##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q t
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
 OR à
    
    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
    
    (I.R.S. Employeror organization)
    
    Identification No. )
 280 Jesús T. Piñero AvenueHato Rey, San Juan, Puerto
Rico
    
    00918(Address of principal executive offices)
    
    (Zip Code)
 (787) 758-2424 (Registrants telephone number, including area code) Indicate by checkmark whether Registrant (a) has filed all reports required to
be filed by Section 13 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).  x Yes
      o NO Number of shares of Class B Common Stock outstanding as of March 31, 2004:
29,539,464 (Does not include 21,559,584 Class A Shares of Common Stock which
are exchangeable into Class B Shares of Common Stock at the option of the
holder.) 1




---



R&G FINANCIAL CORPORATION INDEX PagePart I - Financial InformationItem 1.Consolidated Financial Statements
    
    
    3Consolidated Statements of Financial Condition as of
March 31, 2004 (Unaudited) and December 31, 2003
    
    
    3Consolidated Statements of Income for the Three
Months Ended March 31, 2004 and 2003 (Unaudited)
    
    
    4Consolidated Statements of Comprehensive Income for the Three
Months Ended March 31, 2004 and 2003 (Unaudited)
    
    
    5Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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
    
    
    29Item 4.Controls and Procedures
    
    
    29Part II - Other InformationItem 1.Legal Proceedings
    
    
    30Item 2.Changes in Securities
    
    
    30Item 3.Defaults Upon Senior Securities
    
    
    30Item 4.Submission of Matters to a Vote of Security Holders
    
    
    30Item 5.Other Information
    
    
    30Item 6.Exhibits and Reports on Form 8-K
    
    
    30Signatures
    
    
    32EX-10.3.1 AMENDMENT NO.3 TO THE MASTER PRODUCTIONEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO
  2




---



##### Table of Contents



PART 1-FINANCIAL INFORMATION 
 ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS R&G FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 March 31, 2004
    
    December 31, 2003(Unaudited)(Dollars in thousands)ASSETSCash and due from banks
    
    $
    86,222
    
    
    $
    114,916Money market investments:Securities purchased under agreements to resell
    
    
    119,428
    
    
    
    85,053Time deposits with other banks
    
    
    98,919
    
    
    
    34,349Mortgage loans held for sale, at lower of cost or market
    
    
    271,378
    
    
    
    315,691Mortgage-backed and investment securities held for trading, at fair value
    
    
    14,806
    
    
    
    31,797Trading securities pledged on repurchase agreements, at fair value
    
    
    16,134
    
    
    
    6,558Mortgage-backed and investment securities available for sale, at fair value
    
    
    1,930,429
    
    
    
    1,805,360Available for sale securities pledged on repurchase agreements, at fair
value
    
    
    1,283,163
    
    
    
    1,215,287Mortgage-backed and investment securities held to maturity, at amortized cost
(estimated market value: 2004 - $15,415; 2003 - $14,940)
    
    
    15,345
    
    
    
    14,883Held to maturity securities pledged on repurchase agreements, at amortized cost
(estimated market value: 2004 - $61,502; 2003 - $65,248)
    
    
    59,554
    
    
    
    63,317Federal Home Loan Bank stock, at cost
    
    
    104,479
    
    
    
    100,461Loans receivable, net
    
    
    4,196,730
    
    
    
    4,048,507Accounts receivable, including advances to investors, net
    
    
    49,374
    
    
    
    38,195Accrued interest receivable
    
    
    44,528
    
    
    
    42,527Servicing
asset, net
    
    
    112,467
    
    
    
    119,610Premises and equipment, net
    
    
    44,772
    
    
    
    42,782Other assets
    
    
    136,450
    
    
    
    119,587$
    8,584,178
    
    
    $
    8,198,880LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Deposits
    
    $
    3,709,892
    
    
    $
    3,555,764Federal funds purchased
    
    
    
    
    
    
    21,000Securities sold under agreements to repurchase
    
    
    2,339,910
    

    
    
    2,220,795Notes payable
    
    
    166,394
    
    
    
    192,259Advances from FHLB
    
    
    1,098,600
    
    
    
    1,129,600Other borrowings
    
    
    265,339
    
    
    
    157,670Accounts payable and accrued liabilities
    
    
    206,554
    
    
    
    158,006Other liabilities
    
    
    14,958
    
    
    
    13,4337,801,647
    
    
    
    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, 40,000,000 shares authorized, 21,559,584
issued and outstanding
    
    
    216
    
    
    
    216Class B - $.01 par value, 60,000,000 shares authorized, 29,539,464
issued and outstanding (2003 - 29,506,715)
    
    
    295
    
    
    
    295Additional paid-in capital
    
    
    115,368
    
    
    
    115,017Retained earnings
    
    
    417,121
    
    
    
    387,036Capital reserves
    
    
    25,103
    
    
    
    25,103Accumulated other comprehensive income, net of tax
    
    
    11,428
    
    
    
    9,686782,531
    
    
    
    750,353$
    8,584,178
    
    
    $
    8,198,880
 The accompanying notes are an integral part of these statements. 3




---



##### Table of Contents



R&G FINANCIAL CORPORATION 
 CONSOLIDATED STATEMENTS OF INCOME
 Three monthperiod endedMarch 31,2004
    
    2003(Unaudited)(Dollars in thousands except for per share data)Interest income:Loans
    
    $
    68,169
    
    
    $
    51,955Money market and other investments
    
    
    7,094
    
    
    
    8,618Mortgage-backed securities
    
    
    32,368
    
    
    
    27,683Total interest income
    
    
    107,631
    
    
    
    88,256Interest expense:Deposits
    
    
    23,703
    
    
    
    21,693Securities sold under agreements to repurchase
    
    
    13,513
    
    
    
    12,771Notes payable
    
    
    1,469
    
    
    
    1,870Other
    
    
    13,232
    
    
    
    9,701Total interest expense
    
    
    51,917
    
    
    
    46,035Net interest income
    
    
    55,714
    
    
    
    42,221Provision for loan losses
    
    
    (6,470
    )
    
