R & G Financial Corporation

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


[X]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2003


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.: 0-21137

R&G FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


Puerto Rico		66-0532217

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

280 Jésus T. Piñero Avenue Hato Rey, San Juan, Puerto Rico		00918

(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (787) 758-2424

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange on Which Registered

Class B Common Stock (par value $.01 per share)		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

Series A-D Noncumulative Perpetual Monthly Income Preferred Stock

(liquidation value $25 per share and par value $.01 per share)

(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or

information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

The aggregate value of the 27,751,052 shares of Class B Common Stock of the Registrant issued and outstanding on June 30, 2003, which excludes 1,754,794 shares held by all directors and officers of the Registrant as a group, was approximately $549.5 million. This figure is based on the last known trade price of $19.80 per share (split adjusted) of the Registrant’s Class B Common Stock on June 30, 2003.

Number of shares of Class B Common Stock outstanding as of February 29, 2004: 29,539,115. (Does not include 21,559,584 shares of Class A Common Stock that are exchangeable into shares of Class B Common Stock at the option of the holder.)

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated:

(1) Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 2003 are incorporated into Parts II and IV.

(2) Portions of the definitive proxy statement for the Annual Meeting of Stockholders are incorporated into Part III.

PART I

Cautionary Statement Regarding Forward-Looking Statements

A number of the presentations and disclosures in this Form 10-K, including any statements preceded by, followed by or which include the words “may,” “could,” “should,” “will,” “would,” “hope,” “might,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “assume” or similar expressions constitute forward-looking statements.

These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements and other information with respect to our beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business, including our expectations and estimates with respect to our revenues, expenses, earnings, return on equity, return on assets, efficiency ratio, asset quality and other financial data and capital and performance ratios.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, these statements involve risks and uncertainties that are subject to change based on various important factors (some of which are beyond our control). The following factors, among others, could cause our financial performance to differ materially from our goals, plans, objectives, intentions, expectations and other forward-looking statements:

• the strength of the United States economy in general and the strength of the regional and local economies within Puerto Rico and Florida;

• the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

• inflation, interest rate, market and monetary fluctuations;

• our timely development of new products and services in a changing environment, including the features, pricing and quality of our products and services compared to the products and services of our competitors;

• the willingness of users to substitute competitors’ products and services for our products and services;

• the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;

• technological changes;

• changes in consumer spending and savings habits; and

• regulatory or judicial proceedings.

If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-K.

Therefore, we caution you not to place undue reliance on our forward-looking information and statements.

We do not intend to update our forward-looking information and statements, whether written or oral, to reflect change. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

ITEM 1: BUSINESS

General

The Company

R&G Financial Corporation (“R&G Financial” or the “Company”) is a Puerto Rico chartered, financial holding company that operates R&G Mortgage Corp. (“R&G Mortgage”), the second largest mortgage company in Puerto Rico, R-G Premier Bank of Puerto Rico (“Premier Bank”), a Puerto Rico commercial bank, and R-G Crown Bank (“Crown Bank”) (Premier Bank and Crown Bank hereinafter collectively referred to as “banking subsidiaries” of R&G Financial). Through R&G Mortgage, the Company also operates The Mortgage Store of Puerto Rico, Inc. (“The Mortgage Store”), a Puerto Rico mortgage company, and through Crown Bank, the Company operates Continental Capital Corp. (“Continental”), a mortgage banking company doing business in New York, New Jersey, Connecticut, Florida and North Carolina. The Company also operates Home & Property Insurance Corp., a Puerto Rico insurance agency, and R-G Investments Corporation, a Puerto-Rico licensed broker-dealer registered with the National Association of Securities Dealers (“NASD”).

The Company is currently in its 32nd year of operations and operates its business through its subsidiaries. The Company is primarily engaged in providing a full range of banking services, including commercial banking services, corporate real estate and business lending, residential construction lending, consumer lending and credit cards, offering a diversified range of deposit products and, to a lesser extent, trust and investment services through its private banking department and its broker-dealer. The Company is also engaged in a range of real estate secured lending activities, including the origination, servicing, purchase and sale of mortgages on single-family residences, the securitization and sale of various mortgage-backed and related securities and the holding and financing of mortgage loans and mortgage-backed and related securities for sale or investment and the purchase and sale of servicing rights associated with such mortgage loans.

The Company was organized in 1972 as R&G Mortgage Corp. and completed its initial public offering in 1996, following its reorganization as a bank holding company. As of December 31, 2003, the Company had total assets of $8.2 billion, total deposits of $3.6 billion and stockholders’ equity of $750.4 million. At December 31, 2003, the Company operated 31 bank branches, mainly located in the northeastern section of Puerto Rico, 14 bank branches in the continental United States, located in Florida, 47 mortgage offices in Puerto Rico and 5 mortgage offices in the United States, located in New York, North Carolina and Florida.

The Company has generally sought to achieve long-term financial strength and profitability by increasing the amount and stability of its net interest income and non-interest income. The Company has sought to implement this strategy by: (1) emphasizing the growth of its mortgage banking activities, including the origination and sale of mortgage loans, and growing its loan servicing operation; (2) expanding its retail banking franchise in order to achieve increased market presence and to increase core deposits; (3) enhancing its net interest income by increasing its loans held for investment, particularly single-family residential loans, and investment securities; (4) developing new business relationships

through an increased emphasis on commercial real estate and commercial business lending; (5) diversifying its retail products and services, including an increase in consumer loan originations; (6) meeting the banking needs of its customers through, among other things, the offering of trust and investment services and insurance products; (7) expanding its operations in the United States; and, (8) emphasizing controlled growth, while pursuing a variety of acquisition opportunities when appropriate.

The senior management of the Company is comprised of five executives with an average of over 29 years of experience in the financial services industry. Víctor J. Galán, who owned 42.2% of all of the Company’s issued and outstanding common stock as of December 31, 2003, is the Company’s Chairman and Chief Executive Officer, positions he has held since the Company’s incorporation in 1996. Mr. Galán is also the founder and Chairman of R&G Mortgage, a position he has held since 1972. Ramón Prats is the Company’s President and Vice Chairman, positions he has held since 2001 and 1996, respectively. Mr. Prats formerly was Executive Vice President of R&G Mortgage, a position he held since 1980. Joseph Sandoval is the Company’s Executive Vice President and Chief Financial Officer, positions he has held since 2003 and 1997, respectively. Previously, Mr. Sandoval was an accountant with a predecessor to PriceWaterhouseCoopers LLP. Mario Ruiz has been with R&G Financial subsidiaries since 1990 and is presently Executive Vice President of Premier Bank. Mr. Ruiz previously served in various capacities for R&G Mortgage and The Mortgage Store. Steven Velez has been with R&G Mortgage since 1989 and is presently Executive Vice President of R&G Mortgage.

During the past year, the Company participated in two financing transactions. In August 2003, the Company’s wholly-owned subsidiary, R&G Acquisition Holdings Corporation (“RAC”), a Florida corporation, formed R&G Capital Trust IV, a Delaware statutory business trust, which issued $15.0 million of trust preferred securities in a private placement. In October 2003, R&G Capital Trust III, a Delaware statutory business trust wholly-owned by the Company, issued $100 million of trust preferred securities to the Puerto Rico Conservation Trust Fund, a Puerto Rico non-affiliated charitable trust, which used the trust preferred securities to secure a concurrent offering to the public of its secured notes. Such securities are included within other borrowings in the Company’s Consolidated Statements of Financial Condition. The Company has guaranteed certain obligations of RAC to R&G Capital Trust IV related to the payment of interest by RAC on the trust preferred securities and the eventual redemption of the trust preferred securities at maturity.

The Company’s principal executive offices are located at 280 Jésus T. Piñero Avenue, San Juan, Puerto Rico 00918 and its telephone number is (787) 758-2424.

Banking Operations

General. The Company provides a full range of banking services through its banking subsidiaries, including residential, commercial and personal loans and a diversified range of deposit products. Premier Bank also provides private banking, trust and other financial services to its customers.

R&G Financial’s banking business consists principally of holding deposits from the general public and using them, together with funds obtained from other sources, to originate and purchase loans secured primarily by residential real estate, and to purchase mortgage-backed and other securities. To a lesser extent, but with increasing emphasis over the past few years, R&G Financial also originates construction loans and loans secured by commercial real estate, as well as consumer and personal loans and commercial business loans. Such loans offer higher yields, are generally for shorter terms and offer the Company an opportunity to provide a greater range of financial services to its customers. Premier Bank also offers trust services through its trust department. To date, Premier Bank has engaged in business solely in Puerto Rico. Crown Bank conducts business from its Florida locations, and

Continental originates retail construction and commercial loans in New York, New Jersey, Connecticut, North Carolina and Florida.

Residential Loans. At December 31, 2003, R&G Financial’s loans receivable, net, totaled $4.0 billion, that represented 49.4% of R&G Financial’s $8.2 billion of total assets. At such date, all of R&G Financial’s loans receivable were held by its banking subsidiaries. R&G Financial’s loan portfolio historically has had a substantial amount of loans secured by first mortgage liens on existing single-family residences. At December 31, 2003, $2.4 billion, or 55.3% of R&G Financial’s total loans held for investment, consisted of such loans, of which all but $1.5 million consisted of conventional loans.

Construction Loans. At December 31, 2003, retail construction loans amounted to $170.0 million, or 3.9% of R&G Financial’s total loans held for investment, while commercial construction and land acquisition loans amounted to $595.0 million in the aggregate, or 13.8% of total loans held for investment. R&G Financial intends to continue to increase its involvement in single-family residential construction lending. Such loans afford the Company the opportunity to increase the interest rate sensitivity of its loan portfolio.

Commercial and Consumer Loans. R&G Financial also originates mortgage loans secured by commercial real estate, primarily office buildings, retail stores, warehouses and general purpose industrial space. At December 31, 2003, $728.6 million, or 16.9% of R&G Financial’s total loans held for investment, consisted of such loans. Finally, R&G Financial also offers commercial business loans, including working capital lines of credit, inventory and accounts receivable loans, equipment financing (including equipment leases), term loans, insurance premium loans and loans guaranteed by the Small Business Administration and various consumer loans. At December 31, 2003, consumer loans, some of which are secured by real estate and deposits, amounted to $210.1 million, or 4.9% of total loans held for investment, and commercial business loans amounted to $188.7 million, or 4.4% of total loans held for investment.

Mortgage Banking

Originations. The Company is the second largest mortgage loans originator and servicer of mortgage loans on single-family residences in Puerto Rico. R&G Mortgage is primarily engaged in the business of originating first and second mortgage loans on single-family residential properties secured by real estate. R&G Mortgage also originates residential mortgage loans through The Mortgage Store, its wholly-owned subsidiary. Pursuant to agreements entered into between R&G Mortgage and Premier Bank, non-conforming conventional single-family residential loans and consumer loans secured by real estate are also originated by R&G Mortgage for portfolio retention by Premier Bank. Premier Bank retains most of the nonconforming conventional single-family residential loans because these loans generally do not satisfy resale guidelines of purchasers in the secondary mortgage market, primarily because of size (in the case of “jumbo” loans) or other underwriting technicalities (mostly related to documentation requirements) at the time of origination. However, from time to time, the Company may sell or securitize some of these loans should the need arise for asset/liability management or other considerations. Jumbo loans may be packaged and sold in the secondary market, while loans with underwriting technicalities may be cured through payment experience and subsequently sold. Management believes that these loans are essentially of the same credit quality as conforming loans. During the years ended December 31, 2003, 2002 and 2001, R&G Financial originated a total of $2.8 billion, $2.0 billion and $1.8 billion of residential mortgage loans, respectively. These aggregate originations include loans originated by R&G Mortgage directly for Premier Bank of $1.3 billion, $811.8 million and $664.8 million during the years ended December 31, 2003, 2002 and 2001, respectively, or 45%, 41% and 36%, respectively, of total originations. The loans originated by R&G Mortgage for

Premier Bank are comprised primarily of conventional residential loans and, to a lesser extent, residential construction loans and consumer loans secured by real estate.

Servicing. R&G Financial’s servicing portfolio has grown significantly over the past several years. At December 31, 2003, R&G Financial’s servicing portfolio totaled $10.9 billion and consisted of a total of 147,981 loans. These amounts include R&G Mortgage’s servicing portfolio, totaling $7.9 billion, Crown Bank’s servicing portfolio, totaling $2.5 billion, and Continental’s servicing portfolio, totaling $553.0 million, at December 31, 2003. At December 31, 2003, R&G Financial’s servicing portfolio included $1.9 billion of loans serviced for Premier Bank and $227.5 million of loans serviced for Crown Bank, or 17.4% and 2.1%, respectively, of the total servicing portfolio. Substantially all of the mortgage loans in R&G Financial’s servicing portfolio are secured by single-family residences. R&G Financial generally retains the servicing function with respect to the loans that have been securitized and sold.

Securitizations. R&G Financial pools Federal Housing Administration, the “FHA,” and Veterans Administration, the “VA,” loans into mortgage-backed securities that are guaranteed by the Government National Mortgage Association, the “GNMA.” These securities are sold to securities broker-dealers and other investors in Puerto Rico. Conventional loans may either be sold directly to agencies such as the Federal National Mortgage Association, the “FNMA,” and the Federal Home Loan Mortgage Corporation, the “FHLMC,” or to private investors, or may be pooled into FNMA or FHLMC mortgage-backed securities, that are generally sold to investors. During the years ended December 31, 2003, 2002 and 2001, R&G Financial sold $1.6 billion, $1.2 billion and $1.1 billion of loans, respectively, as part of its mortgage banking activities, that includes loans securitized and sold, but does not include loans originated for Premier Bank.

Regulation

The Company operates its businesses under a variety of federal, state and Puerto Rico laws and rules. As a financial holding company, it is subject to the rules of the Board of Governors of the Federal Reserve System and the Office of the Puerto Rico Commissioner of Financial Institutions, the “OCFI.” Among other things, the Company is required to meet minimum capital requirements, and its activities are limited to those that are determined to be financial in nature or incidental or complimentary to a financial activity.

Premier Bank is subject to extensive regulation and examination by the Federal Deposit Insurance Corporation, or “FDIC,” and by the OCFI, and Crown Bank is subject to extensive regulation and supervision by the Office of Thrift Supervision, or “OTS.” This regulation and supervision establishes a comprehensive framework of activities in which the Company’s banking subsidiaries can engage. In addition, the FDIC and the OTS are required to take “prompt corrective action” if a given bank does not meet its minimum capital requirements. The FDIC and the OTS have established five capital tiers to implement this requirement, from “well capitalized” to “critically undercapitalized.” A bank’s capital tier will depend on various capital measures and other qualitative factors and will subject it to specific requirements. As of December 31, 2003, Premier Bank and Crown Bank met the capital measures for being “well capitalized” under the regulations.

The Company’s mortgage banking business is subject to the rules of the FHA, VA, GNMA, FNMA, FHLMC and the Department of Housing and Urban Development with respect to originating, processing, selling and servicing mortgage loans. In addition to these rules, the Company’s Puerto Rico mortgage banks are subject to the rules of the OCFI and Continental is subject to the rules of the OTS. Among other things, all of these rules prohibit discrimination, establish underwriting guidelines, require credit reports, fix maximum loan amounts and, in some cases, fix maximum interest rates.

Lending Activities from Banking Operations

General. At December 31, 2003, R&G Financial’s loans receivable, net totaled $4.0 billion, which represented 49.4% of R&G Financial’s $8.2 billion of total assets. At December 31, 2003, all of R&G Financial’s loans receivable, net were held by its banking subsidiaries. The principal category of loans in R&G Financial’s portfolio is conventional loans that are secured by first liens on single-family residences. Conventional residential real estate loans are loans that are neither insured by the FHA nor partially guaranteed by the VA. At December 31, 2003, all but $1.5 million of R&G Financial’s first mortgage single-family residential loans consisted of conventional loans. The other principal categories of loans in R&G Financial’s loans receivable, net portfolio are second mortgage residential real estate loans, construction loans, commercial real estate loans, commercial business loans and consumer loans.

