
beginning on July 1, 2004. Even though as of June 30, 2004 most of the
unrealized losses on the Companys investments and mortgage-backed securities
were deemed temporary, at this time the Company can not determine whether the adoption of this
new issuance will have an impact
on the Companys financial position and results of operations, as the extent of
any impact will vary due to the fact that the model calls for many judgments
and additional evidence gathering at each securities valuation date. 9




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##### 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 Plan (275,777 and 207,056
during the three months ended June 30, 2004 and 2003, respectively, and 256,332
and 221,975 during the six month periods ended June 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. Dividends per share on common stock declared and paid by the Company were as
follows: Three month
    
    Six monthperiod ended
    
    period endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003$
    0.0943
    
    
    $
    0.0707
    
    
    $
    0.1821
    
    
    $
    0.1364
 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. June 30,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Mortgage-backed securities held for
trading:FHLMC certificates
    
    $
    28,566
    
    
    $
    33,24528,566
    
    
    
    33,245Investment securities held for trading:Corporate debt obligations
    
    
    2,016
    
    
    
    Municipal securities
    
    
    
    
    
    
    446Bank issued trust preferred securities
    
    
    25
    
    
    
    4,650Other
    
    
    30
    
    
    
    142,071
    
    
    
    5,110$
    30,637
    
    
    $
    38,355
 10




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##### Table of Contents



June 30, 2004
    
    December 31, 2003Amortized
    
    Fair
    
    Amortized
    
    Faircost
    
    value
    
    cost
    
    value(Unaudited)(Dollars in thousands)Mortgage-backed securities available for sale:Collaterized mortgage obligations (CMO):Due from one to five years
    
    $
    3,922
    
    
    $
    3,975
    
    
    $
    5,939
    
    
    $
    6,019Due from five to ten years
    
    
    57,884
    
    
    
    56,847
    
    
    
    20,889
    
    
    
    20,873Due over ten years
    
    
    957,773
    
    
    
    940,899
    
    
    
    941,970
    
    
    
    939,7571,019,579
    
    
    
    1,001,721
    
    
    
    968,798
    
    
    
    966,649CMO residuals (interest only), and interest only
strips (IOs)
    
    
    143,829
    
    
    
    141,114
    
    
    
    107,058
    
    
    
    107,957FNMA certificates:Due from one to five years
    
    
    195
    
    
    
    207
    
    
    
    71
    
    
    
    72Due from five to ten years
    
    
    221,871
    
    
    
    217,713
    
    
    
    87,989
    
    
    
    87,101Due over ten years
    
    
    366,479
    
    
    
    367,429
    
    
    
    388,687
    
    
    
    405,193588,545
    
    
    
    585,349
    
    
    
    476,747
    
    
    
    492,366FHLMC certificates:Due from one to five years
    
    
    285
    
    
    
    302
    
    
    
    3
    
    
    
    3Due from five to ten years
    
    
    63,371
    
    
    
    62,222
    
    
    
    20,308
    
    
    
    19,955Due over ten years
    
    
    371,904
    
    
    
    376,442
    
    
    
    439,876
    
    
    
    448,161435,560
    
    
    
    438,966
    
    
    
    460,187
    
    
    
    468,119GNMA certificates:Due from one to five years
    
    
    3,125
    
    
    
    3,228
    
    
    
    50
    
    
    
    52Due from five to ten years
    
    
    15,050
    
    
    
    15,327
    
    
    
    12,563
    
    
    
    12,918Due over ten years
    
    
    311,159
    
    
    
    311,990
    
    
    
    346,568
    
    
    
    350,217329,334
    
    
    
    330,545
    
    
    
    359,181
    
    
    
    363,1872,516,847
    
    
    
    2,497,695
    
    
    
    2,371,971
    
    
    
    2,398,278Investment securities available for sale:U.S. Government and Agencies securities:Due within one year
    
    
    12,473
    
    
    
    12,590
    
    
    
    62,519
    
    
    
    63,113Due from one to five years
    
    
    566,592
    
    
    
    555,815
    
    
    
    399,275
    
    
    
    398,028Due from five to ten years
    
    
    62,583
    
    
    
    63,069
    
    
    
    79,388
    
    
    
    81,042641,648
    
    
    
    631,474
    
    
    
    541,182
    
    
    
    542,183Corporate debt obligations:Due within one year
    
    
    2,500
    
    
    
    2,503
    
    
    
    14,247
    
    
    
    14,362Due from one to five years
    
    
    48,558
    
    
    
    50,201
    
    
    
    48,578
    
    
    
    51,376Due from five to ten years
    
    
    1,324
    
    
    
    1,302
    
    
    
    2,123
    
    
    
    2,10952,382
    
    
    
    54,006
    
    
    
    64,948
    
    
    
    67,847US Municipal debt obligations-Due over ten years
    
    
    12,313
    
    
    
    12,001
    
    
    
    12,209
    
    
    
    12,339706,343
    
    
    
    697,481
    
    
    
    618,339
    
    
    
    622,369$
    3,223,190
    
    
    $
    3,195,176
    
    
    $
    2,990,310
    
    
    $
    3,020,647
 11




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##### Table of Contents



June 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
    
    $
    2,973
    
    
    $
    3,082
    
    
    $
    3,497
    
    
    $
    3,581Due from five to ten years
    
    
    370
    
    
    
    379
    
    
    
    463
    
    
    
    469Due over ten years
    
    
    21,208
    
    
    
    21,688
    
    
    
    25,475
    
    
    
    26,07924,551
    
    
    
    25,149
    
    
    
    29,435
    
    
    
    30,129FNMA certificates-Due over ten years
    
    
    4,307
    
    
    
    4,493
    
    
    
    4,785
    
    
    
    4,999FHLMC certificates-Due over ten years
    
    
    73
    
    
    
    71
    
    
    
    81
    
    
    
    7928,931
    
    
    