    
    (4,220
    )Net interest income after provision for loan losses
    
    
    49,244
    
    
    
    38,001Non-interest income:Net gain on origination and sale of loans
    
    
    39,893
    
    
    
    33,017Loan administration and servicing fees
    
    
    9,317
    
    
    
    13,201Service charges, fees and other
    
    
    8,912
    
    
    
    5,72158,122
    
    
    
    51,939Total revenues
    
    
    107,366
    
    
    
    89,940Non-interest expenses:Employee compensation and benefits
    
    
    16,700
    
    
    
    15,147Office occupancy and equipment
    
    
    6,380
    
    
    
    5,702Other administrative and general
    
    
    31,243
    
    
    
    30,54354,323
    
    
    
    51,392Income before income taxes
    
    
    53,043
    
    
    
    38,548Income tax expense:Current
    
    
    13,505
    
    
    
    5,940Deferred
    
    
    998
    
    
    
    3,46714,503
    
    
    
    9,407Net income
    
    $
    38,540
    
    
    $
    29,141Earnings per common share - Basic
    
    $
    0.68
    
    
    $
    0.49- Diluted
    
    $
    0.67
    
    
    $
    0.49Weighted average number of shares outstanding - Basic
    
    
    51,089,482
    
    
    
    51,034,079- Diluted
    
    
    51,326,343
    
    
    
    51,271,139
 The accompanying notes are an integral part of these statements. 4




---



##### Table of Contents



R&G FINANCIAL CORPORATION 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 Three monthperiod endedMarch 31,2004
    
    2003(Unaudited)(Dollars in thousands)Net income
    
    $
    38,540
    
    
    $
    29,141Other comprehensive income,
before tax:Unrealized (losses) gains :Cash flow hedges
    
    
    (2,696
    )
    
    
    340Investment securities:Arising during period
    
    
    5,486
    
    
    
    (4,728
    )Less: Reclassification
adjustments for losses (gains) included in
net income
    
    
    13
    
    
    
    (106
    )5,499
    
    
    
    (4,834
    )Other comprehensive gain (loss)
before
income taxes
    
    
    2,803
    
    
    
    (4,494
    )Income tax (expense) benefit
related to items of
other comprehensive income
    
    
    (1,062
    )
    
    
    1,757Other comprehensive income
(loss), net of tax
    
    
    1,741
    
    
    
    (2,737
    )Comprehensive income, net of tax
    
    $
    40,281
    
    
    $
    26,404
 The accompanying notes are an integral part of these statements. 5




---



##### Table of Contents



R&G FINANCIAL CORPORATION 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three month period ended March 31,2004
    
    2003(Unaudited)(Dollars in thousands)Cash flows from operating activities:Net income
    
    $
    38,540
    
    
    $

    29,141Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    3,138
    
    
    
    2,134Amortization of premium on investments and mortgage-backed securities, net
    
    
    1,791
    
    
    
    2,506Scheduled amortization of servicing asset
    
    
    5,479
    
    
    
    5,597Impairment charges on servicing asset
    
    
    9,300
    
    
    
    10,829Provision for loan losses
    
    
    6,470
    
    
    
    4,220Loss (gain) on sales of mortgage-backed and investment securities available for sale
    
    
    13
    
    
    
    (106
    )Unrealized loss on trading securities and derivative instruments, net
    
    
    2,206
    
    
    
    803Decrease (increase) in mortgage loans held for sale
    
    
    57,648
    
    
    
    (27,741
    )Net decrease in securities held for trading
    
    
    7,364
    
    
    
    28,243Increase in receivables
    
    
    (13,181
    )
    
    
    (4,792
    )Increase in other assets
    
    
    (9,420
    )
    
    
    (8,940
    )(Decrease) increase in notes payable and other borrowings
    
    
    (25,928
    )
    
    
    21,274Increase in accounts payable and accrued liabilities
    
    
    42,635
    
    
    
    13,218Increase in other liabilities
    
    
    1,525
    
    
    
    1,919Total adjustments
    
    
    89,040
    
    
    
    49,164Net cash provided by operating activities
    
    
    127,580
    
    
    
    78,305Cash flows from investing activities:Purchases of investment securities available for sale and held to maturity
    
    
    (570,929
    )
    
    
    (770,127
    )Proceeds from sales and redemption of securities available for sale
    
    
    228,495
    
    
    
    144,806Principal repayments on mortgage-backed securities
    
    
    164,030
    
    
    
    242,240Proceeds from sales of loans
    
    
    206,293
    
    
    
    24,488Net originations of loans
    
    
    (381,863
    )
    
    
    (274,910
    )Purchases of FHLB stock, net
    
    
    (4,018
    )
    
    
    (14,619
    )Acquisition of premises and equipment
    
    
    (4,839
    )
    
    
    (3,815
    )Acquisition of servicing rights
    
    
    (7,636
    )
    
    
    (7,921
    )Net cash used in investing activities
    
    
    (370,467
    )
    
    
    (659,858
    )Cash flows from financing activities:Increase in deposits - net
    
    
    154,128
    
    
    
    199,610Decrease in federal funds purchased
    
    
    (21,000
    )
    
    
    Increase in securities sold under agreements to repurchase - net
    
    
    119,115
    
    
    
    341,577(Repayments) advances from FHLB, net
    
    
    (31,000
    )
    
    
    18,000Proceeds from issuance of long-term debt
    
    
    100,000
    
    
    
    Proceeds from issuance of common stock
    
    
    351
    
    
    
    194Cash dividends:Common stock
    
    
    (4,484
    )
    
    
    (3,353
    )Preferred stock
    
    
    (3,971
    )
    
    
    (3,971
    )Cash paid in lieu of fractional shares on stock split
    
    
    (1
    )
    
    
    Net cash provided by financing activities
    
    
    313,138
    
    
    
    552,057Net increase (decrease) in cash and cash equivalents
    
    
    70,251
    
    
    
    (29,496
    )Cash and cash equivalents at beginning of period
    
    
    234,318
    
    
    