Loan Portfolio Composition. The following table sets forth the composition of R&G Financial’s loan portfolio by type of loan at the dates indicated. Except as noted in the footnotes to the table, all of the loans are held by banking subsidiaries of R&G Financial.


	December 31,
	2003						2002						2001
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in Thousands)
Residential real estate - first mortgage	$	2,384,279			55.30	%	$	1,473,051			50.12	%	$	996,885			52.11	%
Residential real estate - second mortgage		34,999			0.81			40,429			1.37			33,321			1.74
Retail construction		169,963			3.94			159,754			5.44			50,767			2.65
Commercial construction and land acquisition(1)		595,030			13.80			329,932			11.23			230,725			12.06
Commercial real estate		728,620			16.90			582,114			19.81			340,139			17.78
Commercial business		188,690			4.38			152,743			5.20			79,909			4.18
Consumer loans:
Loans secured by deposits		24,713			0.57			28,070			0.95			26,176			1.37
Real estate secured consumer loans		53,709			1.25			68,156			2.32			83,509			4.37
Unsecured consumer loans		131,711			3.05			104,715			3.56			71,507			3.74

Total loans receivable		4,311,714			100.00	%		2,938,964			100.00	%		1,912,938			100.00	%

Less:
Allowance for loan losses		(39,615	)					(32,676	)					(17,428	)
Loans in process		(224,960	)					(146,111	)					(92,935	)
Deferred loan costs (fees)		1,369						(45	)					20
Unearned interest		(1	)					(443	)					(207	)

		(232,611	)					(179,275	)					(110,550	)

Loans receivable, net(2)	$	4,048,507					$	2,759,689					$	1,802,388


	December 31,
	2000						1999
	Amount			Percent			Amount			Percent
Residential real estate - first mortgage	$	998,984			58.08	%	$	1,097,891			68.35	%
Residential real estate - second mortgage		27,419			1.59			13,029			0.81
Retail construction		47,698			2.77			38,950			2.42
Commercial construction and land acquisition(1)		143,689			8.35			62,989			3.92
Commercial real estate		270,459			15.72			204,155			12.71
Commercial business		59,120			3.44			54,231			3.38
Consumer loans:
Loans secured by deposits		26,926			1.57			20,539			1.28
Real estate secured consumer loans		100,357			5.83			76,944			4.79
Unsecured consumer loans		45,563			2.65			37,653			2.34

Total loans receivable		1,720,215			100.00	%		1,606,381			100.00	%

Less:
Allowance for loan losses		(11,600	)					(8,971	)
Loans in process		(78,163	)					(33,526	)
Deferred loan fees		909						(437	)
Unearned interest		(85	)					(440	)

		(88,939	)					(43,374	)

Loans receivable, net(2)	$	1,631,276					$	1,563,007

(1)		Includes $250,000, $665,000, $1.2 million and $545,000 of loans held by R&G Mortgage at December 31, 2002, 2001, 2000 and 1999, respectively.

(2)		Does not include mortgage loans held for sale of $315.7 million, $258.7 million, $236.4 million, $95.7 million and $77.3 million at December 31, 2003, 2002, 2001, 2000 and 1999, respectively.

Contractual Principal Repayments and Interest Rates. The following table sets forth certain information at December 31, 2003 regarding the dollar amount of loans maturing in R&G Financial’s total loan portfolio based on the contractual terms to maturity. Loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.


			Due 1-5		Due 5 or more years
	Due 1 year		years after		after December 31,
	or less		December 31, 2003		2003		Total(1)
	(In Thousands)
Residential real estate	$	106,020	$	195,701	$	2,117,557	$	2,419,278
Retail construction		169,963		—		—		169,963
Commercial real estate(2)		618,287		480,895		224,468		1,323,650
Commercial business		118,906		55,382		14,402		188,690
Consumer:
Loans on savings		14,408		10,115		190		24,713
Real estate secured consumer loans		12,094		14,272		27,343		53,709
Unsecured consumer loans		61,822		58,302		11,587		131,711

Total(3)	$	1,101,500	$	814,667	$	2,395,547	$	4,311,714

(1)		Amounts have not been reduced for the allowance for loan losses, loans in process, deferred loan fees or unearned interest.

(2)		Includes $595.0 million of commercial construction and land acquisition loans.

(3)		Does not include mortgage loans held for sale.

The following table sets forth the dollar amount of total loans at December 31, 2003 that have fixed interest rates or that have floating or adjustable interest rates.


			Floating or
	Fixed rate		adjustable-rate		Total(1)
	(In Thousands)
Residential real estate	$	2,381,081	$	38,197	$	2,419,278
Retail construction		121,380		48,583		169,963
Commercial real estate(2)		459,531		864,119		1,323,650
Commercial business		98,958		89,732		188,690
Consumer:
Loans on savings		24,713		—		24,713
Real estate secured consumer loans		43,539		10,170		53,709
Unsecured consumer loans		130,755		956		131,711

Total(3)	$	3,259,957	$	1,051,757	$	4,311,714

(1)		Amounts have not been reduced for the allowance for loan losses, loans in process, deferred loan fees or unearned interest.

(2)		Includes $595.0 million of commercial construction and land acquisition loans.

(3)		Does not include mortgage loans for sale.

Scheduled contractual amortization of loans does not reflect the expected term of R&G Financial’s loan portfolio. The average life of loans is substantially less than their contractual terms because of prepayments and due-on-sale clauses that give R&G Financial the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells

the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan rates are higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are lower than current mortgage loan rates (due to refinancing of adjustable-rate and fixed-rate loans at lower rates). Under the latter circumstance, the weighted average yield on loans decreases as higher-yielding loans are repaid or refinanced at lower rates.

Origination, Purchases and Sales of Loans. The following table sets forth loan originations, purchases and sales from banking operations for the periods indicated.


	Year Ended December 31,
	2003			2002			2001
	(Dollars in Thousands)
Loan originations:
Loans originated by R&G Mortgage:
Residential mortgages	$	1,235,935		$	764,115		$	625,798
Commercial mortgages		—			—			—
Residential construction		45,388			45,026			29,353
Consumer loans		1,985			2,632			9,658

Total loans originated by R&G Mortgage		1,283,308			811,773			664,809

Other loans originated:
Residential real estate(1)		63,695			26,163			—
Commercial real estate		534,544			357,718			213,215
Commercial business		100,224			62,965			59,074
Construction and development(2)		320,027			143,356			171,026
Consumer loans:
Loans on deposit		32,553			40,061			48,730
Real estate secured consumer loans		10,560			4,191			—
Unsecured consumer loans		112,182			90,431			63,702

Total other loans originated		1,173,785			724,885			555,747

Loans purchased		430,826			236,181			61,359

Total loans originated and purchased		2,887,919			1,772,839			1,281,915

Loans sold		(253,977	)		(35,311	)		(130,716	)
Loan participations sold		(63,452	)		(43,301	)		(52,886	)
Loan principal reductions		(1,109,788	)		(691,013	)		(486,410	)

Net increase before other items, net		1,460,702			1,003,214			611,903
Loans acquired in connection with acquisition of Crown Bank		—			486,958			—
Loans securitized and transferred to mortgage-backed securities		—			(534,656	)		(421,645	)

Net increase in loans	$	1,460,702		$	955,516		$	190,258

(1)		All of such loans were conventional loans.

(2)		Includes $29.7 million, $32.2 million and $34.6 million originated by Continental in 2003, 2002 and 2001, respectively.

R&G Financial, through its banking subsidiaries, originates for both investment and sale mortgage loans secured by residential real estate (secured by both first and second mortgage liens) as well as construction loans (for residential real estate), commercial real estate loans, commercial business loans and consumer loans.

R&G Mortgage assists Premier Bank in meeting its loan production targets and goals by, among other things, (i) advertising, promoting and marketing to the general public; (ii) interviewing prospective borrowers and conducting the initial processing of the requisite loan applications, consistent with Premier Bank’s underwriting guidelines; and (iii) providing personnel and facilities with respect to the execution of loan agreements approved by Premier Bank. R&G Mortgage performs the foregoing loan origination services on behalf of Premier Bank with respect to residential mortgage loans, some commercial real estate loans and construction loans. R&G Mortgage receives from Premier Bank 75% of the applicable loan origination fee with respect to loans originated by R&G Mortgage on behalf of Premier Bank. During the years ended December 31, 2003, 2002 and 2001, R&G Mortgage received $15.6 million, $11.6 million and $10.3 million, respectively, of loan origination fees with respect to loans originated by R&G Mortgage on behalf of Premier Bank. These fees are eliminated in consolidation in R&G Financial’s Consolidated Financial Statements. See “- Regulation - R&G Financial - Limitations on Transactions with Affiliates.”

R&G Financial originates commercial real estate, commercial business and consumer loans. Applications for commercial real estate, commercial business and unsecured consumer loans are taken at all branch offices of the Company’s banking subsidiaries, and may be approved by lending officers of each banking subsidiary within designated limits that are established and modified from time to time to reflect an individual’s expertise and experience. All loans in excess of an individual’s designated limits are referred to an officer with the requisite authority. In addition, Premier Bank’s Management Credit Committee is authorized to approve all loans not exceeding $5.0 million, and the Executive Committee of the Board of Directors is authorized to approve all loans exceeding $5.0 million. In the case of Crown Bank, all loans over $1.0 million require approval by Crown Bank’s Credit Committee and Board of Directors. Management of R&G Financial believes that its relatively centralized approach to approving loan applications ensures strict adherence to its underwriting guidelines, while still allowing the Company to approve loan applications on a timely basis.

R&G Financial also purchases conventional loans secured by first liens on single-family residential real estate from unrelated financial institutions. Such loan purchases are underwritten pursuant to the same guidelines as direct loan originations. During the years ended December 31, 2003, 2002 and 2001, Premier Bank purchased $7.1 million, $236.2 million and $61.4 million of loans, respectively, and Crown Bank purchased $423.7 million during the year ended December 31, 2003. Crown Bank did not purchase any such loans during the year ended December 31, 2002.

During the years ended December 31, 2003, 2002 and 2001, loans sold from banking operations were $254.0 million, $35.3 million and $130.7 million, respectively. These loans, which were primarily nonconforming loans at the time of origination, were generally sold in packages in privately negotiated transactions with FNMA and FHLMC or other private parties.

R&G Mortgage services all loans held in Premier Bank’s portfolio (including single-family residential loans retained by Premier Bank, commercial real estate, commercial business and consumer loans (although R&G Mortgage does not actually acquire such servicing rights)). In addition, Premier Bank processes payments on all loans serviced by R&G Mortgage on behalf of Premier Bank. Finally, R&G Mortgage renders securitization services with respect to the pooling of some of Premier Bank’s mortgage loans into mortgage-backed securities. See “- Mortgage Banking Activities.”

Single-Family Residential Real Estate Loans. R&G Financial historically has had a substantial portion of its lending activities in the origination of loans secured by first mortgage liens on existing single-family residences. At December 31, 2003, $2.4 billion or 55.3% of R&G Financial’s total loans held for investment consisted of such loans, of which all but $1.5 million consisted of conventional loans. Premier Bank’s first mortgage single-family residential loans consist exclusively of fixed-rate loans with

terms of between 15 and 30 years. As evidenced by this statistic, the Puerto Rico residential mortgage market has not been receptive to long-term adjustable rate mortgage loans.

R&G Financial’s first mortgage single-family residential loans typically do not exceed 80% of the appraised value of the security property. Pursuant to underwriting guidelines adopted by its Board of Directors, R&G Financial may lend up to 95% of the appraised value of the property securing a first mortgage single-family residential loan provided it is with private mortgage insurance with respect to the top 25% of the loan.

The Company also originates loans secured by second mortgages on single-family residential properties. At December 31, 2003, $35.0 million or 0.8% of R&G Financial’s total loans held for investment consisted of second mortgage loans on single-family residential properties. R&G Financial offers such second mortgage loans in amounts up to $125,000 for a term not to exceed 15 years. The loan-to-value ratio of second mortgage loans generally is limited to 75% of the property’s appraised value (including the first mortgage).

Construction Loans. At December 31, 2003, retail construction (“spot”) loans amounted to $170.0 million or 3.9% of R&G Financial’s total loans held for investment, while commercial construction and land acquisition loans amounted to $595.0 million or 13.8% of total loans held for investment.

Premier Bank and Crown Bank offer “spot” loans to individual borrowers for the purpose of constructing single-family residences. Substantially all of the Company’s construction lending to individuals is originated on a construction/permanent mortgage loan basis. Construction/permanent loans are made to individuals who hold a contract with a general contractor acceptable to the Company to construct their personal residence. The construction phase of the loan provides for monthly payments on an interest only basis at a designated fixed rate for the term of the construction period, that generally does not exceed nine months. Thereafter, the permanent loan is made at then market rates, provided that such rate shall not be more than 2% greater than the interim construction rate. In the case of Premier Bank, R&G Mortgage’s construction loan department approves the proposed contractors and administers the loan during the construction phase. The Company’s construction/permanent loan program has been successful due to its ability to offer borrowers a single closing and, consequently, reduced costs.

R&G Financial also originates construction loans to developers to develop single-family residential properties. At December 31, 2003, R&G Financial had residential construction loans to develop single-family residences with an aggregate principal balance of $339.5 million. Commitments for future funding included in such amount approximate $116.2 million. In addition, R&G Financial had loans to develop commercial properties with an aggregate principal balance of $86.7 million. All loans were performing in accordance with their terms at December 31, 2003.

In addition to the foregoing, at December 31, 2003, R&G Financial had land acquisition loans with an aggregate balance of $168.8 million, that were made in connection with projects to construct single-family residences. R&G Financial and the financial institution that made the interim construction loan have entered into an agreement pursuant to which R&G Financial is to be paid a percentage of the proceeds from each home as it is released upon construction and sale. R&G Financial expects to make the permanent construction loan on some of these projects. Premier Bank has also made a working capital/pre-development loan with an outstanding principal balance of $1.0 million at December 31, 2003 that is secured by land.

R&G Financial intends to continue to increase their involvement in single-family residential construction lending. Such loans afford the Company the opportunity to increase the interest rate

sensitivity of its loan portfolio. Construction lending is generally considered to involve a higher level of risk as compared to permanent single-family residential lending, due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on real estate developers and managers. Moreover, a construction loan can involve additional risks because of the inherent difficulty in estimating both a property’s value at completion of the project and the estimated costs (including interest) of the project. The nature of these loans is such that they are generally more difficult to evaluate and monitor. The Company has taken steps to minimize the foregoing risks by, among other things, limiting its construction lending primarily to residential properties. In addition, the Company has adopted underwriting guidelines that impose stringent loan-to-value, debt service and other requirements for loans that are believed to involve higher elements of credit risk and by working with builders with whom it has established relationships or knowledge thereof. At December 31, 2003, $1.7 million of R&G Financial’s retail construction loans were classified as non-performing. As of such date, $711,000 of commercial construction or land acquisition loans were non-performing.

Commercial Real Estate Loans. The Company also originates mortgage loans secured by commercial real estate. At December 31, 2003, $728.6 million or 16.9% of R&G Financial’s total loans held for investment consisted of such loans. At December 31, 2003, $22.6 million of R&G Financial’s commercial real estate loans were classified as non-performing.

Commercial real estate loans of the Company are primarily secured by office buildings, retail stores, warehouses and general purpose industrial space. Although terms vary, commercial real estate loans generally are amortized over a period of 7 to 15 years in Premier Bank and 10 to 20 years in Crown Bank, and have maturity dates of 5 to 7 years in Premier Bank and 3 to 10 years in Crown Bank. R&G Financial generally originates these loans with interest rates that adjust monthly in accordance with a designated prime rate plus a margin, which generally is negotiated at the time of origination. Such loans will have a floor but no ceiling on the amount by which the rate of interest may adjust over the loan term. Loan-to-value ratios on the Company’s commercial real estate loans are currently limited to 80% or lower. As part of the criteria for underwriting commercial real estate loans, R&G Financial generally requires a debt coverage ratio (the ratio of net cash from operations before payment of debt service to debt service) of 1.20 or more. It is also the Company’s policy to seek additional protection to mitigate any weaknesses identified in the underwriting process. Additional coverage may be provided through mortgage insurance, secondary collateral and/or personal guarantees from the principals of the borrower.