    29,713
    
    
    
    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
    
    
    
    1,9972,500
    
    
    
    2,500
    
    
    
    1,997
    
    
    
    1,997Puerto Rico Government and Agencies obligations:Due within one year
    
    
    549
    
    
    
    559
    
    
    
    558
    
    
    
    567Due from one to five years
    
    
    31,607
    
    
    
    32,932
    
    
    
    31,846
    
    
    
    33,088Due from five to ten years
    
    
    9,399
    
    
    
    9,272
    
    
    
    9,398
    
    
    
    9,23041,555
    
    
    
    42,763
    
    
    
    41,802
    
    
    
    42,885Other  Due from one to five years
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    10044,155
    
    
    
    45,363
    
    
    
    43,899
    
    
    
    44,982$
    73,086
    
    
    $
    75,076
    
    
    $
    78,200
    
    
    $
    80,189
 In addition to the investment and mortgage-backed securities pledged on
repurchase agreements and reported as pledged assets in the statement of
financial condition, at June 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
    
    $
    1,022,839Mortgage-backed and investment securities held to maturity,
at amortized cost
    
    
    243$
    1,023,082
 12




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##### Table of Contents



NOTE 4  LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consist of the following: June 30,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Real estate loans:Residential  first mortgage
    
    $
    2,613,638
    
    
    $
    2,384,279Residential  second mortgage
    
    
    37,700
    
    
    
    34,999Land
    
    
    196,384
    
    
    
    96,796Construction
    
    
    665,100
    
    
    
    603,867Commercial
    
    
    844,054
    
    
    
    792,9504,356,876
    
    
    
    3,912,891Undisbursed portion of loans in process
    
    
    (262,562
    )
    
    
    (224,960
    )Net deferred loan costs
    
    
    2,355
    
    
    
    1,3694,096,669
    
    
    
    3,689,300Other loans:Commercial
    
    
    250,377
    
    
    
    188,690Consumer:Secured by deposits
    
    
    24,343
    
    
    
    24,713Secured by real estate
    
    
    49,545
    
    
    
    53,709Other
    
    
    132,487
    
    
    
    131,711Unearned interest
    
    
    (1
    )
    
    
    (1
    )456,751
    
    
    
    398,822Total loans
    
    
    4,553,420
    
    
    
    4,088,122Allowance for loan losses
    
    
    (46,799
    )
    
    
    (39,615
    )$
    4,506,621
    
    
    $
    4,048,507
 The changes in the allowance for loan losses follow: Six months endedJune 30,2004
    
    2003(Unaudited)(Dollars in thousands)Balance, beginning of period
    
    $
    39,615
    
    
    $
    32,675Provision for loan losses
    
    
    12,735
    
    
    
    8,664Loans charged-off
    
    
    (7,171
    )
    
    
    (7,787
    )Recoveries
    
    
    1,559
    
    
    
    763Transfers
    
    
    61
    
    
    
    Balance, end of period
    
    $
    46,799
    
    
    $
    34,315
 13




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##### Table of Contents



The following table sets forth the amounts and categories of R&G Financials
non-performing assets at the dates indicated. June 30,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Non-accruing loans:Residential real estate (1)
    
    $
    58,671
    
    
    $
    57,031Residential construction
    
    
    2,170
    
    
    
    2,424Commercial real estate
    
    
    23,913
    
    
    
    22,589Commercial business
    
    
    2,092
    
    
    
    1,733Consumer unsecured
    
    
    737
    
    
    
    833Total
    
    
    87,583
    
    
    
    84,610Accruing loans greater than 90 days
delinquent:Residential real estate (1)
    
    
    
    
    
    
    Residential construction
    
    
    
    
    
    
    Commercial real estate
    
    
    
    
    
    
    Commercial business
    
    
    357
    
    
    
    382Consumer
    
    
    247
    
    
    
    422Total accruing loans greater than
90 days delinquent
    
    
    604
    
    
    
    804Total non-performing loans
    
    
    88,187
    
    
    
    85,414Real estate owned (2)
    
    
    21,273
    
    
    
    19,954Other repossessed assets
    
    
    134
    
    
    
    22021,407
    
    
    
    20,174Total non-performing assets
    
    $
    109,594
    
    
    $
    105,588Total non-performing loans as a
percentage of total loans
    
    
    1.83
    %
    
    
    1.98
    %Total non-performing assets as a
percentage of total assets
    
    
    1.23
    %
    
    
    1.29
    %Allowance for loan losses as a percentage
of total non-performing loans
    
    
    53.07
    %
    
    
    46.38
    %Allowance for loan losses as a percentage
of total loans outstanding
    
    
    0.97
    %
    
    
    0.92
    %Net charge-offs to average loans
outstanding
    
    
    0.25
    %
    
    
    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 0.25% during the six months ended June 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. 14




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##### Table of Contents



NOTE 5  SERVICING ASSET The changes in the servicing asset of the Company follows: Three months
    
    Six monthsperiod ended
    
    period endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)(Dollars in thousands)Balance at beginning of period
    
    $
    112,467
    
    
    $
    133,830
    
    
    $
    119,610
    
    
    $
    142,334Rights originated
    
    
    7,228
    
    
    
    7,591
    
    
    
    14,642
    
    
    
    14,083Rights purchased
    
    
    218
    
    
    
    8,081
    
    
    
    440
    
    
    
    9,510Scheduled amortization
    
    
    (5,530
    )
    
    
    (5,648
    )
    
    
    (11,009
    )
    
    
    (11,245
    )Impairment charges:Unscheduled amortization
    
    
    (885
    )
    
    
    (6,116
    )
    
    
    (6,650
    )
    
    
    (12,824
    )Reversal (provision) of valuation reserves
    
    
    4,242
    
    
    
    (10,592
    )
    
    
    707
    
    
    