    197,643Cash and cash equivalents at end of period
    
    $
    304,569
    
    
    $
    168,147Cash and cash equivalents include:Cash and due from banks
    
    $
    86,222
    
    
    $
    101,132Short-term investments
    
    
    
    
    
    
    17,415Securities purchased under agreements to resell
    
    
    119,428
    
    
    
    12,297Time deposits with other banks
    
    
    98,919
    
    
    
    37,303$
    304,569
    
    
    $
    168,147
 The accompanying notes are an integral part of these statements. 6




---



##### Table of Contents



R&G FINANCIAL CORPORATION 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1 - REPORTING ENTITY AND BASIS OF PRESENTATION Reporting entity The accompanying unaudited consolidated financial statements include the
accounts of R&G Financial Corporation (the Company), a diversified financial
services company, and its wholly-owned subsidiaries, R-G Premier Bank of Puerto
Rico (Premier Bank), a Puerto Rico commercial bank, R-G Crown Bank (Crown
Bank), a Florida-based federal savings bank, R&G Mortgage Corp. (R&G
Mortgage), Puerto Ricos second largest mortgage banker, R-G 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-one 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 seven 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, North Carolina and Florida, 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 March 31, 2004
and the results of operations and changes in its cash flows for the three
months ended March 31, 2004 and 2003. The results of operations for the three month periods ended March 31, 2004
are not necessarily indicative of the results to be expected for the year
ending December 31, 2004. The unaudited consolidated financial statements and
notes thereto should be read in conjunction with the audited financial
statements and notes thereto for the year ended December 31, 2003. Basis of consolidation All significant intercompany balances and transactions have been
eliminated in the accompanying unaudited financial statements. 7




---



##### Table of Contents



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, and 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 8




---



##### Table of Contents



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 created by the
Company in August 2003, which issued $15 million in trust preferred securities
in a private placement, and R&G Capital Trust III which in October 2003 issued
$100 million of trust preferred securities in a public offering. On March 31, 2004 the Company created R&G Capital Trust V which also
issued $100 million of trust preferred securities in a public offering. The
requirements of FIN 46 were also applied to R&G Capital Trust
V. Based on
interim guidance issued by the Federal Reserve Board, the deconsolidation of
these vehicles pursuant to FIN 46 would not impact the Tier I capital treatment
of the liabilities to the extent permitted under current regulations until
notice is given to the contrary. Accounting for Certain Loans and/or Debt Securities Acquired in a Transfer In November 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 statement 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 that 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. 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 (236,861 and 237,060
during the three months ended March 31, 2004 and 2003, respectively, after
giving effect to stock split), 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 monthperiod endedMarch 31,2004
    
    2003$0.0878
    
    $
    0.0653
 9




---



##### Table of Contents



NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES The carrying value and estimated fair value of investment and
mortgage-backed securities by category are shown below. The fair value of
investment securities is based on quoted market prices and dealer quotes. March 31,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Mortgage-backed securities held for
trading:FHLMC certificates
    
    $
    30,885
    
    
    $
    33,245Investment securities held for trading:Municipal securities
    
    
    
    
    
    
    446Bank issued trust preferred securities
    
    
    
    
    
    
    4,650Other
    
    
    55
    
    
    
    1455
    
    
    
    5,110$
    30,940
    
    
    $
    38,355
 10




---



##### Table of Contents



March 31, 2004
    
    December 31, 2003Amortized
    
    Fair
    
    Amortized
    
    Faircost
    
    value
    
    cost
    
    value(Unaudited)(Dollars in thousands)Mortgage-backed Securities Available for Sale:Collateralized mortgage obligations (CMO):Due from one to five years
    
    $
    5,014
    
    
    $
    5,082
    
    
    $
    5,939
    
    
    $
    6,019Due from five to ten years
    
    
    42,522
    
    
    
    42,571
    
    
    
    20,889
    
    
    
    20,873Due over ten years
    
    
    1,024,892
    
    
    
    1,030,500
    
    
    
    941,970
    
    
    
    939,7571,072,428
    
    
    
    1,078,153
    
    
    
    968,798
    
    
    
    966,649CMO residuals (interest only), and interest only
strips (IOs)
    
    
    131,575
    
    
    
    132,845
    
    
    
    107,058
    
    
    
    107,957FNMA certificates:Due from one to five years
    
    
    222
    
    
    
    308
    
    
    
    71
    
    
    
    72Due from five to ten years
    
    
    94,016
    
    
    
    94,077
    
    
    
    87,989
    
    
    
    87,101Due over ten years
    
    
    417,881
    
    
    
    427,918
    
    
    
    388,687
    
    
    
    405,193512,119
    
    
    
    522,303
    
    
    
    476,747
    
    
    
    492,366FHLMC certificates:Due from one to five years
    
    
    202
    
    
    
    214
    
    
    
    3
    
    
    
    3Due from five to ten years
    
    
    44,870
    
    
    
    44,531
    
    
    
    20,308
    
    
    
    19,955Due over ten years
    
    
    419,113
    
    
    
    426,954
    
    
    
    439,876
    
    
    
    448,161464,185
    
    
    
    471,699
    
    
    
    460,187
    
    
    
    468,119GNMA certificates:Due from one to five years
    
    
    1,055
    
    
    
    1,089
    
    
    
    50
    
    
    
    52Due from five to ten years
    
    
    11,935
    
    
    
    12,316
    
    
    
    12,563
    
    
    
    12,918Due over ten years
    
    
    332,446
    
    
    
    335,357
    
    
    
    346,568
    
    
    
    350,217345,436
    
    
    
    348,762
    
    
    
    359,181
    
    
    
    363,1872,525,743
    
    
    
    2,553,762
    
    
    
    2,371,971
    
    
    
    2,398,278Investment Securities Available for Sale:U.S. Government and Agencies securities:Due within one year
    
    
    37,482
    
    
    
    37,836
    
    
    
    62,519
    
    
    
    63,113Due from one to five years
    
    
    499,399
    
    
    
    502,100
    
    
    
    399,275
    
    
    