Commercial real estate lending entails different and significant risks when compared to single-family residential lending because such loans typically involve large loan balances to single borrowers and because the payment experience on such loans is typically dependent on the successful operation of the project or the borrower’s business. These risks can also be significantly affected by supply and demand conditions in the local market for apartments, offices, warehouses or other commercial space. R&G Financial attempts to minimize its risk exposure by limiting the extent of its commercial lending generally. In addition, the Company imposes stringent loan-to-value ratios, requires conservative debt coverage ratios, and continually monitors the operation and physical condition of the collateral. Although the Company has begun to increase its emphasis on commercial real estate lending, management does not currently anticipate that the commercial real estate loans portfolio will grow significantly as a percentage of the total loan portfolio.

Commercial Business Loans. The Company offers commercial business loans, including working capital lines of credit, inventory and accounts receivable loans, equipment financing (including equipment leases), term loans, insurance premiums loans and loans guaranteed by the Small Business Administration. Depending on the collateral pledged to secure the extension of credit, maximum loan to value ratios are 75% or less, with exceptions permitted to a maximum of 80%. Loan terms may vary from one to 15 years. The interest rates on such loans are generally variable and are indexed to a

designated prime rate, plus a margin. The Company also generally obtains personal guarantees from the principals of the borrowers. At December 31, 2003, commercial business loans amounted to $188.7 million or 4.4% of total loans held for investment. Although the Company has begun to increase its emphasis on commercial business lending, management does not currently anticipate that its portfolio of commercial business loans will grow significantly as a percentage of the total loan portfolio.

Consumer Loans. R&G Financial also originates consumer loans. At December 31, 2003, $210.1 million or 4.9% of R&G Financial’s total loans held for investment consisted of consumer loans. This amount is comprised mostly of credit cards and other unsecured loans, but the Company also offers real estate secured consumer loans (which in the case of Premier Bank are originated by R&G Mortgage) and deposit accounts. Although R&G Financial has begun to increase the emphasis on consumer lending, management does not currently anticipate that its portfolio of consumer loans will grow significantly as a percentage of the total loan portfolio.

R&G Financial’s unsecured consumer loans consisted principally of credit card receivables and personal loans. At December 31, 2003, credit card receivables, all held by Premier Bank, totaled $57.9 million, and personal loans amounted to $73.8 million. Most credit card receivables are offered to targeted customers, which include referrals (cross selling) from other segments/divisions of the Company. The Company has established minimum FICO scores for these loans. R&G Financial also offers loans secured by deposit accounts, that amounted to $24.7 million at December 31, 2003. Such loans are originated generally for up to 90% of the account balance, with a hold placed on the account restricting the withdrawal of the account balance. In addition, R&G Financial offers real estate secured loans in amounts up to 75% of the appraised value of the property, including the amount of any existing prior liens. Such loans generally have shorter terms and higher interest rates than other mortgage loans. Real estate secured consumer loans generally have a maximum term of 10 years, which may be extended at management’s sole discretion in certain circumstances, and an interest rate that is set at a fixed rate based on market conditions. The loans are secured with a first or second mortgage on the property, including loans where another institution holds the first mortgage. At December 31, 2003, real estate secured consumer loans totaled $53.7 million. Most of the Company’s secured consumer loans have been primarily obtained through newspaper advertising, although such loans are also obtained from existing and walk-in customers.

Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk than mortgage loans because of the type and nature of the collateral and, in certain cases, the absence of collateral. In addition, consumer lending collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely effected by job loss, divorce, illness and personal bankruptcy. In many cases, any repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance because of improper repair and maintenance of the underlying security. The remaining deficiency may not warrant further substantial collection efforts against the borrower. At December 31, 2003, $4.8 million of consumer loans were classified as non-performing, of which $3.5 million were secured by real estate.

Asset Quality. When a borrower fails to make a required payment on a loan, R&G Financial attempts to cure the deficiency by contacting the borrower and seeking payment. Contacts are generally made between the 10th and 15th day after a payment is due. In most cases, deficiencies are cured promptly. If a delinquency extends beyond 15 days, the loan and payment history is reviewed and efforts are made to collect the loan. While R&G Financial generally prefers to work with borrowers to resolve such problems, when the account becomes 90 days delinquent in the case of mortgage loans, R&G Financial does institute foreclosure or other proceedings, as necessary, to minimize any potential loss. In the case of consumer loans, the Company refers the file for collection action after 60 days.

Loans secured by real estate are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When such a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. As a matter of policy, R&G Financial does not accrue interest on loans past due 90 days or more that are secured by real estate, except for certain residential mortgage loans in which the probability of collection of interest is deemed sufficient to warrant accrual. The Company generally does not accrue interest on consumer loans past due over 90 days.

Real estate acquired by the Company as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until sold. Pursuant to a statement of position (“SOP 92-3”) that provides guidance on determining the balance sheet treatment of foreclosed assets in annual financial statements, there is a rebuttable presumption that foreclosed assets are held for sale and such assets are recommended to be carried at the lower of fair value minus estimated costs to sell the property, or cost (generally the balance of the loan on the property at the date of acquisition). After the date of acquisition, all costs incurred in maintaining the property are expensed and costs incurred for the improvement or development of such property are capitalized up to the extent of their net realizable value. The Company’s accounting for its real estate owned complies with the guidance set forth in SOP 92-3.

The following table sets forth the amounts and categories of R&G Financial’s non-performing assets at the dates indicated. R&G Financial did not have any troubled debt restructurings at any of the periods presented. Except as otherwise indicated in the footnotes to the table, the non-performing assets are assets of banking subsidiaries of the Company.


	December 31,
	2003			2002			2001			2000			1999
	(Dollars in Thousands)
Non-accruing loans:
Residential real estate(1)	$	57,031		$	43,281		$	50,358		$	79,234		$	47,413
Residential construction		2,424			1,512			871			487			478
Commercial real estate		22,589			29,375			16,945			11,881			9,005
Commercial business		1,733			2,197			3,105			1,414			1,255
Consumer unsecured		833			802			303			1,186			802
Other		—			—			—			—			61

Total		84,610			77,167			71,582			94,202			59,014

Accruing loans greater than 90 days delinquent:
Residential real estate		—			104			—			—			—
Residential construction		—			—			—			—			—
Commercial real estate		—			—			—			—			—
Commercial business		382			261			462			420			63
Consumer		422			667			428			360			274

Total accruing loans greater than 90 days delinquent		804			1,032			890			780			337

Total non-performing loans		85,414			78,199			72,472			94,982			59,351

Real estate owned, net		19,954			15,544	(2)		10,061			9,056			5,852
Other repossessed assets		220			292			362			583			466

		20,174			15,836			10,423			9,639			6,318

Total non-performing assets	$	105,588		$	94,035		$	82,895		$	104,621		$	65,669

Total non-performing loans as a percentage of total loans(3)		1.98	%		2.66	%		3.79	%		5.52	%		3.66	%

Total non-performing assets as a percentage of total assets		1.29	%		1.50	%		1.78	%		2.96	%		2.26	%

(1)		Includes $3.5 million, $4.5 million, $5.8 million, $6.2 million and $6.1 million consumer loans, respectively, held by Premier Bank secured by first and second mortgages on residential real estate at December 31, 2003, 2002, 2001, 2000 and 1999, respectively. Also includes $6.4 million, $6.5 million, $7.3 million, $17.6 million and $5.9 million residential real estate loans secured by first mortgages held by R&G Mortgage at December 31, 2003, 2002, 2001, 2000 and 1999, respectively.

(2)		Real estate owned, net acquired in connection with the acquisition of Crown Bank in 2002 amounted to $5.1 million.

(3)		While the ratio of non-performing loans to total loans decreased from 2.66% to 1.98% from December 31, 2002 to December 31, 2003, the ratio was nevertheless larger than it would otherwise have been due to securitizations from the loan portfolio, which reduced the amount of loans considered in the calculation of the ratio.

Non-performing loans amounted to $85.4 million at December 31, 2003, as compared to $78.2 million at December 31, 2002. The increase in the aggregate amount of non-performing loans during 2003 is due primarily to an increase in residential real estate non-performing loans in the process of being foreclosed of $13.8 million, partially offset by a decrease of $6.8 million in non-performing commercial real estate loans. An aggregate of $57.0 million or 66.8% of non-performing loans held at December 31, 2003 consisted of residential mortgage loans. Because of the nature of the collateral, R&G Financial has historically recognized a low level of loan charge-offs. R&G Financial’s aggregate charge-offs amounted to 0.32% during 2003, as compared to 0.41% during 2002. Although loan delinquencies have historically been higher in Puerto Rico than in the United States, loan charge-offs have historically been lower than in the United States.

Non-performing residential loans increased by $13.8 million or 31.8% from December 31, 2002 to December 31, 2003. The average loan balance on non-performing mortgage loans amounted to $68,000 at December 31, 2003. As of such date, 436 loans with an aggregate balance of $29.3 million (including 116 consumer loans secured by real estate with an aggregate balance of $2.1 million) were in the process of foreclosure. The total delinquency ratio (including loans past due less than 90 days) on residential mortgages of banking subsidiaries, excluding consumer loans secured by real estate, decreased from 4.13% in 2002 to 3.39% in 2003. The Company’s loss experience on such portfolio has been minimal over the last several years.

Non-performing commercial real estate loans decreased by $6.8 million or 23.1% from $29.4 million at December 31, 2002 to $22.6 million at December 31, 2003. The decrease in non-performing commercial real estate loans is attributable to a decrease of $3.4 million and $3.4 million of such loans in Premier Bank and Crown Bank, respectively, as certain borrowers brought their loans current during the year ended December 31, 2003. The number of loans delinquent over 90 days amounted to 170 loans at December 31, 2003, with an average balance of $133,000. The largest non-performing commercial real estate loan as of December 31, 2003 had a balance of $2.4 million.

Non-performing commercial business loans consist of 31 loans. Such loans include 13 loans with an aggregate balance of $1.3 million which are 90% guaranteed by the Small Business Administration, 14 commercial leases amounting to $241,000 and four other commercial business loan with an aggregate balance of $177,000. These loans have a combined average loan size of $56,000. The largest non-performing commercial business loan as of December 31, 2003 had a $786,000 balance.

At December 31, 2003, R&G Financial’s five largest loans-to-one borrower and their related entities amounted to $40.8 million, $39.7 million, $33.2 million, $30.9 million and $21.3 million. All of such loan concentrations were performing at December 31, 2003.

At December 31, 2003, R&G Financial’s allowance for loan losses totaled $39.6 million, which represented a $6.9 million or 21.2% increase from the level maintained at December 31, 2002. The allowance for loan losses at December 31, 2002 includes $7.5 million of acquired reserves in connection with the acquisition of Crown Bank in June 2002. At December 31, 2003, R&G Financial’s allowance represented approximately 0.92% of the total loan portfolio and 46.38% of total non-performing loans, as compared to 1.11% and 41.79% at December 31, 2002. The increase in the allowance for loan losses reflects the increase in R&G Financial’s commercial real estate and construction loan portfolios, which have higher inherent credit risk compared to residential loans.

Allowance for Loan Losses. It is the policy of the Company to maintain an allowance for estimated losses on loans based on a number of quantitative and qualitative factors, including levels and trends of past due and nonaccrual loans, levels and trends in asset classifications, change in volume and mix of loans and collateral values. Quantitative factors used to assess the adequacy of the allowance for

loan losses are established based upon management’s assessment of the credit risk in the portfolio, historical loan loss experience and the Company’s loan underwriting policies as well as management’s judgment and experience. Provisions for loan losses are provided on both a specific and general basis. Specific and general valuation allowances are increased by provisions charged to expense and decreased by charge-offs of loans, net of recoveries. Specific allowances are provided for impaired loans for which the expected loss is measurable. General valuation allowances are provided based on a formula that incorporates the factors discussed above. R&G Financial periodically reviews the assumptions and formula by which additions are made to the specific and general valuation allowances for losses in an effort to refine such allowances in light of the current status of the factors described above.

Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance may be necessary, and net earnings could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations. The Company’s amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond the Company’s control and future losses may exceed current estimates. Premier Bank’s and Crown Bank’s Internal Asset Review Committee undertakes a monthly evaluation of the adequacy of the allowance for loan losses, which is reviewed and approved at least quarterly by the Board of Directors. The Company provides an allowance to absorb losses that are both probable and reasonably quantifiable as well as for those that are not specifically identified but can be reasonably estimated.

The following table sets forth an analysis of R&G Financial’s allowance for loan losses during the periods indicated, of which $17.9 million is maintained against the loan portfolios of the banking subsidiaries at December 31, 2003:


	At and For the Year Ended December 31,
	2003			2002			2001			2000			1999
	(Dollars in Thousands)
Balance at beginning of period	$	32,676		$	17,428		$	11,600		$	8,971		$	8,056

Charge-offs:
Residential real estate		1,989			959			72			38			17
Commercial real estate		3,555			3,263			1,090			468			353
Commercial business		3,457			3,547			2,899			1,539			1,548
Consumer		4,940			3,924			2,566			1,940			2,518
Other		—			—			—			—			4

Total charge-offs		13,941			11,693			6,627			3,985			4,440

Recoveries:
Residential real estate		371			135			—			—			—
Commercial real estate		366			15			11			80			69
Commercial business		1,120			709			131			381			332
Consumer		467			599			382			402			429

Total recoveries		2,324			1,458			524			863			830

Net charge-offs		11,617			10,235			6,103			3,122			3,610

Transferred reserves from R&G Mortgage		—			—			806			—			—

Allowance for loan losses acquired in acquisitions(1)		—			7,463			—			—			—

Provision for losses on loans		18,556			18,020			11,125			5,751			4,525

Balance at end of period	$	39,615		$	32,676		$	17,428		$	11,600		$	8,971

Allowance for loan losses as a percent of total loans outstanding		0.92	%		1.11	%		0.91	%		0.67	%		0.55	%

Allowance for loan losses as a percent of non-performing loans		46.38	%		41.79	%		24.05	%		12.21	%		15.11	%

Ratio of net charge-offs to average loans outstanding		0.32	%		0.41	%		0.32	%		0.17	%		0.25	%

(1)

Relates to acquired reserves in connection with the acquisition of Crown Bank in 2002.

The following table sets forth information concerning the allocation of R&G Financial’s allowance for loan losses by loan category at the dates indicated.


	December 31,
	2003					2002					2001
			Percent of					Percent of					Percent of
			Loans in Each					Loans in Each					Loans in Each
			Category to					Category to					Category to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans
	(Dollars in Thousands)
Residential real estate	$	6,794		17.15	%	$	2,982		9.13	%	$	2,496		14.32	%
Construction		2,280		5.76			1,522		4.66			800		4.59
Commercial real estate		16,109		40.66			17,114		52.37			7,371		42.29
Commercial business		6,162		15.55			4,104		12.56			2,253		12.93
Consumer		8,270		20.88			6,954		21.28			4,508		25.87

Total	$	39,615		100.00	%	$	32,676		100.00	%	$	17,428		100.00	%


	December 31,
	2000					1999
			Percent of Loans					Percent of Loans
			in Each					in Each
			Category to					Category to
	Amount		Total Loans			Amount		Total Loans
	(Dollars in Thousands)
Residential real estate	$	1,278		11.02	%	$	1,419		15.82	%
Construction		432		3.72			186		2.07
Commercial real estate		4,880		42.07			3,258		36.32
Commercial business		1,321		11.39			1,063		11.85
Consumer		3,689		31.80			3,045		33.94

Total	$	11,600		100.00	%	$	8,971		100.00	%

The allowance for loan losses reflects management’s judgment of the level of allowance adequate to absorb estimated credit losses inherent in R&G Financial’s loan portfolio. The Board of Directors of R&G Financial approved a policy formulated by management for a systematic analysis of the adequacy of the allowance. The major elements of the policy consist of: (1) a monthly analysis of reserve amounts at Premier Bank (quarterly at Crown Bank); (2) approval by the Board of Directors of each banking subsidiary of the periodic analysis; and (3) division of the reserve into specific allocation and unspecified reserve portions. The analysis is based on management’s assessment of the historic rate of losses in addition to concentration, segmentation, regional economic conditions, non-performing loan and asset levels, past due status, composition of the portfolio, and other factors.