    (14,712
    )Balance at end of period
    
    $
    117,740
    
    
    $
    127,146
    
    
    $
    117,740
    
    
    $
    127,146
 NOTE 6 DEPOSITS Deposits are summarized as follows: June 30,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Passbook savings
    
    $
    366,063
    
    
    $
    337,463NOW accounts
    
    
    153,158
    
    
    
    133,201Super NOW accounts
    
    
    434,185
    
    
    
    426,144Regular checking accounts
(non-interest bearing)
    
    
    158,527
    
    
    
    134,659Commercial checking accounts
(non-interest bearing)
    
    
    297,784
    
    
    
    259,6141,043,654
    
    
    
    953,618Certificates of deposit:Under $100,000
    
    
    718,908
    
    
    
    731,655$100,000 and over
    
    
    1,687,141
    
    
    
    1,527,5812,406,049
    
    
    
    2,259,236Accrued interest payable
    
    
    7,232
    
    
    
    5,447$
    3,822,998
    
    
    $
    3,555,764
 Certificates of deposit
include $705.1 million and $623.8 million of brokered
deposits at June 30, 2004 and December 31, 2003,
respectively. 15




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##### Table of Contents



NOTE 7  COMMITMENTS AND CONTINGENCIES As of June 30, 2004, the Company had open commitments to issue GNMA
certificates of approximately $57.7 million. In addition, the Company had
commitments to sell mortgage loans to third party investors amounting to
approximately $846.6 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 six months ended June 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. Other At June 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 $1.4 billion at June 30, 2004. At June 30, 2004, the Company has
an allowance for recourse provisions of $5.1 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. 16




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##### Table of Contents



NOTE 8  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
    
    Six month period endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)
    
    (Unaudited)(Dollars in thousands)Employee costs
    
    $
    27,729
    
    
    $
    23,202
    
    
    $
    53,576
    
    
    $
    46,304Other administrative and general expenses
    
    $
    29,966
    
    
    $
    44,128
    
    
    $
    62,904
    
    
    $
    76,220
 NOTE 9 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 June 30,2004
    
    2003(Unaudited)Mortgage
    
    
    
    
    
    Segments
    
    
    
    
    
    Mortgage
    
    
    
    
    
    SegmentsBanking
    
    Banking
    
    Other (1)
    
    Totals
    
    Banking
    
    Banking
    
    Other (1)
    
    TotalsRevenues
    
    $
    65,131
    
    
    $
    40,618
    
    
    $
    4,593
    
    
    $
    110,342
    
    
    $
    46,364
    
    
    $
    55,696
    
    
    $
    3,929
    
    
    $
    105,989Non-interest expenses
    
    
    29,735
    
    
    
    24,761
    
    
    
    1,564
    
    
    
    56,060
    
    
    
    25,170
    
    
    
    37,745
    
    
    
    1,156
    
    
    
    64,071Income before income taxes
    
    $
    35,396
    
    
    $
    15,857
    
    
    $
    3,029
    
    
    $
    54,282
    
    
    $
    21,194
    
    
    $
    17,951
    
    
    $
    2,773
    
    
    $
    41,918
 Six month period ended June 30,2004
    
    2003(Unaudited)Mortgage
    
    
    
    
    
    Segments
    
    
    
    
    
    Mortgage
    
    
    
    
    
    SegmentsBanking
    
    Banking
    
    Other (1)
    
    Totals
    
    Banking
    
    Banking
    
    Other (1)
    
    TotalsRevenues
    
    $
    134,319
    
    
    $
    74,926
    
    
    $
    9,871
    
    
    $
    219,116
    
    
    $
    87,789
    
    
    $
    101,359
    
    
    $
    7,198
    
    
    $
    196,346Non-interest expenses
    
    
    55,670
    
    
    
    52,490
    
    
    
    3,459
    
    
    
    111,619
    
    
    
    48,545
    
    
    
    65,352
    
    
    
    2,354
    
    
    
    116,251Income before income taxes
    
    $
    78,649
    
    
    $
    22,436
    
    
    $
    6,412
    
    
    $
    107,497
    
    
    $
    39,244
    
    
    $
    36,007
    
    
    $
    4,844
    
    
    $
    80,095
  (1)
    
    Comprised of broker-dealer and insurance agency operations. 17




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##### 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
    
    Six month period endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Revenues:Total revenues for reportable segments
    
    $
    110,342
    
    
    $
    105,989
    
    
    $
    219,116
    
    
    $
    196,346Elimination of intersegment revenues
    
    
    (1,676
    )
    
    
    (1,079
    )
    
    
    (3,405
    )
    
    
    (1,983
    )Corporate revenues
    
    
    399
    
    
    
    428
    
    
    
    720
    
    
    
    915Total consolidated revenues
    
    $
    109,065
    
    
    $
    105,338
    
    
    $
    216,431
    
    
    $
    195,278Income before income taxes:Total income before income taxes for reportable
segments
    
    $
    54,282
    
    
    $
    41,918
    
    
    $
    107,497
    
    
    $
    80,095Elimination of intersegment profits
    
    
    (97
    )
    
    
    21
    
    
    
    (127
    )
    
    
    123Unallocated
corporate (expenses) income
    
    
    (259
    )
    
    
    113
    
    
    
    (401
    )
    
    
    382Income before income taxes, consolidated
    
    $
    53,926
    
    
    $
    42,052
    
    
    $
    106,969
    
    
    $
    80,600
 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 June
30, 2004 and December 31, 2003 follows: June 30,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Assets:Banking
    
    $
    8,232,795
    
    
    $
    7,387,475Mortgage Banking
    
    
    880,486
    
    
    
    890,023Other
    
    
    167,360
    
    
    
    168,294Total assets for reportable segments
    
    
    9,280,641
    
    
    
    8,445,792Parent company assets
    
    
    168,409
    
    
    
    66,920Elimination of intersegment balances
    
    
    (504,475
    )
    