    398,028Due from five to ten years
    
    
    47,562
    
    
    
    49,067
    
    
    
    79,388
    
    
    
    81,042584,443
    
    
    
    589,003
    
    
    
    541,182
    
    
    
    542,183Corporate debt obligations:Due within one year
    
    
    5,009
    
    
    
    5,064
    
    
    
    14,247
    
    
    
    14,362Due from one to five years
    
    
    48,568
    
    
    
    51,439
    
    
    
    48,578
    
    
    
    51,376Due from five to ten years
    
    
    1,784
    
    
    
    1,892
    
    
    
    2,123
    
    
    
    2,10955,361
    
    
    
    58,395
    
    
    
    64,948
    
    
    
    67,847US Municipal debt obligations-Due over ten years
    
    
    12,206
    
    
    
    12,432
    
    
    
    12,209
    
    
    
    12,339652,010
    
    
    
    659,830
    
    
    
    618,339
    
    
    
    622,369$
    3,177,753
    
    
    $
    3,213,592
    
    
    $
    2,990,310
    
    
    $
    3,020,647
 11




---



##### Table of Contents



March 31, 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
    
    $
    3,215
    
    
    $
    3,321
    
    
    $
    3,497
    
    
    $
    3,581Due from five to ten years
    
    
    408
    
    
    
    414
    
    
    
    463
    
    
    
    469Due over ten years
    
    
    22,304
    
    
    
    22,804
    
    
    
    25,475
    
    
    
    26,07925,927
    
    
    
    26,539
    
    
    
    29,435
    
    
    
    30,129FNMA certificates-Due over ten years
    
    
    4,494
    
    
    
    4,692
    
    
    
    4,785
    
    
    
    4,999FHLMC certificates-Due over ten years
    
    
    76
    
    
    
    74
    
    
    
    81
    
    
    
    7930,497
    
    
    
    31,305
    
    
    
    34,301
    
    
    
    35,207Investment securities held to
maturity:United States Government and
Agencies obligations-Due from one to five years
    
    
    2,499
    
    
    
    2,499
    
    
    
    1,997
    
    
    
    1,997Puerto Rico Government and
Agencies obligations:Due within one year
    
    
    558
    
    
    
    566
    
    
    
    558
    
    
    
    567Due from one to five years
    
    
    31,846
    
    
    
    33,175
    
    
    
    31,846
    
    
    
    33,088Due from five to ten years
    
    
    9,399
    
    
    
    9,272
    
    
    
    9,398
    
    
    
    9,23041,803
    
    
    
    43,013
    
    
    
    41,802
    
    
    
    42,885Other - Due from one to five years
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    
    10044,402
    
    
    
    45,612
    
    
    
    43,899
    
    
    
    44,982$
    74,899
    
    
    $
    76,917
    
    
    $
    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 March 31, 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
    
    $
    1,058,156Mortgage-backed securities held to maturity, at amortized
cost
    
    
    264$
    1,058,420
 12




---



##### Table of Contents



NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES Loans consist of the following: March 31,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Real estate loans:Residential - first mortgage
    
    $
    2,433,339
    
    
    $
    2,384,279Residential - second mortgage
    
    
    36,647
    
    
    
    34,999Land
    
    
    109,235
    
    
    
    96,796Construction
    
    
    635,211
    
    
    
    603,867Commercial
    
    
    814,527
    
    
    
    792,9504,028,959
    
    
    
    3,912,891Undisbursed portion of loans in process
    
    
    (228,496
    )
    
    
    (224,960
    )Net deferred loan costs
    
    
    1,106
    
    
    
    1,3693,801,569
    
    
    
    3,689,300Other loans:Commercial
    
    
    223,786
    
    
    
    188,690Consumer:Secured by deposits
    
    
    23,534
    
    
    
    24,713Secured by real estate
    
    
    51,149
    
    
    
    53,709Other
    
    
    140,341
    
    
    
    131,711Unearned interest
    
    
    (1
    )
    
    
    (1
    )438,809
    
    
    
    398,822Total loans
    
    
    4,240,378
    
    
    
    4,088,122Allowance for loan losses
    
    
    (43,648
    )
    
    
    (39,615
    )$
    4,196,730
    
    
    $
    4,048,507
 The changes in the allowance for loan losses follow: Three months endedMarch 31,2004
    
    2003(Unaudited)(Dollars in thousands)Balance, beginning of period
    
    $
    39,615
    
    
    $
    32,675Provision for loan losses
    
    
    6,470
    
    
    
    4,220Loans charged-off
    
    
    (3,081
    )
    
    
    (3,672
    )Recoveries
    
    
    583
    
    
    
    312Transfers
    
    
    61
    
    
    
    (193
    )Balance, end of period
    
    $
    43,648
    
    
    $
    33,342
 13




---



##### Table of Contents



The following table sets forth the amounts and categories of R&G Financials
non-performing assets at the dates indicated. March 31,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Non-accruing loans:Residential real estate (1)
    
    $
    67,864
    
    
    $
    57,031Residential construction
    
    
    2,855
    
    
    
    2,424Commercial real estate
    
    
    22,863
    
    
    
    22,589Commercial business
    
    
    2,311
    
    
    
    1,733Consumer unsecured
    
    
    908
    
    
    
    833Total
    
    
    96,801
    
    
    
    84,610Accruing loans greater than 90 days
delinquent:Residential real estate (1)
    
    
    
    
    
    
    Residential construction
    
    
    
    
    
    
    Commercial real estate
    
    
    881
    
    
    
    Commercial business
    
    
    499
    
    
    
    382Consumer
    
    
    350
    
    
    
    422Total accruing loans greater than
90 days delinquent
    
    
    1,730
    
    
    
    804Total non-performing loans
    
    
    98,531
    
    
    
    85,414Real estate owned (2)
    
    
    19,894
    
    
    
    19,954Other repossessed assets
    
    
    242
    
    
    
    22020,136
    
    
    