Specific Allocations. All classified loans are evaluated for loss portions or potential loss exposure. The evaluation occurs at the time the loan is classified and on a regular basis (at least every 360 days) thereafter. This evaluation is documented in the Internal Asset Review Report relating to a specific loan. Specific allocation of reserves considers the value of collateral, the financial condition of the borrower, and industry and current economic trends.

General Allowances. Management realizes that an institution’s past loss history should be considered in evaluating the inherent loss potential of the loan portfolio. Consequently, management has deemed it prudent to develop and implement a migration analysis for the determination of inherent loss

potential for both its homogeneous and non-homogeneous loan portfolios. Homogeneous loan categories consist of one-to-four family residential mortgages and consumer loans. Commercial business and commercial real estate loans less than $500,000 are also treated as homogeneous loans for asset review purposes. Homogeneous loans are analyzed on a group or pool basis for evaluating credit quality and impairment under FASB’s SFAS No 5. Non-homogeneous loan categories consist of all other commercial business and commercial real estate loans. These assets are reviewed individually for the purpose of evaluating credit quality and impairment under FASB’s SFAS No. 114. The migration loss percentage factors used for each risk class or grade for both homogeneous and non-homogeneous loan categories are based on the results of a 3 year write-off experience migration analysis.

General allowances are derived for consumer lending utilizing historical loss factors derived through migration analysis and adjusting for current trends, economic conditions and portfolio behavioral characteristics. Consumer lending poses more inherent risks than one-to-four family residential lending and, consequently, the loss factors are higher. Because of the Company’s limited loss history for one-to-four family residential loans in Crown Bank, general allowances for Crown Bank are derived utilizing historical industry loss factors, also adjusted for management’s assessment of the qualitative factors presented above. Loss factors are applied based upon delinquency status with higher loss factors applied as the number of days past due increases.

Mortgage Banking Activities

Loan Originations, Purchases and Sales. During the years ended December 31, 2003, 2002 and 2001, R&G Financial originated a total of $2.8 billion, $2.0 billion and $1.8 billion of residential mortgage loans, respectively. These aggregate originations include loans originated by R&G Mortgage directly for Premier Bank of $1.3 billion, $811.8 million and $664.8 million during the years ended December 31, 2003, 2002 and 2001, respectively, of such originations, or 45%, 41% and 36% respectively, of total originations. The loans originated by R&G Mortgage for Premier Bank are comprised primarily of conventional residential loans and, to a lesser extent, consumer loans secured by real estate.

R&G Financial is engaged to a significant extent in the origination of FHA-insured and VA-guaranteed single-family residential loans that are primarily securitized into GNMA mortgage-backed securities and sold to institutional and/or private investors in the secondary market. During the years ended December 31, 2003, 2002 and 2001, R&G Financial originated $358.9 million, $365.2 million and $482.7 million, respectively, of FHA/VA loans, which represented 12.7%, 18.6% and 26.4%, respectively, of total loans originated during such respective periods.

R&G Financial also originates conventional single-family residential loans which are either insured by private mortgage insurers or do not exceed 80% of the appraised value of the mortgaged property. During the years ended December 31, 2003, 2002 and 2001, R&G Financial originated $2.5 billion, $1.6 billion and $1.3 billion, respectively, of conventional single-family residential mortgage loans. Substantially all conforming conventional single-family residential loans are securitized and sold in the secondary market, while a substantial portion of non-conforming conventional single-family residential loans are originated by R&G Mortgage (either directly or through The Mortgage Store) on behalf of Premier Bank and either held by Premier Bank in its portfolio or subsequently securitized by R&G Mortgage and/or sold in the secondary market from time to time.

Non-conforming loans generally consist of loans which, primarily because of size or other underwriting technicalities (mostly related to documentation requirements) which may be cured through seasoning, do not satisfy the guidelines for resale of FNMA, FHLMC, GNMA and other private secondary market investors at the time of origination. Management believes that these loans are

essentially of the same credit quality as conforming loans. In connection with mortgage operations, during the years ended December 31, 2003, 2002 and 2001, non-conforming conventional loans represented approximately 52%, 54% and 48%, respectively, of R&G Financial’s total volume of mortgage loans originated, most of which were originated by R&G Mortgage on behalf of Premier Bank. During the years ended December 31, 2003, 2002 and 2001, 96.3%, 94.1% and 94.1% of loans originated by R&G Mortgage on behalf of Premier Bank consisted of single-family residential loans during such respective periods. R&G Mortgage originates single-family residential, construction and commercial real estate loans on behalf of Premier Bank pursuant to the terms of a Master Production Agreement between R&G Mortgage and Premier Bank. See “- Lending Activities from Banking Operations - Origination, Purchase and Sale of Loans.”

While R&G Financial makes available a wide variety of mortgage products designed to respond to consumer needs and competitive conditions, it currently emphasizes 15-year and 30-year conventional first mortgages and 15-year and 30-year FHA loans and VA loans. Substantially all of such loans consist of fixed-rate mortgages. R&G Financial also offers second mortgage loans up to $125,000 with a maximum term of 15 years. The maximum loan-to-appraised value ratio on second mortgage loans permitted by R&G Financial is generally 75% (including the amount of any first mortgage). In addition, R&G Financial also offers real estate secured consumer loans up to $60,000 with a maximum term of 15 years. The maximum loan-to-appraised value ratio on real estate secured consumer loans permitted by R&G Financial is generally 80%. R&G Financial will secure such loans with either a first or second mortgage on the property.

The Company’s loan origination activities in Puerto Rico are conducted out of R&G Mortgage offices and mortgage banking centers, and in the continental United States, mainly through loan officers and solicitors, out of Crown Bank’s branches and Continental’s mortgage offices. Residential mortgage loan applications are attributable to walk-in customers, existing customers and advertising and promotion, referrals from real estate brokers and builders, loan solicitors and mortgage brokers.

Loan origination activities performed by the Company include soliciting, completing and processing mortgage loan applications and preparing and organizing the necessary loan documentation. Loan applications are examined for compliance with underwriting criteria and, if all requirements are met, the Company issues a commitment to the prospective borrower specifying the amount of the loan and the loan origination fees, points and closing costs to be paid by the borrower or seller and the date on which the commitment expires.

R&G Mortgage also purchases FHA loans and VA loans from other mortgage bankers for resale to institutional investors and other investors in the form of GNMA mortgage-backed securities. R&G Mortgage’s strategy is to increase its servicing portfolio primarily though internal originations through its branch network and, to a lesser extent, purchases from third parties. Purchases of loans from other mortgage bankers in the wholesale loan market are generally limited to FHA loans and VA loans and such purchases provide R&G Mortgage with a source of low cost production that allows R&G Mortgage to continue to increase the size of its servicing portfolio. R&G Mortgage purchased $23.7 million, $21.9 million and $29.3 million of loans from third parties during the years ended December 31, 2003, 2002 and 2001, respectively.

The following table sets forth loan originations, purchases and sales from its mortgage banking business by R&G Financial for the periods indicated.


	Year Ended December 31,
	2003			2002			2001
	(Dollars in Thousands)
Loans Originated For Premier Bank:
Conventional loans(1):
Number of loans		10,674			7,182			6,355
Volume of loans	$	1,281,323		$	809,141		$	655,151
FHA/VA loans:
Number of loans		—			—			—
Volume of loans		—			—			—
Consumer loans(2):
Number of loans		126			133			485
Volume of loans	$	1,985		$	2,632		$	9,658
Total loans:
Number of loans		10,800			7,315			6,840
Volume of loans	$	1,283,308		$	811,773		$	664,809
Percent of total volume		45	%		41	%		36	%

Loans Originated For Third Parties:
Conventional loans(1):
Number of loans		10,179			7,123			6,791
Volume of loans	$	1,193,565		$	782,782		$	679,190
FHA/VA loans:
Number of loans		3,271			3,537			4,823
Volume of loans	$	358,906		$	365,172		$	482,721
Total loans:
Number of loans		13,450			10,660			11,614
Volume of loans	$	1,552,471		$	1,147,954		$	1,161,911
Percent of total volume		54	%		58	%		63	%

Total loan originations	$	2,835,779		$	1,959,727		$	1,826,720

Loans Purchased For R&G Mortgage:
Number of loans		315			283			371
Volume of loans(3)	$	23,709		$	21,890		$	29,342
Percent of total volume		1	%		1	%		1	%

Total loan originations and purchases	$	2,859,488		$	1,981,617		$	1,856,062


	Year Ended December 31,
	2003			2002			2001
	(Dollars in Thousands)
Loans Sold To Third Parties(4):
Conventional loans(1):
Number of loans		10,935			7,114			6,124
Volume of loans	$	1,255,701		$	794,869		$	603,542
FHA/VA loans:
Number of loans		2,957			2,668			3,365
Volume of loans	$	351,162		$	369,449		$	513,366
Total loans:
Number of loans		13,892			9,782			9,489
Volume of loans(3)	$	1,606,863		$	1,164,318		$	1,116,908
Percent of total volume		56	%		59	%		60	%

Adjustments:
Loans originated for Premier Bank	$	(1,283,308	)	$	(811,773	)	$	(664,809	)
Loan amortization		(60,149	)		(44,200	)		(31,802	)

Net (decrease) increase in loans	$	(90,832	)	$	(38,674	)	$	42,543

Average Initial Loan Origination Balance:
Premier Bank:
Conventional loans(1)	$	120		$	113		$	103
FHA/VA loans		—			—			—
Third Parties:
Conventional loans(1)	$	117		$	110		$	100
FHA/VA loans		110			103			100
Total
Conventional loans(1)	$	119		$	111		$	102
FHA/VA loans		110			103			100
Refinancings(5):
Premier Bank		52	%		50	%		57	%
Third Parties		68	%		56	%		50	%

(1)		Includes non-conforming loans.

(2)		All of such loans were secured by real estate.

(3)		Includes $23.7 million, $21.8 million and $27.1 million of loans purchased from another institution, and securitized and sold to the same financial institution during 2003, 2002 and 2001, respectively.

(4)		Includes loans converted into mortgage-backed securities.

(5)		As a percent of the total dollar volume of mortgage loans originated by R&G Mortgage for Premier Bank (excluding consumer loans) or third parties, as the case may be. In the case of Premier Bank, refinancings do not necessarily represent refinancings of loans previously held by Premier Bank.

All loan originations, regardless of whether originated by the Company or purchased from third parties, must be underwritten in accordance with R&G Financial’s underwriting criteria, including loan-to-appraised value ratios, borrower income qualifications, debt ratios and credit history, investor requirements, necessary insurance and property appraisal requirements. R&G Financial’s underwriting standards also comply with the relevant guidelines set forth by HUD, VA, FNMA, FHLMC, bank regulatory authorities, private mortgage investment conduits and private mortgage insurers, as applicable. The Company’s underwriting personnel, while operating out of its loan offices, make underwriting decisions independent of the Company’s mortgage loan origination personnel.

Typically, when a mortgage loan is originated, the borrower pays an origination fee. These fees are generally in the range of 0% to 7% of the principal amount of the mortgage loan, and are payable at the closing of such loan. The Company receives these fees on mortgage loans originated through its retail branches. The Company may charge additional fees depending upon market conditions and regulatory considerations as well as the Company’s objectives concerning mortgage loan origination volume and pricing. The Company incurs certain costs in originating mortgage loans, including overhead, out-of-pocket costs and, in some cases, where the mortgage loans are subject to a purchase commitment from private investors, related commitment fees. The volume and type of mortgage loans and of commitments made by investors vary with competitive and economic conditions (such as the level of interest rates and the status of the economy in general), resulting in fluctuations in revenues from mortgage loan originations. Generally accepted accounting principles (“GAAP”) require that general operating expenses incurred in originating mortgage loans be charged to current expense. Direct origination costs and origination fee income must be deferred and amortized using the interest method, until the repayment or sale of the related mortgage loans. Historically, the value of servicing rights which result from R&G Financial’s origination activities has exceeded the net costs attributable to such activities.

R&G Financial customarily sells most of the loans that it originates, except for those originated on behalf of Premier Bank pursuant to a Master Production Agreement with R&G Mortgage. See “-Lending Activities from Banking Operations - Origination, Purchases and Sales of Loans.” During the years ended December 31, 2003, 2002 and 2001, R&G Financial sold $1.6 billion, $1.2 billion and $1.1 billion of loans, respectively, which includes loans securitized and sold but does not include loans originated by R&G Mortgage on behalf of Premier Bank. With respect to such loan sales, $211.8 million or 13.2%, $253.1 million or 21.7% and $375.1 million or 33.6%, respectively, consisted of GNMA-guaranteed mortgage-backed securities of FHA loans or VA loans packaged into pools of $1 million or more ($2.5 million to $5 million for GNMA serial notes) by R&G Mortgage. These securities were sold directly either through R-G Investments Corporation, R&G Financial’s broker-dealer, Premier Bank’s Trust Department, or indirectly through securities broker-dealers.

Conforming conventional loans originated or purchased by the Company are generally sold directly to FNMA, FHLMC or private investors for cash or are grouped into pools of $1 million or more in aggregate principal balance and exchanged for FNMA or FHLMC-issued mortgage-backed securities, which the Company sells to securities broker-dealers. In connection with any such exchanges, the Company pays guarantee fees to FNMA and FHLMC. The issuance of mortgage-backed securities provides R&G Financial with flexibility in selling the mortgages that it originates or purchases and also provides income by increasing the value and marketability of the loans. Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements (so-called “non-conforming loans”) are generally originated on behalf of Premier Bank by R&G Mortgage and either retained in Premier Bank’s portfolio, sold to financial institutions or other private investors.

While R&G Financial’s exchanges of mortgage loans into agency securities and sales of mortgage loans are generally made on a non-recourse basis, the Company also engages in the sale or exchange of mortgage loans on a recourse basis. In the past, recourse sales often involved the sale of non-conforming loans to FNMA, FHLMC and local financial institutions. R&G Financial estimates the fair value of the retained recourse obligation at the time mortgage loans are sold. At December 31, 2003, R&G Financial had loans in its servicing portfolio with provisions for recourse in the principal amount of approximately $1.1 billion, as compared to $762.3 million and $552.4 million as of December 31, 2002 and 2001, respectively. Of the recourse loans existing at December 31, 2003, approximately $224.0 million in principal amount consisted of loans sold to FNMA and FHLMC and converted into mortgage-backed securities of such agencies, and approximately $851.8 million in principal amount consisted of non-conforming loans sold to other financial institutions and/or private investors. As of December 31,

2003, R&G Financial had reserves for possible losses related to its recourse obligations of $4.0 million. Historical losses on recourse obligations have not been significant.

Loan Servicing. R&G Financial acquires servicing rights through its mortgage loan originations (including originations on behalf of Premier Bank) and purchases from third parties. The Company generally retains the rights to service mortgage loans sold, which it has originated or purchased, and receives the related servicing fees. Loan servicing includes collecting principal and interest and remitting the same to the holders of the mortgage loans or mortgage-backed securities to which such mortgage loan relates, holding escrow funds for the payment of real estate taxes and insurance premiums, contacting delinquent borrowers, supervising foreclosures in the event of unremedied defaults and generally administering the loans. The Company receives annual loan servicing fees ranging from 0.25% to 0.50% of the declining outstanding principal balance of the loans serviced plus any late charges. In general, the Company’s servicing agreements are terminable by the investor for cause without penalty or after payment of a termination fee ranging from 0.5% to 1.0% of the outstanding principal balance of the loans being serviced.

R&G Financial’s servicing portfolio has grown significantly over the past several years. At December 31, 2003, R&G Financial’s servicing portfolio totaled $10.9 billion and consisted of a total of 147,981 loans. These amounts include R&G Mortgage’s servicing portfolio totaling $7.9 billion, Crown Bank’s servicing portfolio totaling $2.5 billion and Continental’s servicing portfolio totaling $553.0 million at December 31, 2003. At December 31, 2003, R&G Financial’s servicing portfolio included $1.9 billion of loans serviced for Premier Bank and $227.5 million of loans serviced for Crown Bank, or 17.4% and 2.1%, respectively, of the total servicing portfolio. Substantially all of the mortgage loans in R&G Financial’s servicing portfolio are secured by single (one-to-four) family residences. At December 31, 2003, approximately 72.0% of R&G Financial’s mortgage servicing portfolio is comprised of mortgages secured by real estate located in Puerto Rico.