    
    (313,832
    )Consolidated total assets
    
    $
    8,944,575
    
    
    $
    8,198,880
 18




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##### 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. 19




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##### 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 53 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. 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 $10.9 billion as of June
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 June 30, 2004, the Company held securities available for sale with a fair
market value of $3.2 billion, which included $2.5 billion of mortgage-backed
securities, of which $320.4 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 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, through its international banking subsidiaries, 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 20




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##### Table of Contents



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 June 30, 2004, total assets amounted to $8.9 billion, as compared to
$8.2 billion at December 31, 2003. The $745.7 million or 9.1% increase in total
assets since the beginning of the year was primarily the result of a $174.5
million or 5.8% increase in mortgage-backed and investment securities available
for sale, and a $458.1 million or 11.3% increase in loans receivable, net, due
to continued strong loan production during the first half of 2004. Total loan
production for the six months ended June 30, 2004 was $2.1 billion, a 2.2%
decrease when compared to the corresponding period in 2003. Although the
Companys loan production during the six months ended June 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 June 30, 2004, R&G Financial had $4.2 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 7.5% from $3.6 billion at December 31, 2003 to
$3.8 billion at June 30, 2004, whereas repurchase agreements increased by
$267.7 million or 12.1%. At June 30, 2004, R&G Financials allowance for loan losses totaled $46.8
million, which represented a $7.2 million or 18.1% increase from the level
maintained at December 31, 2003. At June 30, 2004, R&G Financials allowance
represented approximately 0.97% of the total loan portfolio and 53.07% 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 2.16%
and 158.55%, respectively, at June 30, 2004, compared to 2.09% and 139.57% at
December 31, 2003. The reconciliation of non-performing loans to non-performing
loans excluding residential real estate follows: June 30, 2004
    
    December 31, 2003(Unaudited)(Dollars in thousands)Allowance for loan losses
    
    $
    46,799
    
    
    $
    39,615Total non-performing loans
    
    $
    88,187
    
    
    $
    85,414Less: Residential real estate
    
    
    (58,671
    )
    
    
    (57,031
    )$
    29,516
    
    
    $
    28,383Total loans
    
    $
    4,813,627
    
    
    $
    4,311,714Less: Residential real estate
    
    
    (2,651,338
    )
    
    
    (2,419,278
    )$
    2,162,289
    
    
    $
    1,892,436Allowance for loan losses as a percentage of
    total non-performing loans (excluding residential real estate)
    
    
    158.55
    %
    
    
    139.57
    %Allowance for loan losses as a percentage of
    total loans (excluding residential real estate)
    
    
    2.16
    %
    
    
    2.09
    % Non-performing loans amounted to $88.2 million at June 30, 2004, an
increase of $2.8 million or 3.24% when compared to $85.4 million at December 31, 2003.
The increase is primarily related to a $1.6 million increase in delinquent
residential real estate loans over 90 days past due. During the first quarter
of 2004, the Company repurchased 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, including most of the loans
repurchased during the first quarter. 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 June 30, 2004, $58.7 million or 66.5% of non-performing loans consisted of
residential mortgage loans in 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 0.25% during the six
months ended June 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. 21




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Stockholders equity increased from $750.4 million at December 31, 2003 to
$779.8 million at June 30, 2004. The $29.5 million or 3.9% increase was due
primarily to the net income recognized during the period, net of dividends paid
and a $33.0 million loss in other comprehensive income. Results of Operations During the three and six months ended June 30, 2004, R&G Financial
reported net income of $40.7 million and $79.3 million or $0.72 and $1.39 of
earnings per diluted share, respectively, compared to net income of $31.5
million and $60.6 million or $0.54 and $1.03 of earnings per diluted share for
the comparative periods in 2003. These results reflect an increase in earnings
per diluted share of 33.3% and 35.0% for the three and six month periods ending
June 30, 2004 over the comparable periods in 2003. Net interest income increased by $24.9 million or 28.7% during the six
month period ended June 30, 2004 to $111.7 million, due to a $1.7 billion
increase in the average balance of interest-earning assets, together with a 3
basis point increase in the Companys net interest margin from
2.76% to 2.79%. The increase in the average balance of interest
earning assets is mostly related with a $1.3 billion or 39.5%
increase in the average balance of loans receivable as a result of
strong loan production. Total loan production during the six months ended June 30, 2004
amounted to $2.07 billion compared to $2.11 billion during the prior comparable period. The provision for loan losses amounted to $12.7 million during the six
months ended June 30, 2004, a 47.0% 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. R&G Financial also experienced an increase in non-interest income during
the six months ended June 30, 2004 over the comparable period. Net gain on sale
of loans increased by $3.4 million or 4.4% 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.

Loan administration, fee income and other income decreased by $3.1 million or
8.0% over the comparable period, due principally to a decrease in the Companys
weighted average servicing fee during the period, net of a $4.1 million
increase in fee and other income. Net interest income increased by $11.4 million or 25.7% to $56.0 million
during the quarter ended June 30, 2004 over the prior comparable period, due to
a $1.7 billion increase in the average balance of interest-earning assets while
the Companys net interest margin remained constant at 2.71%. Net gain on sale
of loans decreased 7.7% to $41.4 million during the three month ended June 30,
2004, together with a $2.4 million or 12.0% decrease in loan administration,
fee income and other income. Total expenses decreased by $5.2 million or 4.5% during the six months
ended June 30, 2004 over the comparable 2003 period, due to a $12.6 million or
17.2% decrease in other administrative and general expenses, partially offset
by a $5.9 million or 19.8% increase in employee compensation and benefits
associated with general growth in Company operations in Puerto Rico and
Florida. Office occupancy and equipment expenses also increased by $1.5
million or 12.8%. The decrease in other administrative and general expenses is
mainly due to a $21.6 million reduction in expenses associated with impairment
charges of the Companys servicing asset. Total expenses decreased by $8.1 million or 12.8% during the three month
period ended June 30, 2004 over the prior comparable period, due to a $13.3
million or 31.2% decrease in other general and administrative expenses, which
includes a $20.1 million decrease in expenses associated with impairment
charges of the Companys servicing asset, partially offset by a $4.3 million or
29.9% increase in employee compensation and benefits, and a $832,000 or 13.7%
increase in occupancy expenses. During the six months ended June 30, 2004, the Company reported $6.7
million of impairment charges on its servicing asset related to unscheduled
amortization amounts, compared to $12.8 million during the 22