    20,174Total non-performing assets
    
    $
    118,667
    
    
    $
    105,588Total non-performing loans as a
percentage of total loans
    
    
    2.21
    %
    
    
    1.98
    %Total non-performing assets as a
percentage of total assets
    
    
    1.38
    %
    
    
    1.29
    %Allowance for loan losses as a percentage
of total non-performing loans
    
    
    44.30
    %
    
    
    46.38
    %Allowance for loan losses as a percentage
of total loans outstanding
    
    
    0.98
    %
    
    
    0.92
    %Net charge-offs to average loans
outstanding
    
    
    0.22
    %
    
    
    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 0.22% during the three months ended March 31,
2004 and 0.32% during the year ended December 31, 2003.  (2)
    
    Consist primarily of residential real estate foreclosed by the
Company. 14




---



##### Table of Contents



NOTE 5 - SERVICING ASSET The changes in the servicing asset of the Company follows: Three monthsperiod endedMarch 31,2004
    
    2003(Unaudited)(Dollars in thousands)Balance at beginning of period
    
    $
    119,610
    
    
    $
    142,334Rights originated
    
    
    7,414
    
    
    
    6,492Rights purchased
    
    
    222
    
    
    
    1,429Scheduled amortization
    
    
    (5,479
    )
    
    
    (5,597
    )Impairment charges:Unscheduled amortization
    
    
    (5,765
    )
    
    
    (6,708
    )Provision of valuation reserves
    
    
    (3,535
    )
    
    
    (4,120
    )Balance at end of period
    
    $
    112,467
    
    
    $
    133,830
 NOTE 6 - DEPOSITS Deposits are summarized as follows: March 31,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Passbook savings
    
    $
    350,613
    
    
    $
    337,463NOW accounts
    
    
    143,378
    
    
    
    133,201Super NOW accounts
    
    
    437,639
    
    
    
    426,144Regular checking accounts
(non-interest bearing)
    
    
    153,037
    
    
    
    134,659Commercial checking accounts
(non-interest bearing)
    
    
    288,473
    
    
    
    259,6141,022,527
    
    
    
    953,618Certificates of deposit:Under $100,000
    
    
    714,314
    
    
    
    731,655$100,000 and over
    
    
    1,615,576
    
    
    
    1,527,5812,329,890
    
    
    
    2,259,236Accrued interest payable
    
    
    6,862
    
    
    
    5,447$
    3,709,892
    
    
    $
    3,555,764
 15




---



##### Table of Contents



NOTE 7 - COMMITMENTS AND CONTINGENCIES Commitments to buy and sell GNMA certificates and mortgage loans As of March 31, 2004, the Company had open commitments to issue GNMA
certificates of approximately $109.4 million. In addition, the Company had
commitments to sell mortgage loans to third party investors amounting to
approximately $251.8 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 three months ended March 31, 2004. 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 March 31, 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 $1.2 billion at March 31, 2004. At March 31, 2004, the Company
has an allowance for recourse provisions of $4.1 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, and 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




---



##### 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 endedMarch 31,2004
    
    2003(Unaudited)(Dollars in thousands)Employee costs
    
    $
    25,847
    
    
    $
    23,102Other administrative and general expenses
    
    $
    32,938
    
    
    $
    32,092
 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 March 31,2004
    
    2003(Unaudited)Mortgage
    
    
    
    
    
    Segments
    
    
    
    
    
    Mortgage
    
    
    
    
    
    SegmentsBanking
    
    Banking
    
    Other (1)
    
    Totals
    
    Banking
    
    Banking
    
    Other (1)
    
    TotalsRevenues
    
    $
    73,441
    
    
    $
    31,812
    
    
    $
    5,278
    
    
    $
    110,531
    
    
    $
    41,425
    
    
    $
    45,663
    
    
    $
    3,269
    
    
    $
    90,357Non-interest expenses
    
    
    25,935
    
    
    
    27,729
    
    
    
    1,895
    
    
    
    55,559
    
    
    
    23,375
    
    
    
    27,607
    
    
    
    1,198
    
    
    
    52,180Income before income taxes
    
    $
    47,506
    
    
    $
    4,083
    
    
    $
    3,383
    
    
    $
    54,972
    
    
    $
    18,050
    
    
    $
    18,056
    
    
    $
    2,071
    
    
    $
    38,177
  (1)
    
    Comprised of broker-dealer and insurance agency operations. 17




---



##### 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 endedMarch 31,2004
    
    2003(Dollars in thousands)Revenues:Total revenues for reportable segments
    
    $
    110,531
    
    
    $
    90,357Elimination of intersegment revenues
    
    
    (1,729
    )
    
    
    (904
    )Corporate revenues
    
    
    (1,436
    )
    
    
    487Total consolidated revenues
    
    $
    107,366
    
    
    $
    89,940Income before income taxes:Total income before income taxes for reportable
segments
    
    $
    54,972
    
    
    $
    38,177Elimination of intersegment profits
    
    
    (30
    )
    
    
    102Unallocated corporate income
    
    
    (1,899
    )
    
    
    269Income before income taxes, consolidated
    
    $
    53,043
    
    
    $
    38,548
 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
March 31, 2004 and December 31, 2003 follows: March 31,
    
    December 31,2004
    
    2003(Unaudited)(Dollars in thousands)Assets:Banking
    
    $
    7,806,171
    
    
    $
    7,387,475Mortgage Banking
    
    
    863,819
    
    
    
    890,023Other
    
    
    161,026
    
    
    
    168,294Total assets for reportable segments
    
    
    8,831,016
    
    
    
    8,445,792Parent company assets
    
    
    171,450
    
    
    
    66,920Elimination of intersegment balances
    
    
    (418,288
    )
    
    
    (313,832
    )Consolidated total assets
    
    $
    8,584,178
    
    
    $
    8,198,880
 18




---



##### 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;
    
    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




---



##### 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 31 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 7 commercial lending offices in the continental United States,
and 52 mortgage offices in Puerto Rico, including 25 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, a New York
mortgage banking subsidiary of Crown Bank with offices in New York, North
Carolina and Florida. 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
March 31, 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 March 31, 2004, the Company held securities available for sale with a fair
market value of $3.2 billion, which included $2.6 billion of mortgage-backed
securities, of which $337.1 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 20