R&G Mortgage services all loans held in Premier Bank’s loan portfolio (including single-family residential loans retained by Premier Bank and certain commercial real estate loans), although R&G Mortgage does not actually acquire such servicing rights. Once loans are sold, Premier Bank retains the servicing rights to such loans; R&G Mortgage continues to service the loans on behalf of Premier Bank. Premier Bank pays R&G Mortgage servicing fees with respect to the loans serviced by R&G Mortgage on behalf of Premier Bank. In addition, Premier Bank processes payments of all loans originated by R&G Mortgage on behalf of Premier Bank. In connection therewith, R&G Mortgage pays Premier Bank a fee equal to between $0.50 and $1.00 per loan. See “- Regulation - R&G Financial - Limitations on Transactions with Affiliates.”

R&G Financial’s mortgage loan servicing portfolio is subject to reduction by reason of normal amortization, prepayments and foreclosure of outstanding mortgage loans. Additionally, R&G Financial may sell mortgage loan servicing rights from time to time.

The following table sets forth certain information regarding the total loan servicing portfolio of R&G Financial for the periods indicated.


	Year Ended December 31,
	2003			2002			2001
	(Dollars in Thousands)
Composition of Servicing Portfolio at End of Period:
Conventional and other mortgage loans(1)	$	8,317,318		$	8,035,208		$	4,070,074
FHA/VA loans		2,625,503			2,956,736			3,154,497

Total servicing portfolio	$	10,942,821		$	10,991,944		$	7,224,571

Activity in the Servicing Portfolio:
Beginning servicing portfolio	$	10,991,944		$	7,224,571		$	6,634,059
Add: Loan originations and purchases		2,935,327			2,204,275			1,887,582
Servicing of portfolio loans acquired(2)		1,008,231			4,325,499			4,936
Less: Sale of servicing rights(3)		(255,814	)		(229,587	)		(211,603	)
Run-offs(4)		(3,736,867	)		(2,532,814	)		(1,090,403	)

Ending servicing portfolio	$	10,942,821		$	10,991,944		$	7,224,571

Number of loans serviced		147,981			158,659			113,070
Average loan size	$	74		$	69		$	64
Average servicing fee rate		0.467	%		0.508	%		0.499	%

(1)		Includes non-conforming loans.

(2)		Includes $2.6 billion acquired in connection with the acquisition of Crown Bank in June 2002.

(3)		Includes loans sold, servicing released, by Continental totaling $255.8 million, $229.6 million and $211.6 million in 2003, 2002 and 2001, respectively.

(4)		Run-off refers to regular amortization of loans, prepayments and foreclosures.

The following table sets forth certain information at December 31, 2003 regarding the number of, and aggregate principal balance of, the mortgage loans serviced by R&G Financial for its loan portfolio and for third parties at various mortgage interest rates.


	At December 31, 2003
	Portfolio				Loans Serviced				Total Loans
	Loans Serviced				for Third Parties				Serviced
	Number of		Aggregate		Number of		Aggregate		Number of		Aggregate
	Loans		Principal Balance		Loans		Principal Balance		Loans		Principal Balance
	(Dollars in Thousands)
Mortgage Interest Rate
Less than 7.00%		12,695	$	1,678,325		45,229	$	4,148,220		57,924	$	5,826,545
7.00% - 7.49%		2,883		279,084		23,971		1,739,345		26,854		2,018,429
7.50% - 7.99%		1,365		112,938		23,943		1,405,174		25,308		1,518,112
8.00% - 8.49%		601		44,297		11,461		601,983		12,062		646,280
8.50% - 8.99%		753		36,475		10,790		478,584		11,543		515,059
9.00% - 9.49%		356		13,341		4,069		152,260		4,425		165,601
9.50% - 9.99%		331		10,422		3,249		90,474		3,580		100,896
10.00% - 10.49%		172		4,262		1,268		41,105		1,440		45,367
10.50% - 10.99%		254		6,357		931		29,147		1,185		35,504
11.00% or more		160		2,364		3,239		68,661		3,399		71,025

		19,570	$	2,187,865		128,150	$	8,754,953		147,720	$	10,942,818

The amount of principal prepayments on mortgage loans serviced by R&G Financial was $356.9 million, $288.2 million and $180.3 million for the years ended December 31, 2003, 2002 and 2001, respectively. This represented approximately 3.3%, 3.1% and 2.5% of the aggregate principal amount of mortgage loans serviced during such periods. The primary means used by R&G Mortgage to reduce the sensitivity of its servicing fee income to changes in interest and prepayment rates is the development of a strong internal origination capability that has allowed R&G Financial to continue to increase the size of its servicing portfolio even in times of high prepayments.

Servicing agreements relating to the mortgage-backed securities programs of FNMA, FHLMC and GNMA, and certain other investors, require R&G Financial to advance funds to make scheduled payments of principal, interest, taxes and insurance, if such payments have not been received from the borrowers. During the years ended December 31, 2003, 2002 and 2001, the monthly average amount of funds advanced by R&G Financial under such servicing agreements was $26.7 million, $24.4 million and $7.4 million, respectively. Funds advanced by R&G Financial pursuant to these arrangements are generally recovered by R&G Financial within 30 days.

In connection with its loan servicing activities, R&G Financial holds escrow funds for the payment of real estate taxes and insurance premiums with respect to the mortgage loans it services. At December 31, 2003, R&G Financial held $163.2 million of such escrow funds, $97.8 million of which were deposited in Premier Bank, $61.2 million of which were deposited in Crown Bank and $4.2 million of which were deposited with other financial institutions. The escrow funds lower the overall cost of funds, while the escrow funds deposited with other financial institutions serve as part of R&G Financial’s compensating balances which permit the Company to borrow funds from such institutions (pursuant to certain warehouse lines of credit) at rates that are lower than would otherwise apply. See “- Sources of Funds - Borrowings.”

The degree of risk associated with a mortgage loan servicing portfolio is largely dependent on the extent to which the servicing portfolio is non-recourse or recourse. In non-recourse servicing, the principal credit risk to the servicer is the cost of temporary advances of funds. In recourse servicing, the servicer agrees to share credit risk with the owner of the mortgage loans such as FNMA or FHLMC or with an insurer or guarantor. Losses on recourse servicing occur primarily when foreclosure sale proceeds of the property underlying a defaulted mortgage are less than the then outstanding principal balance and accrued interest of such mortgage loan and the cost of holding and disposing of such underlying property. At December 31, 2003, R&G Financial was servicing mortgage loans with an aggregate principal amount of $1.1 billion on a recourse basis. During the last three years, losses incurred due to recourse servicing have not been significant.

R&G Financial’s general strategy is to retain the servicing rights related to the mortgage loans it originates and purchases. Nevertheless, there is a market for servicing rights, which are generally valued in relation to the present value of the expected income stream generated by the servicing rights. Among the factors which influence the value of a servicing portfolio are servicing fee rates, loan balances, loan types, loan interest rates, the expected average life of the underlying loans (which may be reduced through foreclosure or prepayment), the value of escrow balances, delinquency and foreclosure experience, servicing costs, servicing termination rights of permanent investors and any recourse provisions. Although the Company may on occasion consider future sales of a portion of its servicing portfolio, management does not anticipate sales of servicing rights to become a significant part of its operations.

The market value of, and earnings from, R&G Financial’s mortgage loan servicing portfolio may be adversely affected if mortgage interest rates decline and mortgage loan prepayments increase. In a period of declining interest rates and accelerated prepayments, income generated from the Company’s

mortgage loan servicing portfolio may also decline. Conversely, as mortgage interest rates increase, the market value of the Company’s mortgage loan servicing portfolio may be positively affected. See Note 1 to R&G Financial’s Notes to Consolidated Financial Statements for a discussion of SFAS No. 140 and the treatment of servicing rights, incorporated by reference into Item 8 hereof.

Mortgage Loan Delinquencies and Foreclosures. The following table shows the delinquency statistics for R&G Financial’s servicing portfolio at the dates indicated.


	Year Ended December 31,
	2003					2002					2001
			Percent of					Percent of					Percent of
	Number of		Servicing			Number of		Servicing			Number of		Servicing
	Loans		Portfolio			Loans		Portfolio			Loans		Portfolio
Loans delinquent for:
30-59 days		5,106		3.45	%		5,708		3.60	%		5,995		5.30	%
60-89 days		1,672		1.13			1,696		1.07			1,746		1.54
90 days or more		3,559		2.41			3,298		2.08			2,678		2.37

Total delinquencies(1)		10,337		6.99	%		10,702		6.75	%		10,419		9.21	%

Foreclosures pending(2)		2,345		1.58	%		2,199		1.39	%		2,056		1.82	%

(1)		Includes at December 31, 2003 an aggregate of $92.6 million of delinquent loans serviced for Premier Bank, or 0.85% of the total servicing portfolio, $7.2 million of delinquent loans held by Crown Bank, or 0.07% of the total servicing portfolio, and $18.1 million of delinquent loans held by R&G Mortgage, or 0.16% of the total servicing portfolio.

(2)		At December 31, 2003, Premier Bank had foreclosures pending on $26.1 million of loans being serviced by R&G Mortgage, which constituted 0.24% of the servicing portfolio. Crown Bank had foreclosures pending on $1.1 million of loans it is servicing for its own portfolio, and R&G Mortgage had foreclosures pending on $10.9 million of loans it is servicing for its own portfolio at December 31, 2003.

While delinquency rates in Puerto Rico are generally higher than in the mainland United States, these rates are not necessarily indicative of future foreclosure rates or losses on foreclosures. Real estate owned as a result of foreclosures (“REO”) related to R&G Financial’s mortgage banking business arise primarily through foreclosure on mortgage loans repurchased from investors either because of breach of representations or warranties or pursuant to recourse arrangements. As of December 31, 2003, 2002 and 2001, R&G Financial held REO related to servicing activities with a book value of approximately $13.0 million, $9.6 million and $3.0 million, respectively. Sales of REO resulted in losses to R&G Financial of $3.5 million, $1.5 million and $442,000 during the years ended December 31, 2003, 2002 and 2001, respectively. There is no liquid secondary market for the sale of R&G Financial’s REO. The increase in the amount of losses resulting from the sale of REO is related to an increase in the volume of foreclosed loans and the eventual disposition of the resulting REOs.

With respect to mortgage loans securitized through GNMA programs, the Company is fully insured as to principal by the FHA and VA against foreclosure loans. As a result of these programs, foreclosure on these loans had generated no loss of principal as of December 31, 2003. Currently, Crown Bank only services conventional loans, as opposed to FHA/VA loans. R&G Mortgage, however, incurs about $3,000 per loan foreclosed in interest and legal charges during the time between payment by R&G Mortgage and FHA or VA reimbursement. For the years ended December 31, 2003, 2002 and 2001, total expenses related to FHA or VA loans foreclosed amounted to $983,000, $797,000 and $337,000,

respectively. Although FNMA and FHLMC are obligated to reimburse the Company for principal and interest payments advanced by the Company as a servicer (except for recourse servicing), the funding of delinquent payments or the exercise of foreclosure rights involves costs to the Company which may not be recouped. Such nonrecouped expenses have to date been immaterial.

Any significant adverse economic developments could result in an increase in defaults or delinquencies on mortgage loans that are serviced by the Company or held by the Company pending sale in the secondary mortgage market, thereby reducing the resale value of such mortgage loans.

General. R&G Financial’s securities portfolio is managed by investment officers in accordance with a comprehensive written investment policy which addresses strategies, types and levels of allowable investments and which is reviewed and approved annually by the respective Boards of Directors of the Company’s banking subsidiaries. The management of the securities portfolio is set in accordance with strategies developed by Interest Rate Risk, Budget and Investments Committee (“IRRBICO”) of each banking subsidiary.

As discussed under “- Mortgage Banking Activities,” R&G Mortgage is primarily engaged in the origination of mortgage loans and the securitization of such loans into mortgage-backed and related securities and the subsequent sale of such securities to securities broker-dealers and other investors in the secondary market. As a result of R&G Mortgage’s securitization activities, R&G Mortgage maintains a substantial portfolio of GNMA mortgage-backed securities. As of such date, R&G Mortgage held tax-exempt GNMA mortgage-backed securities with a fair value of $296.3 million, which are classified as available for sale. At December 31, 2003, R&G Mortgage’s CMO interest-only residuals and interest only strips, which are classified as available for sale, had an amortized cost of $63.7 million and a fair value of $61.7 million.

Under Premier Bank’s and Crown Bank’s Investment Policies, the Company’s banking subsidiaries generally invest in U.S. Treasury obligations (with a maturity up to five years), U.S. Agency obligations, FNMA, GNMA and FHLMC mortgage-backed certificates, investment grade municipal obligations (with a maturity of up to five years), bankers’ acceptances and Federal Home Loan Bank (“FHLB”) notes (with a maturity of up to five years), investment grade commercial paper (with a maturity of up to 9 months), federal funds (with a maturity of six months or less), certificates of deposit in other financial institutions (including Eurodollar deposits), repurchase agreements (with a maturity of six months or less), investment grade corporate bonds (with a maturity of five years or less) and certain mortgage-backed derivative securities (with a weighted average life of less than ten years).

At December 31, 2003, the securities portfolios of the Company’s banking subsidiaries included $51.4 million of securities held for investment, consisting principally of $4.7 million of GNMA mortgage-backed securities, $4.9 million of FHLMC and FNMA mortgage backed securities, and $41.8 million of certain Puerto Rico Government obligations and other Puerto Rico securities, all held by Premier Bank. In addition, at December 31, 2003, the securities portfolios of the Company’s banking subsidiaries classified as available for sale had a fair value of $2.8 billion, consisting principally of $66.7 million of GNMA mortgage-backed securities, $960.5 million of FHLMC and FNMA mortgage-backed securities, $100.5 million of FHLB stock, $966.6 million of CMOs, $46.2 million of CMO interest-only residuals and interest only strips, $67.8 million corporate debt obligations and $542.2 million of U.S. Government and Agency securities. A substantial amount of securities held by Premier Bank are tax-exempt.

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

At December 31, 2003, $439.6 million or 13.6% of R&G Financial’s mortgage-backed and investment securities were pledged to secure various obligations of R&G Financial (excluding repurchase agreements).

The following table presents certain information regarding the composition and period to maturity of R&G Financial’s securities portfolio held to maturity as of the dates indicated below. The weighted average yield in the following table is calculated on an actual basis and not on a tax-equivalent basis. All of the securities in the following table are assets of the Company’s banking subsidiaries, except as otherwise indicated in the footnote below.


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

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

The following table presents certain information regarding the composition and period to maturity of R&G Financial’s held for trading and available for sale mortgage-backed and investment securities portfolio as of the dates indicated below.