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prior comparable period. The decrease in unscheduled amortization amounts
during the six months period June 30, 2004 compared to prior comparable period
is due to lower prepayment speeds in the Companys servicing portfolio. The
decrease in prepayments reflect the increase in interest rates for mortgage
loans during the period. Based on the level of interest rates during the second
quarter of 2004, the Company recorded during the three months ended June 30,
2004 a $4.2 million reversal of impairment charges on its servicing asset
related to previously recorded valuation reserves for temporary declines in the
fair value of its servicing portfolio. The value of the Companys servicing
portfolio is expected to increase given the more recent levels of higher
interest rates, which is expected to result in lower prepayment speeds.
Unscheduled amortization amounts are expected to decline also in future periods
due to the lower prepayment speeds. 23




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##### Table of Contents



Interest Rate Risk Management The
following table summarizes the anticipated maturities or repricing of
R&G Financials interest-earning assets and interest-bearing liabilities as of
June 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. 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-earning assets(1):Loans receivable
    
    $
    1,446,339
    
    
    $
    885,207
    
    
    $
    961,193
    
    
    $
    517,532
    
    
    $
    740,797
    
    
    $
    4,551,068Mortgage loans held for sale
    
    
    70,028
    
    
    
    189,582
    
    
    
    5,274
    
    
    
    3,784
    
    
    
    8,357
    
    
    
    277,025Mortgage-backed securities(2)(3)
    
    
    205,085
    
    
    
    526,111
    
    
    
    564,385
    
    
    
    360,255
    
    
    
    899,358
    
    
    
    2,555,194Investment Securities(3)
    
    
    136,089
    
    
    
    63,564
    
    
    
    297,988
    
    
    
    328,957
    
    
    
    28,202
    
    
    
    854,800Other interest-earning assets(4)
    
    
    209,749
    
    
    
    13,910
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    223,659Total
    
    $
    2,067,290
    
    
    $
    1,678,374
    
    
    $
    1,828,840
    
    
    $
    1,210,528
    
    
    $
    1,676,714
    
    
    $
    8,461,746Interest bearing liabilities:Deposits (5)NOW and Super NOW accounts
    
    $
    29,118
    
    
    $
    82,263
    
    
    $
    90,432
    
    
    $
    73,250
    
    
    $
    312,280
    
    
    $
    587,343Passbook savings accounts
    
    
    9,153
    
    
    
    26,541
    
    
    
    66,074
    
    
    
    52,860
    
    
    
    211,436
    
    
    
    366,064Regular and commercial checking
    
    
    22,815
    
    
    
    63,885
    
    
    
    70,226
    
    
    
    56,884
    
    
    
    242,502
    
    
    
    456,312Certificates of deposit
    
    
    352,157
    
    
    
    926,553
    
    
    
    792,230
    
    
    
    333,480
    
    
    

    1,628
    
    
    
    2,406,048FHLB advances
    
    
    278,000
    
    
    
    104,600
    
    
    
    431,000
    
    
    
    285,000
    
    
    
    140,000
    
    
    
    1,238,600Securities sold under agreements to
repurchase (6)
    
    
    1,241,315
    
    
    
    194,976
    
    
    
    816,545
    
    
    
    97,500
    
    
    
    138,200
    
    
    
    2,488,536Other borrowings(7)
    
    
    122,470
    
    
    
    113,438
    
    
    
    
    
    
    
    
    
    
    
    206,186
    
    
    
    442,094Total
    
    
    2,055,028
    
    
    
    1,512,256
    
    
    
    2,266,507
    
    
    
    898,974
    
    
    
    1,252,232
    
    
    
    7,984,997Effect of hedging instruments
    
    
    170,000
    
    
    
    
    
    
    
    330,100
    
    
    
    (420,100
    )
    
    
    (80,000
    )
    
    
    Excess (deficiency) of interest-earning
assets over interest-bearing liabilities
    
    $
    182,262
    
    
    $
    166,118
    
    
    
    ($107,567
    )
    
    
    ($108,546
    )
    
    $
    344,482
    
    
    $
    476,749Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities
    
    $
    182,262
    
    
    $
    348,380
    
    
    $
    240,813
    
    
    $
    132,267
    
    
    $
    476,749Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a percent
of total assets
    
    
    2.04
    %
    
    
    3.89
    %
    
    
    2.69
    %
    
    
    1.48
    %
    
    
    5.33
    %
 (footnotes on following page) 24




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##### Table of Contents



(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.(6)
    
    Includes federal funds purchased, if any.(7)
    
    Comprised of warehousing lines, notes payable and other borrowings. As of June 30, 2004, the Company had a one year positive gap of
approximately $348.4 million, which constituted 3.9% 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 as of June 30, 2004 compared to a negative gap as of December 31, 2003,
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. The Company estimates that as of June 30, 2004, close to 50.2% of
all borrowings of the Company had maturity dates longer than one year. 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. Average Balances, Net
Interest Margin, Yields Earned, and Rates Paid The following table presents 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. 25




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##### Table of Contents



For the three months period ended June 30,2004
    
    2003Average
    
    
    
    
    
    Yield /
    
    Average
    
    
    
    
    
    Yield /(Dollars in thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateInterest-Earning Assets:Cash and cash equivalents(1)
    
    $
    217,495
    
    
    $
    822
    
    
    