---



##### Table of Contents



refinancing
activity is less sensitive to interest rate changes in Puerto Rico than in the
mainland United States because a significant amount of refinance loans are made
for debt consolidation purposes. R&G Financial customarily sells or securitizes into mortgage-backed
securities substantially all the loans it originates, except for certain
non-conforming conventional mortgage loans and certain consumer, construction,
land, and commercial loans which are held for investment and classified as
loans receivable. Financial Condition At March 31, 2004, total assets amounted to $8.6 billion, as compared to
$8.2 billion at December 31, 2003. The $385.3 million or 4.7% increase in
total assets since the beginning of the year was primarily the result of a
$192.9 million or 6.4% increase in mortgage-backed and investment securities
available for sale, and a $148.2 million or 3.7% increase in loans receivable,
net, due to continued strong loan production during the three months period
ended March 31, 2004 of $929.8 million, although a 9% decrease when compared to the
corresponding period in 2003. The Companys loan production during the
quarter ended March 31, 2004 was principally affected by decreased refinancings
in the U.S. at Crown Bank. 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 March 31, 2004, R&G Financial had $3.9 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 4.3% from $3.6 billion at
December 31, 2003 to $3.7 billion at March 31, 2004, whereas repurchase
agreements increased by $119.1 million or 5.4%. At March 31, 2004, R&G Financials allowance for loan losses totaled $43.6
million, which represented a $4.0 million or 10.2% increase from the level
maintained at December 31, 2003. At March 31, 2004, R&G Financials allowance
represented approximately 0.98% of the total loan portfolio and 44.30% 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 2.18%
and 142.33%, respectively, at March 31, 2004, compared to 2.09% and 139.57% at
December 31, 2003. Non-performing loans amounted to $98.5 million at March 31, 2004, an
increase of $13.1 million when compared to $85.4 million at December 31, 2003.
The increase is primarily related to a $10.8 million increase in delinquent
residential real estate loans over 90 days past due, as the
Company re-acquired loans pursuant to recourse provisions in existing
sale contracts made prior to 2001. On certain of these contracts, the
Company is required to re-acquire any loans sold that become
delinquent over 120 days. At March 31, 2004, $67.9
million or 68.9% 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 0.22% during the
three months ended March 31, 2004 and 0.32% during the year ended December 31,
2003. Although loan delinquencies have historically been higher in Puerto Rico
than in the United States, actual foreclosures and the resulting loan
charge-offs have historically been lower than in the United States. Stockholders equity increased from $750.4 million at December 31, 2003 to
$782.5 million at March 31, 2004. The $32.2 million or 4.3% increase was due
primarily to the net income recognized during the period, net of dividends
paid. 21




---



##### Table of Contents



Results of Operations During the three months ended March 31, 2004, R&G Financial reported net
income of $38.5 million or $0.67 of earnings per diluted share compared to net
income of $29.1 million or $0.49 of earnings per diluted share for the
comparative period in 2003. These results reflect an increase in earnings per
diluted share of 36.7% for the three months period ending March 31, 2004 over
the comparable periods in 2003. Net interest income increased by $13.5 million or 32.0% during the three
months period ended March 31, 2004 to $55.7 million, due to a $1.7 billion
increase in the average balance of interest-earning assets, together with a 7
basis point increase in the Companys net interest margin from 2.81% to 2.88%. The provision for loan losses amounted to $6.5 million during the three
months ended March 31, 2004, a 53.3% 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 three months ended March 31, 2004 over the comparable period. Net gain on
sale of loans increased by $6.9 million or 20.8% 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. Total loan production during the three months ended March 31, 2004
amounted to $929.8 million compared to $1.0 billion during the prior comparable
period. Loan administration and servicing fees decreased by $3.9 million
or 29.4% over the comparable period, due to a decrease in the Companys
weighted average servicing fee during the period. Other fee income increased
by $3.2 million or 55.8%. Such increase reflects the added contributions made
by the Companys insurance agency and broker-dealer subsidiaries, as well as
the fee income generated through the operations of Crown Bank. Total expenses increased by $2.9 million or 5.7% during the three months
ended March 31, 2004 over the comparable 2003 period, partially due to a $1.6
million or 10.3% increase in employee compensation and benefits associated with
general growth in Company operations in Puerto Rico and Florida. The increase
in total expenses was also due to a $678,000 or 11.9% increase in office
occupancy and equipment expenses and a $700,000 or 2.3% increase in other
administrative and general expenses, which is net of a $1.5 million reduction
in expenses associated with impairment charges of the Companys servicing
asset. During the first quarter of 2004, the Company reported $5.8 million of
impairment charges on its servicing asset related to unscheduled amortization
amounts, compared to $6.7 million during the first quarter of 2003. The
decrease in unscheduled amortization amounts during the first quarter of 2004
compared to the first quarter of 2003 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.
Notwithstanding the reduction of prepayment speeds of the portfolio, the
Company recorded during the first quarter of 2004 a $3.5 impairment charge on
its servicing asset related to valuation reserves for a temporary decline in
the fair value of its servicing portfolio. The decline was caused by a
decrease during March 2004 in the interest rate for refinancings of mortgage
loans. Given that the decrease in the rate for mortgage loans was only for a short
period of time during the quarter, such decrease did not have a significant
effect on actual prepayment of the portfolio nor
unscheduled amortization amounts during the quarter. Based on the level of
interest rates since, management estimates a complete reversal during the
second quarter of 2004 of the $3.5 million valuation impairment charge recorded
during the first quarter. The value of the Companys servicing portfolio is
expected to increase
given the more recent levels of higher interest rates, which are expected to
result in lower prepayment speeds. Unscheduled amortization amounts are
expected to decline also in future periods due to the lower prepayment speeds. 22




---



##### Table of Contents



Interest Rate Risk Management The following table summarizes the anticipated maturities or repricing or
R&G Financials interest-earning assets and interest-bearing liabilities as of
March 31, 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
    