	December 31,
	2003							2002
					Weighted							Weighted
	Amortized				Average			Amortized				Average
	Cost		Fair Value		Yield			Cost		Fair Value		Yield
	(Dollars in Thousands)
Mortgage-backed securities available for sale:
GNMA certificates
Due from one-five years	$	50	$	52		6.67	%	$	—	$	—		—	%
Due from five-ten years		12,563		12,918		6.32			16,515		16,759		6.34
Due over ten years		346,568		350,217		6.24			440,767		446,339		5.33
FNMA certificates
Due from one-five years		71		72		3.84			—		—		—
Due from five-ten years		87,989		87,101		4.38			370		390		6.50
Due over ten years		388,687		405,193		5.50			258,805		269,367		6.89
FHLMC certificates
Due within one year		—		—		—			2		2		8.72
Due from one-five years		3		3		9.06			20		21		9.04
Due from five-ten years		20,308		19,955		4.28			889		935		6.59
Due over ten years		439,876		448,161		6.26			738,041		756,228		6.46
Collateralized mortgage obligations (CMOs)
Due within one year		—		—		—			112		112		8.25
Due from one-five years		5,939		6,019		4.14			17,178		17,288		4.74
Due from five-ten years		20,889		20,873		4.14			31,571		32,219		5.48
Due over ten years		941,970		939,757		4.43			404,981		409,830		5.40
CMO residuals and other mortgage-backed securities
Due from one-five years		5,885		9,455		12.44			10,862		12,496		12.56
Due from five-ten years		101,173		98,502		12.00			20,102		20,263		14.71
Investment securities available for sale:
U.S. Government & Agencies
Due within one year		62,519		63,113		3.78			—		—		—
Due from one-five years		399,275		398,028		3.02			263,632		267,896		3.90
Due from five-ten years		79,388		81,042		5.43			137,756		143,695		6.05
Municipal debt obligations
Due over ten years		12,209		12,339		4.46			4,884		4,879		4.57
Corporate debt obligations
Due within one year		14,247		14,362		6.67			3,205		3,367		6.63
Due from one-five years		48,578		51,376		5.41			52,779		55,283		6.54
Due from five-ten years		2,123		2,109		7.77			2,979		2,385		7.76
Due over ten years		—		—		—			9,805		9,809		6.89
Mortgage securities portfolio mutual fund		—		—		—			3,266		2,964		4.21
FHLB stock		100,461		100,461		1.69			84,337		84,337		5.42
Other		—		—		—			49		49		—

	$	3,090,771	$	3,121,108		5.06	%	$	2,502,908	$	2,556,913		5.87	%

Mortgage-backed securities held for trading:
GNMA certificates	$	—	$	—		—	%	$	9,281	$	9,741		6.13	%
FHLMC certificates		32,155		33,245		7.64			62,550		65,016		7.18
Investment securities held for trading:
Municipal securities		451		446		4.77			—		—		—
Bank issued trust preferred securities		4,594		4,650		6.70			—		—		—
Other		14		14		7.50			—		—		—

	$	37,214	$	38,355		7.49	%	$	71,831	$	74,757		7.04	%


	December 31,
	2001
					Weighted
	Amortized				Average
	Cost		Fair Value		Yield
	(Dollars in Thousands)
Mortgage-backed securities available for sale:
GNMA certificates
Due from one-five years	$	50	$	50		8.49	%
Due from five-ten years		11,053		11,172		5.97
Due over ten years		513,508		511,639		6.50
FNMA certificates
Due from one-five years		—		—		—
Due from five-ten years		538		549		6.50
Due over ten years		266,495		270,936		7.24
FHLMC certificates
Due within one year		—		—		—
Due from one-five years		73		74		8.93
Due from five-ten years		1,265		1,292		6.60
Due over ten years		435,662		437,026		6.74
Collateralized mortgage obligations (CMOs)
Due from one-five years		—		—		—
Due from five-ten years		27,212		27,316		6.05
Due over ten years		202,546		202,468		5.98
CMO residuals and other mortgage-backed securities
Due within one year		—		—		—
Due from one-five years		9,897		9,627		15.00
Due from five-ten years		9,239		10,797		8.08
Investment securities available for sale:
U.S. Government & Agencies
Due within one year		9,600		9,807		5.78
Due from one-five years		156,522		157,408		4.82
Due from five-ten years		307,110		310,938		6.21
Municipal debt obligations:
Due over ten years		—		—		—
Corporate debt obligations
Due within one year		—		—		—
Due from one-five years		53,637		54,503		6.53
Due from five-ten years		—		—		—
Due over ten years		—		—		—
Mortgage securities portfolio mutual fund		—		—		—
FHLB stock		66,077		66,077		5.20
Other		—		—		—

	$	2,070,484	$	2,081,679		6.42	%

Securities held for trading:
GNMA certificates	$	18,152	$	18,152		5.80	%
FHLMC certificates		73,687		75,796		7.29

	$	91,839	$	93,948		6.99	%

A substantial portion of R&G Financial’s securities are held in mortgage-backed securities. Mortgage-backed securities (which also are known as mortgage participation certificates or pass-through certificates) represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally U.S. Government agencies and government sponsored enterprises) that pool and repackage the participation interests in the form of securities, to investors such as R&G Financial. Such U.S. Government agencies and government sponsored enterprises, which guarantee the payment of principal and interest to investors, primarily include the FHLMC, the FNMA and the GNMA.

The FHLMC is a public corporation chartered by the U.S. Government and owned by the 12 Federal Home Loan Banks and federally-insured savings institutions. The FHLMC issues participation certificates backed principally by conventional mortgage loans. The FHLMC guarantees the timely payment of interest and the ultimate return of principal within one year. The FNMA is a private corporation chartered by the U.S. Congress with a mandate to establish a secondary market for conventional mortgage loans. The FNMA guarantees the timely payment of principal and interest on FNMA securities. FHLMC and FNMA securities are not backed by the full faith and credit of the United States, but because the FHLMC and the FNMA are U.S. Government-sponsored enterprises, these securities are considered to be among the highest quality investments with minimal credit risks. The GNMA is a government agency within HUD which is intended to help finance government-assisted housing programs. GNMA securities are backed by FHA-insured and VA-guaranteed loans, and the timely payment of principal and interest on GNMA securities are guaranteed by the GNMA and backed by the full faith and credit of the U.S. Government. Because the FHLMC, the FNMA and the GNMA were established to provide support for low- and middle-income housing, there are limits to the maximum size of loans that qualify for these programs. To accommodate larger-sized loans, and loans that, for other reasons, do not conform to the agency programs, a number of private institutions have established their own home-loan origination and securitization programs.

Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The characteristics of the underlying pool of mortgage, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security thus approximates the life of the underlying mortgages. Mortgage-backed securities generally increase the quality of R&G Financial’s assets by virtue of the insurance or guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of R&G Financial.

R&G Financial’s securities portfolio includes CMOs. CMOs have been developed in response to investor concerns regarding the uncertainty of cash flows associated with the prepayment option of the underlying mortgagor and are typically issued by government agencies, government sponsored enterprises and special purpose entities, such as trusts, corporations or partnerships, established by financial institutions or other similar institutions. A CMO can be collateralized by loans or securities that are insured or guaranteed by the FNMA, the FHLMC or the GNMA. In contrast to pass-through mortgage-backed securities, in which cash flow is received pro rata by all security holders, the cash flow from the mortgages underlying a CMO is segmented and paid in accordance with a predetermined priority to investors holding various CMO classes. By allocating the principal and interest cash flows from the underlying collateral among the separate CMO classes, different classes of bonds are created, each with its own stated maturity, estimated average life, coupon rate and prepayment characteristics.

The FDIC has issued a statement of policy which states, among other things, that mortgage derivative products (including CMOs and CMO residuals) which possess average life or price volatility in excess of a benchmark fixed rate 30-year mortgage-backed pass-through security are “high-risk mortgage

securities,” are not suitable investments for depository institutions, and if considered “high risk” at purchase must be carried in the institution’s trading account or as assets held for sale, and must be marked to market on a regular basis. In addition, if a security was not considered “high risk” at purchase but was later found to be “high risk” based on the tests, it may remain in the held-to-maturity portfolio as long as the institution has positive intent to hold the security to maturity and has a documented plan in place to manage the high risk. At December 31, 2003, CMOs and interest-only securities and residuals of the Company’s banking subsidiaries, which had a fair value of $46.2 million, were designated as “high-risk mortgage securities” and classified as available for sale, increasing from $10.7 million as of December 31, 2002. Most of such securities have been internally generated by the Company. The Company expects to continue generating such securities in the future.

General. R&G Financial will consider various sources of funds to fund its investment and lending activities and evaluates the available sources of funds in order to reduce R&G Financial’s overall funding costs. Deposits, reverse repurchase agreements, warehouse lines of credit, notes payable, FHLB advances, subordinated capital notes and sales, maturities and principal repayments on loans and securities have been the major sources of funds for use in R&G Financial’s lending and investing activities and for other general business purposes.

Deposits. Deposits are the major sources of funds for R&G Financial’s lending and other investment purposes. Consumer and commercial deposits are attracted principally from within the Company’s primary market area through the offering of a broad selection of deposit instruments, including passbook, NOW and Super NOW, checking and commercial checking and certificates of deposit ranging in terms from 7 days to 10 years. Included among these deposit products are $1.5 billion of certificates of deposit with balances of $100,000 or more, which amounted to 43.0% of R&G Financial’s total deposits at December 31, 2003. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.

The Company attempts to price its deposits in order to promote deposit growth. The Company regularly evaluates its internal costs of funds, surveys rates offered by competing institutions, reviews cash flow requirements for lending and liquidity and executes rate changes when deemed appropriate. The Company does not obtain funds through brokers on a regular basis, although at December 31, 2003, the Company held $623.8 million of deposits acquired from money desks in the United States.

The principal methods currently used by the Company to attract deposit accounts include offering a wide variety of services and accounts and competitive interest rates. The Company utilizes traditional marketing methods to attract new customers and savings deposits, including advertising.

The following table presents for the banking subsidiaries the average balance of each deposit type and the average rate paid on each deposit type for the periods indicated.

The following table sets forth the maturities of certificates of deposit having principal amounts of $100,000 or more at December 31, 2003.

Borrowings. R&G Financial’s business requires continuous access to various funding sources, both short and long-term. R&G Mortgage’s primary source of short-term funds is through sales of securities to investment dealers under agreements to repurchase (“reverse repurchase agreements”). The Company also uses reverse repurchase agreements to fund a majority of its investment securities portfolio.

In a reverse repurchase agreement transaction, R&G Financial will generally sell a mortgage-backed security agreeing to repurchase either the same or a substantially identical security on a specified later date (generally not more than 90 days) at a price less than the original sales price. The difference in the sale price and purchase price is the cost of the use of the proceeds. The mortgage-backed securities underlying the agreements are delivered to the dealers who arrange the transactions. For agreements in which R&G Financial has agreed to repurchase substantially identical securities, the dealers may sell, loan or otherwise dispose of R&G Financial’s securities in the normal course of their operations; however, such dealers or third party custodians safe-keep the securities which are to be specifically repurchased by R&G Financial. Reverse repurchase agreements represent a competitive cost funding source for R&G Financial. Nevertheless, R&G Financial is subject to the risk that the lender may default at maturity and not return the collateral. The amount at risk is the value of the collateral that exceeds the balance of the borrowing. In order to minimize this potential risk, R&G Financial only deals with large, established investment brokerage firms when entering into these transactions.

Reverse repurchase transactions are accounted for as financing arrangements rather than as sales of such securities, and the obligations to repurchase such securities are reflected as a liability in R&G Financial’s Consolidated Financial Statements. As of December 31, 2003, R&G Financial had $2.2 billion of reverse repurchase agreements outstanding, with a weighted average interest rate of 2.26%.

R&G Financial’s loan originations are also funded by borrowings under various warehouse lines of credit provided by various commercial banks (“Warehouse Lines”). At December 31, 2003, R&G Financial was permitted to borrow under such Warehouse Lines up to $309.9 million, $170.5 million of which was drawn upon and outstanding as of such date. The Warehouse Lines are used by R&G Financial to fund loan commitments and must generally be repaid within 180 days after the loan is closed or when payment from the sale of the funded loan is received, whichever occurs first. Until such sale closes, the Warehouse Lines provide that the funded loan is pledged to secure the outstanding borrowings. The Warehouse Lines are also collateralized by a general assignment of mortgage payments receivable and an assignment of certain mortgage servicing rights. Certain of these warehousing lines of credit impose restrictions with respect to the maintenance of minimum levels of net worth and working capital and limitations on the amount of indebtedness and dividends which may be declared. Management of R&G Financial believes that as of December 31, 2003, it was in compliance with all of such covenants and restrictions and does not anticipate that such covenants and restrictions will limit its operations.

The interest rate on funds borrowed pursuant to the Warehouse Lines is based on Libor rates plus a negotiated amount. By maintaining compensating balances, R&G Financial is able to borrow funds under the Warehouse Lines at a lower interest rate than would otherwise apply. These compensating balances are comprised of a portion of the escrow accounts maintained by R&G Financial for principal and interest payments and related tax and insurance payments on loans its services. At December 31, 2003, the weighted average interest rate being paid by R&G Financial under its Warehouse Lines amounted to 2.26%.

Although R&G Financial’s primary sources of funds are deposits, it also borrows funds on both a short and long-term basis. The Company obtains both fixed-rate and variable-rate short-term and long-term advances from the FHLB of New York and Atlanta through its banking subsidiaries upon the security of certain of their residential first mortgage loans, securities and cash deposits, provided certain standards related to the credit-worthiness of the banking subsidiaries have been met. FHLB advances are available for general business purposes to expand lending and investing activities. Advances from the FHLB are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. At December 31, 2003, the Company had access to $2.2 billion in advances from the FHLB and had $1.1 billion outstanding as of such date, which mature at various dates commencing in January 1, 2004 through March 2, 2011 and have a weighted average interest rate of 3.56%. At December 31, 2003, the Company had pledged investment securities and loans aggregating $1.4 billion to the FHLB as collateral for the advances. The Company maintains collateral with the FHLB in excess of applicable requirements in order to facilitate any necessary future borrowings.

The following table sets forth certain information regarding the short-term borrowings of R&G Financial at or for the dates indicated.


	At or For the Year Ended
	December 31,
	2003			2002			2001
	(Dollars in Thousands)
Securities sold under agreements to repurchase:
Average balance outstanding	$	1,884,191		$	1,437,089		$	1,035,814
Maximum amount outstanding at any month-end during the period		2,220,795			1,602,394			1,396,939
Balance outstanding at end of period		2,220,795			1,489,758			1,396,939
Average interest rate during the period		2.71	%		3.56	%		4.77	%
Average interest rate at end of period		2.26	%		3.16	%		3.47	%
Notes Payable:
Average balance outstanding	$	217,750		$	241,346		$	233,462
Maximum amount outstanding at any month-end during the period		218,052			196,330			258,301
Balance outstanding at end of period		192,259			194,607			195,587
Average interest rate during the period		3.15	%		2.81	%		4.88	%
Average interest rate at end of period		2.29	%		2.55	%		3.04	%

FHLB advances:
Average balance outstanding	$	1,026,279		$	698,170		$	444,422
Maximum amount outstanding at any month-end during the period		1,129,600			940,725			523,000
Balance outstanding at end of period		1,129,600			940,725			464,125
Average interest rate during the period		3.92	%		4.51	%		5.36	%
Average interest rate at end of period		3.56	%		4.23	%		4.87	%

R&G Financial also provides trust and investment services through Premier Bank’s Trust Department. Services offered include custodial services, the administration of IRA accounts and the sale to investors of mortgage-backed securities guaranteed by GNMA. As of December 31, 2003, Premier Bank’s Trust Department administered trust accounts with aggregate assets of $293.0 million as of such date. Premier Bank receives fees dependent upon the level and type of service provided. The administration of Premier Bank’s Trust Department is performed by the Trust Committee of the Board of Directors of Premier Bank.

R&G Financial’s wholly-owned licensed broker-dealer subsidiary, R-G Investments Corporation, is a NASD registered broker-dealer which offers fixed-income and other investment products to its clients, including customers of sister subsidiaries, R&G Mortgage and Premier Bank.

The Company began insurance operations in November 2000 with its acquisition of Home & Property Insurance Corp., a Puerto Rico insurance agency which provides insurance policies principally on residential properties to R&G Financial’s customers and, to a lesser extent, other parties. Home & Property Insurance Corp. sells primarily property, auto and life insurance to individuals and commercial entities. During the years ended December 31, 2003 and 2002, R-G Investments Corporation and Home & Property Insurance Corp. together contributed

$16.7 million and $8.3 million of revenues, respectively, representing 4.2% and 2.9% of total revenues, respectively, for such periods. In addition, their net income before taxes amounted to $10.8 million and $8.3 million for the years ended December 31, 2003 and 2002, respectively. For additional information, see Note 27 to R&G Financial’s Notes to Consolidated Financial Statements, incorporated by reference into Item 8 hereof.