    1.51
    %
    
    $
    81,550
    
    
    $
    318
    
    
    
    1.56
    %Investment securities held for trading
    
    
    1,846
    
    
    
    9
    
    
    
    1.95
    
    
    
    
    
    
    
    
    
    
    
    Investment securities available for sale
    
    
    675,209
    
    
    
    6,196
    
    
    
    3.67
    
    
    
    603,477
    
    
    
    6,782
    
    
    
    4.50Investment securities held to maturity
    
    
    44,351
    
    
    
    603
    
    
    
    5.44
    
    
    
    30,374
    
    
    
    369
    
    
    
    4.86Mortgage-backed securities held for trading
    
    
    37,843
    
    
    
    629
    
    
    
    6.65
    
    
    
    50,666
    
    
    
    957
    
    
    
    7.56Mortgage-backed securities available for sale
    
    
    2,449,535
    
    
    
    30,443
    
    
    
    4.97
    
    
    
    2,198,671
    
    
    
    27,262
    
    
    
    4.96Mortgage-backed securities held to maturity
    
    
    29,651
    
    
    
    421
    
    
    
    5.68
    
    
    
    41,608
    
    
    
    595
    
    
    
    5.72Loans receivable, net (2)
    
    
    4,713,895
    
    
    
    70,091
    
    
    
    5.95
    
    
    
    3,458,562
    
    
    
    55,007
    
    
    
    6.36FHLB Stock
    
    
    107,752
    
    
    
    482
    
    
    
    1.79
    
    
    
    101,050
    
    
    
    1,268
    
    
    
    5.02Total interest-earning assets
    
    
    8,277,577
    
    
    $
    109,696
    
    
    
    5.30
    %
    
    
    6,565,958
    
    
    $
    92,558
    
    
    
    5.64
    %Non-interest-earning assets
    
    
    486,800
    
    
    
    
    
    
    
    
    
    
    
    507,176Total assets
    
    $
    8,764,377
    
    
    
    
    
    
    
    
    
    
    $
    7,073,134Interest-Bearing Liabilities:Deposits
    
    $
    3,724,802
    
    
    $
    23,742
    
    
    
    2.55
    %
    
    $
    3,123,204
    
    
    $
    22,968
    
    
    
    2.94
    %Securities sold under agreements to
repurchase (3)
    
    
    2,442,591
    
    
    
    14,119
    
    
    
    2.31
    
    
    
    1,725,061
    
    
    
    12,814
    
    
    
    2.97Notes payable
    
    
    175,388
    
    
    
    550
    
    
    
    1.25
    
    
    
    227,648
    
    
    
    2,139
    
    
    
    3.76Other borrowings(4)
    
    
    1,446,783
    
    
    
    15,279
    
    
    
    4.22
    
    
    
    1,006,511
    
    
    
    10,068
    
    
    
    4.00Total interest-bearing liabilities
    
    
    7,789,564
    
    
    $
    53,690
    
    
    
    2.76
    %
    
    
    6,082,424
    
    
    $
    47,989
    
    
    
    3.16
    %Non-interest-bearing liabilities
    
    
    193,634
    
    
    
    
    
    
    
    
    
    
    
    299,598Total
liabilities
    
    
    7,983,198
    
    
    
    
    
    
    
    
    
    
    
    6,382,022Stockholders equity
    
    
    781,179
    
    
    
    
    
    
    
    
    
    
    
    691,112Total liabilities and stockholders equity
    
    $
    8,764,377
    
    
    
    
    
    
    
    
    
    
    $
    7,073,134Net interest income; interest rate spread (5)
    
    
    
    
    
    $
    56,006
    
    
    
    2.54
    %
    
    
    
    
    
    $
    44,569
    
    
    
    2.48
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.71
    %
    
    
    
    
    
    
    
    
    
    
    2.71
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    106.26
    %
    
    
    
    
    
    
    
    
    
    
    107.95
    %
 (footnotes on the following page) 26




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##### Table of Contents



For the three months period ended June 30,2004
    
    2003Average
    
    
    
    
    
    Yield /
    
    Average
    
    
    
    
    
    Yield /(Dollars in thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateInterest-Earning Assets:Cash and cash equivalents(1)
    
    $
    198,592
    
    
    $
    1,437
    
    
    
    1.45
    %
    
    $
    79,750
    
    
    $
    583
    
    
    
    1.46
    %Investment securities held for trading
    
    
    1,564
    
    
    
    18
    
    
    
    2.30
    
    
    
    
    
    
    
    
    
    
    
    Investment securities available for sale
    
    
    624,594
    
    
    
    11,739
    
    
    
    3.76
    
    
    
    596,003
    
    
    
    12,910
    
    
    
    4.33Investment securities held to maturity
    
    
    44,304
    
    
    
    1,098
    
    
    
    4.96
    
    
    
    30,419
    
    
    
    768
    
    
    
    5.05Mortgage-backed securities held for trading
    
    
    40,335
    
    
    
    1,291
    
    
    
    6.40
    
    
    
    81,494
    
    
    
    1,931
    
    
    
    4.74Mortgage-backed securities available for sale
    
    
    2,392,055
    
    
    
    61,688
    
    
    
    5.16
    
    
    
    2,080,655
    
    
    
    54,081
    
    
    
    5.20Mortgage-backed securities held to maturity
    
    
    31,006
    
    
    
    882
    
    
    
    5.69
    
    
    
    43,359
    
    
    
    1,249
    
    
    
    5.76Loans receivable, net (2)
    
    
    4,581,052
    
    
    
    138,260
    
    
    
    6.04
    
    
    
    3,284,068
    
    
    
    106,962
    
    
    
    6.51FHLB Stock
    
    
    104,149
    
    
    
    914
    
    
    
    1.76
    
    
    
    96,608
    
    
    
    2,330
    
    
    
    4.82Total interest-earning assets
    
    
    8,017,651
    
    
    $
    217,327
    
    
    