    $
    1,417,423
    
    
    $
    472,215
    
    
    $
    665,205
    
    
    $
    410,507
    
    
    $
    1,273,920
    
    
    $
    4,239,270Mortgage loans held for sale
    
    
    57,527
    
    
    
    29,652
    
    
    
    68,876
    
    
    
    55,912
    
    
    
    59,411
    
    
    
    271,378Mortgage-backed securities(2)(3)
    
    
    154,562
    
    
    
    432,077
    
    
    
    453,031
    
    
    
    321,877
    
    
    
    1,253,599
    
    
    
    2,615,146Investment Securities(3)
    
    
    238,948
    
    
    
    159,391
    
    
    
    293,548
    
    
    
    109,896
    
    
    
    6,983
    
    
    
    808,766Other interest-earning assets(4)
    
    
    218,347
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    218,347Total
    
    $
    2,086,807
    
    
    $
    1,093,335
    
    
    $
    1,480,660
    
    
    $
    898,192
    
    
    $
    2,593,913
    
    
    $
    8,152,907Interest bearing liabilities:Deposits (5)NOW and Super NOW accounts
    
    $
    29,781
    
    
    $
    81,237
    
    
    $
    89,300
    
    
    $
    72,333
    
    
    $
    308,366
    
    
    $
    581,017Passbook savings accounts
    
    
    8,766
    
    
    
    25,422
    
    
    
    63,286
    
    
    
    50,628
    
    
    
    202,510
    
    
    
    350,612Regular and commercial checking
    
    
    22,074
    
    
    
    61,812
    
    
    
    67,949
    
    
    
    55,038
    
    
    
    234,637
    
    
    
    441,510Certificates of deposit
    
    
    422,333
    
    
    
    809,110
    
    
    
    688,043
    
    
    
    408,466
    
    
    
    1,938
    
    
    
    2,329,890FHLB advances
    
    
    138,000
    
    
    
    5,000
    
    
    
    530,600
    
    
    
    235,000
    
    
    
    190,000
    
    
    
    1,098,600Securities sold under agreements to
repurchase (6)
    
    
    1,039,195
    
    
    
    167,223
    
    
    
    945,292
    
    
    
    50,000
    
    
    
    138,200
    
    
    
    2,339,910Other borrowings(7)
    
    
    99,407
    
    
    
    132,326
    
    
    
    
    
    
    
    
    
    
    
    200,000
    
    
    
    431,733Total
    
    
    1,759,556
    
    
    
    1,282,130
    
    
    
    2,384,470
    
    
    
    871,465
    
    
    
    1,275,651
    
    
    
    7,573,272Effect of hedging instruments
    
    
    170,000
    
    
    
    
    
    
    
    (65,000
    )
    
    
    (25,000
    )
    
    
    (80,000
    )
    
    
    Excess (deficiency) of interest-earning
assets over interest-bearing liabilities
    
    $
    497,251
    
    
    ($
    188,795
    )
    
    ($
    968,810
    )
    
    $
    1,727
    
    
    $
    1,238,262
    
    
    $
    579,635Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities
    
    $
    497,251
    
    
    $
    308,456
    
    
    ($
    660,354
    )
    
    ($
    658,627
    )
    
    $
    579,635Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a percent
of total assets
    
    
    5.79
    %
    
    
    3.59
    %
    
    
    -7.69
    %
    
    
    -7.67
    %
    
    
    6.75
    %
 (footnotes on following page) 23




---



##### 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 March 31, 2004, the Company had a one year positive gap of
approximately $308.5 million, which constituted 3.6% 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 March 31, 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 quarter 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 March 31, 2004, close to 61.9% 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. 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. 24




---



##### Table of Contents



For the three months period ended March 31,2004
    
    2003Average
    
    
    
    
    
    Yield /
    
    Average
    
    
    
    
    
    Yield /(Dollars in thousands)
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateInterest-Earning Assets:Cash and cash equivalents(1)
    
    $
    170,377
    
    
    $
    615
    
    
    
    1.44
    %
    
    $
    77,931
    
    
    $
    265
    
    
    
    1.36
    %Investment securities held for trading
    
    
    1,298
    
    
    
    9
    
    
    
    2.77
    
    
    
    
    
    
    
    
    
    
    
    Investment securities available for sale
    
    
    573,979
    
    
    
    5,543
    
    
    
    3.86
    
    
    
    588,445
    
    
    
    6,892
    
    
    
    4.68Investment securities held to maturity
    
    
    44,256
    
    
    
    495
    
    
    
    4.47
    
    
    
    30,466
    
    
    
    399
    
    
    
    5.24Mortgage-backed securities held for trading
    
    
    42,826
    
    
    
    662
    
    
    
    6.18
    
    
    
    112,665
    
    
    
    974
    
    
    
    3.46Mortgage-backed securities available for sale
    
    
    2,332,165
    
    
    
    31,245
    
    
    
    5.36
    
    
    
    1,961,327
    
    
    
    26,055
    
    

    
    5.31Mortgage-backed securities held to maturity
    
    
    32,361
    
    
    
    461
    
    
    
    5.70
    
    
    
    45,129
    
    
    
    654
    
    
    
    5.80Loans receivable, net (2)
    
    
    4,450,354
    
    
    
    68,169
    
    
    
    6.13
    
    
    
    3,107,633
    
    
    
    51,955
    
    
    
    6.69FHLB Stock
    
    
    100,547
    
    
    
    432
    
    
    
    1.72
    
    
    
    92,117
    
    
    
    1,062
    
    
    
    4.61Total interest-earning assets
    
    
    7,748,163
    
    
    $
    107,631
    
    
    
    5.56
    %
    
    
    6,015,713
    
    
    $
    88,256
    
    
    
    5.87
    %Non-interest-earning assets
    
    
    643,366
    
    
    
    
    
    
    
    
    
    
    
    567,977Total assets
    
    $
    8,391,529
    
    
    
    
    
    
    
    
    
    
    $
    6,583,690Interest-Bearing Liabilities:Deposits
    
    $
    3,596,302
    
    
    $
    23,703
    
    
    