As of December 31, 2003, R&G Financial (on a consolidated basis) had 2,289 full-time employees and 85 part-time employees. The employees are not represented by a collective bargaining agreement and R&G Financial believes that it has good relations with its employees.

Set forth below is a brief description of certain laws and regulations which, together with the descriptions of laws and regulations contained elsewhere herein, are deemed material to an investor’s understanding of the extent to which R&G Financial and its subsidiary companies are regulated. The description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere herein, does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations.

General. R&G Financial is a registered financial holding company pursuant to the Bank Holding Company Act of 1956, as amended (the “BHCA”). R&G Financial, as a financial holding company, is subject to regulation and supervision by the Federal Reserve Board and the OCFI. R&G Financial is required to file annually a report of its operations with, and is subject to examination by, the Federal Reserve Board and the OCFI.

BHCA Activities and Other Limitations. The BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, without prior approval of the Federal Reserve Board. No approval under the BHCA is required, however, for a bank holding company already owning or controlling 50% of the voting shares of a bank to acquire additional shares of such bank.

The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than banking or managing or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to weigh the expected benefit to the public, such as greater convenience, increased competition or gains in efficiency, against the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.

The Federal Reserve Board has by regulation determined that certain activities are closely related to banking within the meaning of the BHCA. These activities include operating a mortgage company, such a R&G Mortgage, finance company, credit card company, factoring company, trust company or savings association; performing certain data processing operations; providing limited securities brokerage services; acting as an investment or financial advisor; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; providing tax planning and preparation services; operating a collection agency; and providing certain courier services. The Federal Reserve Board also has determined that certain other activities, including real estate

brokerage and syndication, land development, property management and underwriting of life insurance not related to credit transactions, are not closely related to banking and a proper incident thereto.

Limitations on Transactions with Affiliates. Transactions between financial institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act and Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and provides interpretative guidance with respect to affiliate transactions. Affiliates of a financial institution include, among other entities, the financial institution’s holding company (such as R&G Financial) and companies that are under common control with the financial institution. In general, subject to certain specified exemptions, a financial institution or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates: (i) to an amount equal to 10% of the financial institution’s capital and surplus, in the case of covered transactions with any one affiliate; and (ii) to an amount equal to 20% of the financial institution’s capital and surplus, in the case of covered transactions with all affiliates.

In addition, a financial institution and its subsidiaries may engage in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the financial institution or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A “covered transaction” includes: (i) a loan or extension of credit to an affiliate; (ii) a purchase of, or an investment in, securities issued by an affiliate; (iii) a purchase of assets from an affiliate, with some exceptions; (iv) the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; and (v) the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.

In addition, under Regulation W: (i) a financial institution may not purchase a low-quality asset from an affiliate; (ii) covered transactions and other specified transactions between a financial institution or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and (iii) with some exceptions, each loan or extension of credit by a financial institution to an affiliate must be secured by collateral with a market value ranging from 100% to 130%, depending on the type of collateral, of the amount of the loan or extension of credit.

Regulation W exempts from the quantitative limits and collateral requirements transactions between “sister banks.” The sister bank exemption covers transactions between a bank and a FDIC insured depository institution if the same company controls 80% or more of the voting securities of the bank and the depository institution. In addition, an operating subsidiary of a FDIC depository institution is treated as part of the depository institution, for purposes of the definition.

In addition, Sections 22(h) and (g) of the Federal Reserve Act place restrictions on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, an executive officer and to a greater than 10% stockholder of a financial institution, and certain affiliated interests of either, may not exceed, together with all other outstanding loans to such person and affiliated interests, the financial institution’s loans to one borrower limit (generally equal to 15% of the institution’s unimpaired capital and surplus). Section 22(h) also requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loans are made pursuant to a benefit or compensation program that (i) is widely available to employees of the institution and (ii) does not give preference to any director, executive officer or principal stockholder, or certain affiliated interests of either, over other employees of the savings institutions. Section 22(h) also requires prior board approval for certain loans. In addition, the aggregate amount of extensions of credit by a financial institution to all insiders cannot exceed the institution’s unimpaired capital and surplus. Furthermore, Section 22(g) places additional restrictions on loans to executive officers.

R&G Mortgage and Premier Bank are parties to various agreements that address how each would conduct itself in specifically delineated affiliated transactions (the “Affiliated Transaction Agreements”). The Affiliated Transaction Agreements include a Master Purchase, Servicing and Collections Agreement (the “Master Purchase Agreement”), a Master Custodian Agreement, a Master Production Agreement, a Securitization Agreement and a Data Processing Computer Service Agreement. The terms of these agreements were negotiated at arm’s length on the basis that they are substantially the same, or at least as favorable to Premier Bank, as those prevailing for comparable transactions with, or involving, other nonaffiliated companies.

Pursuant to the Master Production Agreement, Premier Bank, on a monthly basis, determines its loan production targets and goals (the “Loan Production Goals”) and R&G Mortgage assists Premier Bank to reach its Loan Production Goals by, among other things: (i) advertising, promoting and marketing to the general public; (ii) interviewing prospective borrowers and initial processing of loan applications, consistent with Premier Bank’s underwriting guidelines and Loan Production Goals previously established; and (iii) providing personnel and facilities with respect to the execution of any loan agreement approved by Premier Bank. In exchange for these services, Premier Bank remits to R&G Mortgage a percentage of the processing or originating fees charged to the borrowers under loan agreements, as set forth in the agreements. See “-Lending Activities from Banking Operations - Originations, Purchases and Sales of Loans.”

Until January 1, 2001, the Master Purchase Agreement provided for the sale by Premier Bank to R&G Mortgage of the servicing rights to all first and second mortgage loans secured by residential properties which become part of Premier Bank’s loan portfolio once the related loans are sold. Effective January 1, 2001, Premier Bank retains servicing rights on loans sold or secured into mortgage-backed securities. R&G Mortgage services all other loans held in Premier Bank’s loan portfolio (including single-family residential loans retained by Premier Bank and certain commercial real estate loans), although R&G Mortgage does not actually acquire such servicing rights. The Master Purchase Agreement further provides that R&G Mortgage exclusively will service such loans and that Premier Bank will process payments of such loans, all according to a fee schedule. See “ - Mortgage Banking Activities - Loan Originations, Purchases and Sales of Loans.”

Under the Securitization Agreement, R&G Mortgage renders securitization services with respect to the pooling of some of Premier Bank’s mortgage loans into mortgage-backed securities. With respect to securitization services rendered, Premier Bank pays a securitization fee of 25 basis points. The Master Custodian Agreement provides that Premier Bank shall be the custodial agent for R&G Mortgage of certain documentation related to the issuance by R&G Mortgage of GNMA, FNMA or FHLMC mortgage-backed certificates. In consideration of these services, Premier Bank receives a fee for each mortgage note included in a mortgage-backed certificate per year for which it acts as custodian, as set forth in the agreement. See “- Mortgage Banking Activities - Loan Originations, Purchases and Sales of Loans.”

Capital Requirements. The Federal Reserve Board has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the BHCA. The Federal Reserve Board capital adequacy guidelines generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets, with at least one-half of that amount consisting of Tier I or core capital and up to one-half of that amount consisting of Tier II or supplementary capital. Tier I capital for bank holding companies generally consists of the sum of common stockholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier I capital), less goodwill and, with certain exceptions, intangibles. Tier II capital generally consists of hybrid capital instruments; perpetual preferred stock which is not eligible to be

included as Tier I capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics, with the categories ranging from 0% (requiring no additional capital) for assets such as cash to 100% for the bulk of assets which are typically held by a bank holding company, including multi-family residential and commercial real estate loans, commercial business loans and consumer loans. Single-family residential first mortgage loans which are not past-due (90 days or more) or non-performing and which have been made in accordance with prudent underwriting standards are assigned a 50% level in the risk-weighing system, as are certain privately-issued mortgage-backed securities representing indirect ownership of such loans. Off-balance sheet items also are adjusted to take into account certain risk characteristics.

In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose does not include goodwill and any other intangible assets and investments that the Federal Reserve Board determines should be deducted from Tier I capital. The Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or operational weaknesses or deficiencies or those that are not experiencing or anticipating significant growth. Other bank holding companies are expected to maintain Tier I leverage capital ratios of at least 4.0% to 5.0% or more, depending on their overall condition.

R&G Financial is in compliance with the above-described Federal Reserve Board regulatory capital requirements.

Financial Support of Affiliated Institutions. Under Federal Reserve Board policy, R&G Financial will be expected to act as a source of financial strength to its banking subsidiaries and to commit resources to support them in circumstances when it might not do so absent such policy. The legality and precise scope of this policy is unclear, however, in light of recent judicial precedent. In addition, any capital loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.

USA Patriot Act of 2001. In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. that occurred on September 11, 2001. The Patriot Act is intended is to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

Financial Services Modernization Legislation. The Gramm-Leach-Bliley Act, signed into law in November 1999, revises and expands the existing provisions of the BHCA by including a new section that permits a bank holding company to elect to become a financial holding company, which may engage in a full range of financial activities. The qualification requirements and the process for a bank holding company that elects to be treated as a financial holding company requires that all the subsidiary banks controlled by the bank holding company at the time of election to become a financial holding company

must be and remain at all times well capitalized and well managed. R&G Financial applied for and became a financial holding company in 2000.

Financial holding companies may engage, directly or indirectly, in any activity that is determined to be (i) financial in nature, (ii) incidental to such financial activity, or (iii) complementary to a financial activity and which does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Gramm-Leach-Bliley Act specifically provides that the following activities have been determined to be “financial in nature”: (a) lending, trust and other banking activities; (b) insurance activities; (c) financial or economic advice or services; (d) pooled investments; (e) securities underwriting and dealing; (f) existing bank holding company domestic activities; (g) existing bank holding company foreign activities; and (h) merchant banking activities.

In addition, the Gramm-Leach-Bliley Act specifically gives the Federal Reserve Board the authority, by regulation or order, to expand the list of “financial” or “incidental” activities, but requires consultation with the U.S. Treasury, and gives the Federal Reserve Board authority to allow a financial holding company to engage in any activity that is “complementary” to a financial activity and does not “pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.”

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

The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of specified issues by the SEC and the Comptroller General. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

The SOA addresses, among other matters: (i) audit committees; (ii) certification of financial statements by the chief executive officer and the chief financial officer; (iii) the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; (iv) a prohibition on insider trading during pension plan black out periods; (v) disclosure of off-balance sheet transactions; (vi) a prohibition on personal loans to directors and officers; (vii) expedited filing requirements for Forms 4’s; (viii) disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; (ix) “real time” filing of periodic reports; (x) the formation of a public accounting oversight board; (xi) auditor independence; and (xii) various increased criminal penalties for violations of securities laws.

General. Premier Bank is incorporated under the Puerto Rico Banking Act of 1933, as amended (the “Puerto Rico Banking Law”) and is subject to extensive regulation and examination by the OCFI, the FDIC and certain requirements established by the Federal Reserve Board. Crown Bank is subject to extensive regulation by the OTS and the FDIC. The federal and Puerto Rico laws and regulations which are applicable to banks and thrift institutions regulate, among other things, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. There are periodic examinations by the aforementioned regulatory authorities to test Premier Bank’s and Crown Bank’s compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the OCFI, the FDIC, the OTS or the U.S. Congress or Puerto Rico legislature could have a material adverse impact on R&G Financial and its operations.

FDIC Insurance Premiums. The banking subsidiaries of the Company currently pay deposit insurance premiums to the FDIC based on a risk-based assessment system established by the FDIC for all Savings Association Insurance Fund (“SAIF”) member institutions, such as Crown Bank and Bank Insurance Fund (“BIF”) member institutions, such as Premier Bank. Under applicable regulations, institutions are assigned to one of three capital groups that is based solely on the level on an institution’s capital: “well capitalized,” “adequately capitalized” and “undercapitalized.” These three groups are then divided into three subgroups that reflect varying levels of supervisory concern, from those that are considered to be healthy to those which are considered to be of substantial supervisory concern. The matrix so created results in nine assessment risk classifications, with rates ranging from .0% for well capitalized, healthy institutions to .27% for undercapitalized institutions with substantial supervisory concerns. Each of Premier Bank and Crown Bank was classified as a “well-capitalized” institution as of December 31, 2003.

The FDIC may terminate the deposit insurance of any insured depository institution, including Premier Bank or Crown Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of Premier Bank’s or Crown Bank’s deposit insurance.

From time to time, new laws are proposed that, if enacted, could have an effect on the financial institutions industry. For example, deposit insurance reform legislation is currently pending in Congress that would: (i) merge the Bank Insurance Fund and the SAIF; (ii) increase the current deposit insurance coverage limit for insured deposits to $130,000 and index future coverage limits to inflation; (iii) double deposit insurance coverage limits for individual retirement accounts; and (iv) replace the current fixed 1.25 designated reserve ratio with a reserve range, giving the FDIC discretion in determining a level adequate within this range. If any of these proposals eventually become law, they could have an effect on R&G Financial’s operations and the way it conducts business.

Capital Requirements. The FDIC has promulgated regulations and adopted a statement of policy regarding the capital adequacy of state-chartered banks that, like Premier Bank, will not be members of the Federal Reserve System. These requirements are substantially similar to those adopted by the Federal Reserve Board regarding bank holding companies, as described above.

The FDIC’s capital regulations establish a minimum 3.0% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively increases the minimum Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the FDIC’s regulation, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization and are rated composite 1 under the Uniform Financial Institutions Rating System. Leverage or core capital is defined as the sum of common stockholders’ equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain qualifying supervisory goodwill and certain purchased mortgage servicing rights.

The FDIC also requires that banks meet a risk-based capital standard. The risk-based capital standard for banks requires the maintenance of total capital (which is defined as Tier I capital and supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier I capital are equivalent to those discussed above under the 3% leverage capital standard. The components of supplementary capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital. At December 31, 2003, Premier Bank met each of its capital requirements.

The FDIC and the other federal banking agencies have published a joint policy statement that describes the process the banking agencies will use to measure and assess the exposure of a bank’s net economic value to changes in interest rates. The FDIC and other federal banking agencies have also adopted a joint policy statement on interest rate risk policy. Because market conditions, bank structure, and bank activities vary, the agencies concluded that each bank needs to develop its own interest rate risk management program tailored to its needs and circumstances. The policy statement describes prudent principles and practices that are fundamental to sound interest rate risk management, including appropriate board and senior management oversight and a comprehensive risk management process that effectively identifies, measures, monitors and controls risks.

Under OTS capital regulations, an institution is well capitalized if it has a total risk-based capital ratio of at least 10.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a leverage ratio of at least 5.0%. An institution is adequately capitalized if it has a total risk-based capital ratio of at least 8.0%, a Tier 1 risk-based capital ratio of at least 4.0% and a leverage ratio of at least 4.0% (or 3.0% if it has a composite rating of “1” and is not experiencing or anticipating significant growth). The regulation also establishes three categories for institutions with lower ratios: undercapitalized, significantly undercapitalized and critically undercapitalized. At December 31, 2003, Crown Bank met the capital requirements of a “well capitalized” institution under applicable OTS regulations.

OTS capital regulations also require savings associations to meet three additional capital standards: (i) tangible capital equal to at least 1.5% of total adjusted assets, (ii) leverage capital (core capital) equal to 4.0% of total adjusted assets, and (iii) risk-based capital equal to 8.0% of total risk-weighted assets. These capital requirements are viewed as minimum standards by the OTS, and most institutions are expected to maintain capital levels well above the minimum. In addition, the OTS regulations provide that minimum capital levels higher than those provided in the regulations may be established by the OTS for individual savings associations, upon a determination that the savings association’s capital is or may become inadequate in view of its circumstances. Crown Bank is not subject to any such individual minimum regulatory capital requirement and Crown Bank’s regulatory capital exceeded all minimum regulatory capital requirements as of December 31, 2003.

Activities and Investments. The activities and equity investments of FDIC-insured, state-chartered banks (which under the Federal Deposit Insurance Act include banking institutions incorporated under the laws of Puerto Rico) are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary or (ii) acquiring or retaining the voting shares of a depository institution if certain requirements are met. In addition, an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member and the bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the impermissible activity.