    5.42
    %
    
    $
    6,292,356
    
    
    $
    180,814
    
    
    
    5.75
    %Non-interest-earning assets
    
    
    558,227
    
    
    
    
    
    
    
    
    
    
    
    515,482Total assets
    
    $
    8,575,878
    
    
    
    
    
    
    
    
    
    
    $
    6,807,838Interest-Bearing Liabilities:Deposits
    
    $
    3,660,685
    
    
    $
    47,445
    
    
    
    2.59
    %
    
    $
    2,984,816
    
    
    $
    44,661
    
    
    
    2.99
    %Securities sold under agreements to
repurchase (3)
    
    
    2,330,893
    
    
    
    27,632
    
    
    
    2.37
    
    
    
    1,723,074
    
    
    
    25,585
    
    
    
    2.97Notes payable
    
    
    177,199
    
    
    
    2,019
    
    
    
    2.28
    
    
    
    229,167
    
    
    
    4,009
    
    
    
    3.50Other borrowings(4)
    
    
    1,356,141
    
    
    
    28,511
    
    
    
    4.20
    
    
    
    996,032
    
    
    
    19,769
    
    
    
    3.97Total interest-bearing liabilities
    
    
    7,524,918
    
    
    $
    105,607
    
    
    
    2.81
    %
    
    $
    5,933,089
    
    
    $
    94,024
    
    
    
    3.17
    %Non-interest-bearing liabilities
    
    
    280,056
    
    
    
    
    
    
    
    
    
    
    
    193,268Total
liabilities
    
    
    7,804,974
    
    
    
    
    
    
    
    
    
    
    
    6,126,357Stockholders equity
    
    
    770,904
    
    
    
    
    
    
    
    
    
    
    
    681,481Total liabilities and stockholders equity
    
    $
    8,575,878
    
    
    
    
    
    
    
    
    
    
    $
    6,807,838Net interest income; interest rate spread (5)
    
    
    
    
    
    $
    111,720
    
    
    
    2.61
    %
    
    
    
    
    
    $
    86,790
    
    
    
    2.58
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.79
    %
    
    
    
    
    
    
    
    
    
    
    2.76
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    106.55
    %
    
    
    
    
    
    
    
    
    
    
    106.06
    %
 (footnotes on the following page) 27




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##### 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 six months period endedJune 30,2004
    
    2003(Dollars in thousands)Composition of Servicing Portfolio at period end:GNMA
    
    $
    2,079,520
    
    
    $
    2,474,267FNMA/FHLMC
    
    
    4,487,059
    
    
    
    5,711,663Other mortgage loans (3)
    
    
    4,380,879
    
    
    
    3,132,576Total servicing portfolio (3)
    
    $
    10,947,458
    
    
    $
    11,318,506Activity in the Servicing Portfolio:Beginning servicing portfolio
    
    $
    10,942,821
    
    
    $
    10,991,945Add: Loan originations and purchases
    
    
    1,714,071
    
    
    
    1,424,138Servicing of portfolio loans acquired
    
    
    2,016
    
    
    
    1,006,036Less: Sale of servicing rights(1)
    
    
    (149,337
    )
    
    
    (129,184
    )Run-offs(2)
    
    
    (1,562,113
    )
    
    
    (1,974,429
    )Ending servicing portfolio(3)
    
    $
    10,947,458
    
    
    $
    11,318,506Number of loans serviced
    
    
    144,914
    
    
    
    155,946Average loan size
    
    $
    76
    
    
    $
    73Average servicing fee rate
    
    
    0.40
    %
    
    
    0.48
    %
 28




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##### 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 $2.1 billion and $1.5 billion, respectively,
serviced for Premier Bank, which constituted 19.6% and 13.5% of the total
servicing portfolio, and $387.2 million and $82.5 million, respectively,
serviced for Crown Bank, which constituted 3.5% and 0.7%, 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 June 30, 2004, approximately 25.3% 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 six
month periods ended June 30, 2004 and 2003, the Company recognized $6.7 million
and $12.8 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 June 30, 2004, the Company had $150.0 million in borrowing capacity
under unused warehousing and other lines of credit, $1.2 billion in borrowing
capacity under unused lines of credit with the FHLB and $55.0 million available
unused fed funds lines of credit. At June 30, 2004, the Company had outstanding commitments to originate
and/or purchase mortgage and non-mortgage loans of $641.7 million (including
unused lines of credit). Certificates of deposit which are scheduled to mature
within one year totaled $1.3 billion at June 30, 2004, and borrowings that are
scheduled to mature within the same period amounted to $1.9 billion. The
Company anticipates that it will have sufficient funds available to meet its
current loan commitments and other liquidity needs. 29




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##### 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
June 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 7.07%, 12.28% and 13.29%, respectively. At June 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 7.35%, 11.20% and
12.06%, respectively. Thus, at June 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 a proposed rule that would continue to allow
trust preferred securities issued by variable interest entities to
constitute Tier 1 capital for bank holding companies. The
proposed rules would impose stricter quantitative and qualitative
limits on the Tier 1 treatment of trust preferred securities.
Currently, trust preferred securities and qualifying perpetual
preferred stock are limited in the aggregate to no more than 25% of a
holding companys core capital elements. The proposed rule would
amend the existing limit by providing that restricted core capital
elements (including trust preferred securities and qualifying
perpetual preferred stock) can be no more than 25% of core capital,
net of goodwill. It is possible that the Federal Reserve rules will
not be adopted as proposed and that the Federal Reserve will conclude
that trust preferred securities should no longer be treated as
Tier 1 regulatory 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. 30




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##### 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 June 30, 2004 is presented on page 24 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. 31




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##### 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:Changes
in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities Not applicable. 
 Item 3:Defaults Upon Senior Securities Not applicable. 
 Item 4:Submission of Matters to a Vote of Security Holders  The Companys Annual Meeting of Stockholders was held on April 23, 2004.
The following matters were submitted for a vote:  1.
    