    2.64
    %
    
    $
    2,844,890
    
    
    $
    21,693
    
    
    
    3.05
    %Securities sold under agreements to
repurchase (3)
    
    
    2,218,083
    
    
    
    13,513
    
    
    
    2.44
    
    
    
    1,721,065
    
    
    
    12,771
    
    
    
    2.97Notes payable
    
    
    177,092
    
    
    
    1,469
    
    
    
    3.32
    
    
    
    230,702
    
    
    
    1,870
    
    
    
    3.24Other borrowings(4)
    
    
    1,263,945
    
    
    
    13,232
    
    
    
    4.19
    
    
    
    987,288
    
    
    
    9,701
    
    
    
    3.93Total interest-bearing liabilities
    
    
    7,255,422
    
    
    $
    51,917
    
    
    
    2.86
    %
    
    
    5,783,945
    
    
    $
    46,035
    
    
    
    3.18
    %Non-interest-bearing liabilities
    
    
    369,665
    
    
    
    
    
    
    
    
    
    
    
    127,890Total
liabilities
    
    
    7,625,087
    
    
    
    
    
    
    
    
    
    
    
    5,911,835Stockholders equity
    
    
    766,442
    
    
    
    
    
    
    
    
    
    
    
    671,855Total liabilities and stockholders equity
    
    $
    8,391,529
    
    
    
    
    
    
    
    
    
    
    $
    6,583,690Net interest income; interest rate spread (5)
    
    
    
    
    
    $
    55,714
    
    
    
    2.70
    %
    
    
    
    
    
    $
    42,221
    
    
    
    2.69
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.88
    %
    
    
    
    
    
    
    
    
    
    
    2.81
    %Average interest-earning assets to average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    106.79
    %
    
    
    
    
    
    
    
    
    
    
    104.01
    %
 (footnotes on following
page) 25




---



##### 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 the 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 three months period endedMarch 31,2004
    
    2003(Dollars in thousands)Composition of Servicing Portfolio at period end:GNMA
    
    $
    2,243,093
    
    
    $
    2,559,133FNMA/FHLMC
    
    
    4,747,562
    
    
    
    5,425,414Other mortgage loans (3)
    
    
    3,902,822
    
    
    
    2,892,433Total servicing portfolio (3)
    
    $
    10,893,477
    
    
    $
    10,876,980Activity in the Servicing Portfolio:Beginning servicing portfolio
    
    $
    10,942,821
    
    
    $
    10,991,945Add: Loan originations and purchases
    
    
    628,281
    
    
    
    676,109Servicing of portfolio loans acquired
    
    
    834
    
    
    
    165,851Less: Sale of servicing rights(1)
    
    
    (66,628
    )
    
    
    (71,531
    )Run-offs(2)
    
    
    (611,831
    )
    
    
    (885,394
    )Ending servicing portfolio(3)
    
    $
    10,893,477
    
    
    $
    10,876,980Number of loans serviced
    
    
    146,331
    
    
    
    155,824Average loan size
    
    $
    74
    
    
    $
    70Average servicing fee rate
    
    
    0.40
    %
    
    
    0.48
    %
   (1)
    
    Corresponds to loans sold, servicing released, by Continental Capital.(2)
    
    Run-off refers to regular amortization of loans, prepayments and
foreclosures. 26




---



##### Table of Contents



(3)
    
    At the dates shown, included $2.0 billion and $1.3 billion, respectively,
serviced for Premier Bank, which constituted 18.3% and 12.4% of the total
servicing portfolio, and $262.0 million and $86.5 million, respectively,
serviced for Crown Bank, which constituted 2.40% and 0.79%, respectively,
of the total servicing portfolio at such dates. Substantially all 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 March 31, 2004, approximately 26.2% 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
three month periods ended March 31, 2004 and 2003, the Company recognized $5.8
million and $6.7 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 March 31, 2004, the Company had $160.4 million in borrowing capacity
under unused warehousing and other lines of credit and $1.2 billion in
borrowing capacity under unused lines of credit with the FHLB. At March 31, 2004, the Company had outstanding commitments to originate
and/or purchase mortgage and non-mortgage loans of $550.8 million (including
unused lines of credit). Certificates of deposit which are scheduled to mature
within one year totaled $1.2 billion at March 31, 2004, and borrowings that are
scheduled to mature within the same period amounted to $1.5 billion. The
Company anticipates that it will have sufficient funds available to meet its
current loan commitments. 27




---



##### 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 assets, are multiplied by a risk-weight
of 0% to 100%, based on the risks the FDIC believes are inherent in the type of
asset or item. The components of Tier 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
March 31, 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 7.17%, 12.30% and 13.30%, respectively. At March 31, 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 8.09%, 12.09% and
12.92%, respectively. Thus, at March 31, 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. 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. 28




---



##### 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 March 31, 2004 is presented on page 21 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. 29




---



##### 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 Not applicable 
 Item 3:Defaults Upon Senior Securities Not applicable 
 Item 4:Submission of Matters to a Vote of Security Holders Not applicable 
 Item 5:Unregistered Sales of Equity Securities and Use of Proceeds 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 Mortgage
Corporation and R-G Premier Bank of Puerto Rico dated February 16, 1990,
as amended on April 1, 1991, December 1, 1991, February 1, 1994 and July
1, 1994 (4)
 30




---



##### Table of Contents



No.
    
    Description10.2
    
    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.(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.(*)
    
    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 March 31, 2004. (1)  Form 8-K
filed on January 20, 2004 with an attached press release
announcing the Registrants earnings for the year ended
December 31, 2003. 31




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. R&G FINANCIAL CORPORATIONDate: May 10, 2004
    
    By:
    
    /S/ VICTOR J. GALANVíctor J. Galán, Chairman
and Chief Executive Officer(Principal Executive Officer)By:
    
    /S/ JOSEPH R. SANDOVALJoseph R. SandovalExecutive Vice President
and Chief Financial Officer(Principal Financial and
Accounting Officer)
 32