    With respect to the election of three directors to serve three-year
terms expiring at the Annual Meeting of Stockholders to be held in the
year 2007 or until their respective successors are elected and
qualified, the following were the number of shares voted for each
nominee: Victor L. Galan-Fundora
    
    Class A -  For
    
    
    21,559,584
    
    
    Against
    
    
    Class B - For
    
    
    16,312,497
    
    
    Against
    
    
    9,032,562Rafael Nin
    
    Class A -  For
    
    
    21,559,584
    
    
    Against
    
    
    Class B - For
    
    
    24,037,414
    
    
    Against
    
    
    1,307,645Benigno Fernandez
    
    Class A -  For
    
    
    21,559,584
    
    
    Against
    
    
    Class B - For
    
    
    24,037,417
    
    
    Against
    
    
    1,307,642
  The following directors terms of office continued after the
meeting: Gilberto Rivera - Arreaga, Laureano Carus, Ileana M.
Colon-Carlo, Roberto Gorbea, Victor J. Galan, Ramon Prats, Enrique
Umpierre Suárez and Eduardo McCormack.  2.
    
    With respect to the ratification of the appointment of
PricewaterhouseCoopers, LLP as the Companys independent auditors for
the fiscal year ending December 31, 2004, the following were the number
of shares voted: Class A -
    
    For
    
    
    21,559,584
    
    
    Against
    
    
    
    
    
    Abstain
    
    
    
    
    
    Broker Non-votes
    
    
    Class B -
    
    For
    
    
    25,232,436
    
    
    Against
    
    
    100,722
    
    
    Abstain
    
    
    11,901
    
    
    Broker Non-votes
    
    
    
  3.
    
    With respect to the approval of an amendment to the Amended and
Restated Certificate of Incorporation of the Company to increase the
authorized common stock of the Company from One Hundred Million
(100,000,000) to Two Hundred Million (200,000,000), the following were
the number of shares voted: Class A -
    
    For
    
    
    21,559,584
    
    
    Against
    
    
    
    
    
    Abstain
    
    
    
    
    
    Broker Non-votes
    
    
    Class B -
    
    For
    
    
    22,398,615
    
    
    Against
    
    
    2,929,881
    
    
    Abstain
    
    
    16,563
    
    
    Broker Non-votes
    
    
    
   32




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##### Table of Contents



4.
    
    With respect to the approval of the R&G Financial Corporation 2004
Stock Option Plan, the following were the number of shares voted: Class A -
    
    For
    
    
    21,559,584
    
    
    Against
    
    
    
    
    
    Abstain
    
    
    
    
    
    Broker Non-votes
    
    
    Class B -
    
    For
    
    
    13,066,873
    
    
    Against
    
    
    2,887,645
    
    
    Abstain
    
    
    9,390,541
    
    
    Broker Non-votes
    
    
    
 
 Item 5:Other
Information. Not applicable. 
 Item 6:Exhibits and Reports on Form 8-K. (a) 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)3.1.0
    
    Certificate of Incorporation of R&G Financial Corporation (4)3.1.1
    
    Certificate of Amendment to Certificate of Incorporation of R&G
Financial Corporation (4)3.1.2
    
    Amended and Restated Certificate of Incorporation of R&G Financial
Corporation (5)3.1.3
    
    Certificate of Amendment to Amended and Restated Certificate of
Incorporation of R&G Financial Corporation (6)3.1.4
    
    Second Certificate of Amendment to Amended and Restated Certificate
of Incorporation of R&G Financial Corporation (15)3.1.5
    
    Certificate of Resolution designating the terms of the Series A
Preferred Stock (7)3.1.6
    
    Certificate of Resolution designating the terms of the Series B
Preferred Stock (8)3.1.7
    
    Certificate of Designation for Series C Preferred Stock (12)3.1.8
    
    Certificate of Designation for Series D Preferred Stock (13)3.2
    
    Bylaws of R&G Financial Corporation (4)4.0
    
    Form of Stock Certificate of R&G Financial Corporation (4)4.1
    
    Form of Series A Preferred Stock Certificate of R&G Financial Corporation (9)4.2
    
    Form of Series B Preferred Stock Certificate of R&G Financial Corporation (10)4.3
    
    Form of Series C Preferred Stock Certificate of R&G Financial Corporation (11)4.4
    
    Form of Series D Preferred Stock Certificate of R&G Financial Corporation (14)4.5
    
    Form of Indenture dated as of October 6, 2003, between R&G Financial
Corporation and Wilmington Trust Company (18)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
 33




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##### Table of Contents



No.
    
    DescriptionMortgage 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, 200410.4
    
    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.(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. 34




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##### Table of Contents



(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 Form 10-Q filed with the SEC on
May 10, 2004.(*)
    
    Management contract or compensatory plan or arrangement.(b)
    
    Reports on Form 8-K The Registrant filed the following Reports on Form 8-K during the quarter
ended June 30, 2004. 35




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##### Table of Contents



(1)
    
    Form 8-K filed on April 20, 2004 with an attached press release
announcing the Registrants earnings for the quarter ended March 30,
2004.(2)
    
    Form 8-K filed on April 23, 2004 with an attached investor
presentation of Registrants results for the quarter ended March 30,
2004.(3)
    
    Form 8-K filed on April 1, 2004 reporting the successful completion
of its $100 million trust preferred securities offering to the Puerto
Rico Conservation Trust Fund, a Puerto Rico charitable trust. 36




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##### 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 CORPORATIONAugust 9, 2004
    By:
    Date:/S/ VICTOR J. GALANVíctor J. Galán, Chairmanand Chief Executive Officer
(Principal Executive Officer) By:
    /S/ JOSEPH R. SANDOVALJoseph R. SandovalExecutive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer) 37