Puerto Rico Banking Law. As a commercial bank organized under the laws of the Commonwealth, Premier Bank is subject to supervision, examination and regulation by the OCFI pursuant to the Puerto Rico Banking Law.

The Puerto Rico Banking Law requires that at least ten percent (10%) of the yearly net income of Premier Bank be credited annually to a reserve fund. This apportionment shall be done every year until the reserve fund shall be equal to the sum of Premier Bank’s paid-in common and preferred stock capital. As of December 31, 2003, Premier Bank had credited $25.1 million to such reserve fund.

The Puerto Rico Banking Law also provides that when the expenditures of a bank are greater than the receipts, the excess of the former over the latter shall be charged against the undistributed profits of such bank, and the balance, if any, shall be charged against the reserve fund, as a reduction thereof. If there is no reserve fund sufficient to cover such balance in whole or in part, the outstanding amount shall be charged against the capital account and no dividend shall be declared until said capital has been restored to its original amount and the reserve fund to 20% of the original capital. In addition, every bank is required by the Puerto Rico Banking Law to maintain a legal reserve which shall not be less than 20% of its demand liabilities, except government deposits (federal, state and municipal) which are secured by actual collateral. The reserve is required to be made up of any of the following instruments or any combination of them: (i) legal tender of the United States; (ii) checks on banks or trust companies located in any part of Puerto Rico, to be presented for collection during the day following that on which they are received; (iii) money deposited in other banks provided said deposits are authorized by the Commissioner, subject to immediate collection; and (iv) federal funds sold and securities purchased under agreements to resell, provided such funds are repaid on or prior to the close of the next business day.

Under the Puerto Rico Banking Law, Premier Bank is permitted to make loans to any one person, firm, partnership or corporation, up to an aggregate amount of fifteen percent (15%) of the paid-in capital

and reserve fund of Premier Bank, plus 15% of 50% of undistributed earnings for “well capitalized” institutions. As of December 31, 2003, the legal lending limit for Premier Bank under these provisions was approximately $53.6 million. If such loans are secured by collateral worth at least twenty-five percent (25%) more than the amount of the loan, the aggregate maximum amount may reach one-third of the paid-in capital of Premier Bank, plus its reserve fund. The legal lending limit for Premier Bank for loans secured by collateral with at least 25% more than the amount of the loan was approximately $119.1 million. Premier Bank’s maximum extension of credit to any one borrower was $54.6 million at December 31, 2003, which is fully secured with collateral with a “loan to value” ratio of less than 80%. There are no restrictions on the amount of loans to subsidiaries of banks, or loans that are secured by mortgages by real estate, or loans that are wholly secured by bonds, securities and other evidences of indebtedness of the United States or the Commonwealth, or by current debt bonds, not in default, of municipalities or instrumentalities of the Commonwealth. Loans to non-banking affiliates of Premier Bank, are subject however to the lending limitations set forth in Sections 23A and 23B of the Federal Reserve Act and Regulation W. The Puerto Rico Banking Law also authorizes Premier Bank to conduct certain financial and related activities directly or through subsidiaries. The Puerto Rico Banking Law also prohibits Puerto Rico banks from making loans secured by their own stock, and from purchasing their own stock, unless such purchase is necessary to prevent losses because of a debt previously contracted in good faith. The stock so purchased must be sold in a private or public sale within one year from the date of purchase. Premier Bank may repurchase its own stock for the purpose of reducing its capital, subject to the approval of the OCFI.

The rate of interest that Premier Bank may charge on mortgage and other types of loans to individuals in Puerto Rico is subject to Puerto Rico’s usury laws. Such laws are administered by the Financing Board, which consists of the Commissioner of Financial Institutions, the President of the Government Development Bank, the Chairman of the Planning Board and the Puerto Rico Secretaries of Commerce, Treasury and Consumer Affairs and three representatives from the private sector. The Financing Board promulgates regulations that specify maximum rates on various types of loans to individuals. The Financing Board eliminated the regulations that set forth the maximum interest rates that could be charged on consumer loans, mortgage loans and commercial loans. The origination charges on residential mortgage loans may not exceed 6% of the loan amount.

Regulatory Enforcement Authority. Applicable banking laws include substantial enforcement powers available to federal and Puerto Rico banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Regulations Applicable to Crown Bank. Crown Bank is subject to the lending limits applicable to national banks. With limited exceptions, the maximum amount that a savings association or a national bank may lend to any borrower, including related entities of the borrower, at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. At December 31, 2003, Crown Bank’s loans-to-one-borrower limit was $14.3 million based upon the 15% of unimpaired capital and surplus measurement. At December 31, 2003, Crown Bank’s largest single lending relationship had an outstanding balance of $11.6 million, and consisted of 3 loans secured by real estate.

Savings associations must also meet a qualified thrift lender, or “QTL,” test, which test may be met either by maintaining a specified level of assets in qualified thrift investments as specified by the Home Owners Loan Act of 1933, or HOLA, or by meeting the definition of a “domestic building and loan

association” under the Internal Revenue Code of 1986, as amended, or the “Code.” Qualified thrift investments are primarily residential mortgages and related investments, including mortgage related securities. The required percentage of investments under the HOLA is 65% of assets while the Code requires investments of 60% of assets. An association must be in compliance with the QTL test or the definition of domestic building and loan association on a monthly basis in nine out of every 12 months. Associations that fail to meet the QTL test will generally be prohibited from engaging in any activity not permitted for both a national bank and a savings association. As of December 31, 2003, Crown Bank was in compliance with its QTL requirement.

Community Reinvestment Act and the Fair Lending Laws. Premier Bank and Crown Bank have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities and the denial of applications. In addition, an institution’s failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in the applicable federal regulatory agencies and/or the Department of Justice taking enforcement actions against the institution. Based on their most recent examinations, Premier Bank and Crown Bank each received a satisfactory rating with respect to its performance pursuant to the Community Reinvestment Act.

Federal Home Loan Bank System. Premier Bank and Crown Bank are members of the FHLB system. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the board of directors of the individual FHLB. As an FHLB member, each of Premier Bank and Crown Bank is required to own capital stock in a FHLB in an amount equal to the greater of: (i) 1% of its aggregate outstanding principal amount of its residential mortgage loans, home purchase contracts and similar obligations at the beginning of each calendar year; or (ii) 5% of its FHLB advances or borrowings. At December 31, 2003, Premier Bank and Crown Bank each met the required investment in FHLB stock, with each holding $88.5 million and $12.0 million of the FHLB of New York and FHLB of Atlanta stock, respectively.

Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain noninterest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non personal time deposits. At December 31, 2003, Premier Bank and Crown Bank were in compliance with these requirements.

The mortgage banking business conducted by R&G Mortgage, The Mortgage Store and Continental is subject to the rules and regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to originating, processing, selling and servicing mortgage loans and the issuance and sale of mortgage-backed securities. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts and, with respect to VA loans, fix maximum interest rates. Moreover, lenders are required annually to submit to FNMA, FHA, FHLMC, GNMA and VA audited financial statements, and each regulatory entity has its own financial requirements. The affairs of these subsidiaries are also subject to supervision and examination by FNMA, FHA, FHLMC, GNMA, HUD and VA at all times to assure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity

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

Mortgage loan production activities are subject to the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder. The Truth-in-Lending Act contains disclosure requirements designed to provide consumers with uniform, understandable information with respect to the terms and conditions of loans and credit transactions in order to give them the ability to compare credit terms. The Truth-in-Lending Act provides consumers a three day right to cancel certain credit transactions, including any refinance mortgage or junior mortgage loan on a consumer’s primary residence.

The mortgage subsidiaries are required to comply with the Equal Credit Opportunity Act of 1974, as amended (“ECOA”), and Regulation B promulgated thereunder, which prohibit creditors from discriminating against applicants on the basis of race, color, sex, age or marital status, and restrict creditors from obtaining certain types of information from loan applicants. It also requires certain disclosures by lenders regarding consumer rights and requires lenders to advise applicants of the reasons for any credit denial. In instances where the applicant is denied credit or the rate or charge for loan increases as a result of information obtained from a consumer credit agency, another statute, The Fair Credit Reporting Act of 1970, as amended, requires the lenders to supply the applicant with the name and address of the reporting agency.

The Federal Real Estate Settlement Procedures Act (“RESPA”) imposes, among other things, limits on the amount of funds a borrower can be required to deposit with the mortgage subsidiaries in any escrow account for the payment of taxes, insurance premiums or other charges.

R&G Mortgage and The Mortgage Store are also subject to regulation by the OCFI, with respect to, among other things, licensing requirements and the recordkeeping, examination and reporting requirements of the Puerto Rico Mortgage Banking Institutions Law (the “Mortgage Banking Law”). R&G Mortgage and The Mortgage Store are licensed by the OCFI as a mortgage banking institution in Puerto Rico. Such authorization to act as a mortgage banking institution must be renewed as of January 1 of each year. In the past, neither R&G Mortgage nor The Mortgage Store has not had any difficulty in renewing its authorization to act as a mortgage banking institution, and management is unaware of any existing practices, conditions or violations which would result in either company being unable to receive such authorization in the future.

The Mortgage Banking Law requires the prior approval of the OCFI for the acquisition of control of any mortgage banking institution licensed under the Mortgage Banking Law. For purposes of the Mortgage Banking Law, the term “control” means the power to direct or influence decisively, directly or indirectly, the management or policies of a mortgage banking institution. The Mortgage Banking Law provides that a transaction that results in the holding of less than 10% of the outstanding voting securities of a mortgage banking institution shall not be considered a change of control. Pursuant to the Mortgage Banking Law, upon receipt of notice of a proposed transaction that may result in change of control, the OCFI is obligated to make such inquires as it deems necessary to review the transaction. Under the Mortgage Banking Law, the determination of the OCFI whether or not to authorize a proposed change of control is final and non-appealable.

As is the case with Premier Bank, the rate of interest that R&G Mortgage and The Mortgage Store may charge on mortgage loans to individuals is subject to Puerto Rico’s usury laws. Such laws are administered by the Financing Board that promulgates regulations that specify maximum rates on various types of loans to individuals. Regulation 26-A promulgated by the Financing Board fixes the maximum rate (which is adjusted on a weekly basis) that may be charged on residential first mortgage loans.

As a registered broker-dealer, R-G Investments Corporation is subject to regulation and examination by the SEC and the NASD, which may affect its manner of operation and profitability. Such regulations cover a broad range of subject matters. Rules and regulations for registered broker-dealers cover such issues as: capital requirements; sales and trading practices; use of client funds and securities; the conduct of directors, officers, and employees; record-keeping and recording; supervisory procedures to prevent improper trading on material non-public information; qualification and licensing of sales personnel; and limitations on the extension of credit in securities transactions.

R-G Investments Corporation is subject to the net capital requirements set forth in Rule 15c3-1 of the Exchange Act. The net capital requirements measure the general financial condition and liquidity of a broker-dealer by specifying a minimum level of net capital that a broker-dealer must maintain, and by requiring that a significant portion of its assets be kept liquid. If R-G Investments Corporation failed to maintain its minimum required net capital, it would be required to cease executing customer transactions until it came back into compliance. This could also result in R-G Investments Corporation losing its NASD membership, its registration with the SEC, or require a complete liquidation.

The SEC’s risk assessment rules also apply to R-G Investments Corporation as a registered broker-dealer. These rules require broker-dealers to maintain and preserve records and certain information, describe risk management policies and procedures, and report on the financial condition of affiliates whose financial and securities activities are reasonably likely to have a material impact on the financial and operational condition of the broker-dealer.

In addition to federal registration, state securities commissions require the registration of certain broker-dealers.

Violations of federal, state and NASD rules or regulations may result in the revocation of broker-dealer licenses, imposition of censures or fines, the issuance of cease and desist orders, and the suspension or expulsion of officers and employees from the securities business firm.

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

The Company’s principal executive office is located at 280 Jesús T. Piñero Avenue, Hato Rey, San Juan, Puerto Rico 00918. At December 31, 2003, the Company operated its subsidiaries mostly through leased facilities. All of the Company’s subsidiaries, except Crown Bank and Continental, conduct business in Puerto Rico. Premier Bank operates from 31 offices, R&G Mortgage operates from 37 offices, Crown Bank operates from 14 banking offices and one mortgage office located in the State of Florida, The Mortgage Store operates from ten offices, Home & Property Insurance Corp. operates from one office, R-G Investments Corporation operates from three offices and Continental operates from four offices located in the States of New York and North Carolina.

The Company is not involved in any pending legal proceedings other than nonmaterial legal proceedings occurring in the ordinary course of business.

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

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

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

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

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

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

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

ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer along with its Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(b). Based upon that evaluation, the Company’s Chief Executive Officer along with its Executive Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting the Company to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. There has not been any change in the Company’s internal control over financial reporting that occurred during its most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

The information required herein is incorporated by reference from the Registrant’s Proxy Statement for the 2004 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the Registrant’s fiscal year, 2004 (“Proxy Statement”).

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

The information required herein is incorporated by reference from the Registrant’s Proxy Statement.

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

The information required herein is incorporated by reference from the Registrant’s Proxy Statement.

(a)		Documents Filed as Part of this Report

(1)		The following financial statements are incorporated by reference from Item 8 hereof (see Exhibit 13):

Independent Auditors’ Report.

Consolidated Statements of Financial Condition as of December 31, 2003 and 2002.

Consolidated Statements of Income for the Years Ended December 31, 2003, 2002 and 2001.

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001.

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2003, 2002 and 2001.

Notes to Consolidated Financial Statements.

(2)		All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.

(3)		The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.


No.		Description
2.1		Amended and Restated Agreement and Plan of Merger by and between R&G Financial Corporation, R-G Premier Bank of Puerto Rico and R-G Interim Premier Bank, dated as of September 27, 1996 (1)

2.2.0		Agreement and Plan of Reorganization among R&G Financial Corporation, R&G Acquisition Holdings Corporation, The Crown Group, Inc. and Crown Bank, a Federal Savings Bank dated as of December 19, 2001 (2)

2.2.1		Amendment No. 2 to Agreement and Plan of Reorganization among R&G Financial Corporation, R&G Acquisition Holdings Corporation, The Crown Group, Inc. and Crown Bank, a Federal Savings Bank dated as of February 27, 2002 (3)

3.1.0		Certificate of Incorporation of R&G Financial Corporation (4)

3.1.1		Certificate of Amendment to Certificate of Incorporation of R&G Financial Corporation (4)

3.1.2		Amended and Restated Certificate of Incorporation of R&G Financial Corporation (5)

3.1.3		Certificate of Amendment to Amended and Restated Certificate of Incorporation of R&G Financial Corporation (6)

3.1.4		Second Certificate of Amendment to Amended and Restated Certificate of Incorporation of R&G Financial Corporation (15)

3.1.5		Certificate of Resolution designating the terms of the Series A Preferred Stock (7)

3.1.6		Certificate of Resolution designating the terms of the Series B Preferred Stock (8)

3.1.7		Certificate of Designation for Series C Preferred Stock (12)

3.1.8		Certificate of Designation for Series D Preferred Stock (13)

3.2		Bylaws of R&G Financial Corporation (4)

4.0		Form of Stock Certificate of R&G Financial Corporation (4)

4.1		Form of Series A Preferred Stock Certificate of R&G Financial Corporation (9)

4.2		Form of Series B Preferred Stock Certificate of R&G Financial Corporation (10)

4.3		Form of Series C Preferred Stock Certificate of R&G Financial Corporation (11)

4.4		Form of Series D Preferred Stock Certificate of R&G Financial Corporation (14)

4.5		Form of Indenture, dated as of October 6, 2003, between R&G Financial Corporation and Wilmington Trust Company(18)

10.1		Master Purchase, Servicing and Collection Agreement between R&G Mortgage Corporation and R-G Premier Bank of Puerto Rico dated February 16, 1990, as amended on April 1, 1991, December 1, 1991, February 1, 1994 and July 1, 1994 (4)

10.2		Master Custodian Agreement between R&G Mortgage Corporation and R-G Premier Bank of Puerto Rico dated February 16, 1990, as amended on June 27, 1996 (4)

10.3		Master Production Agreement between R&G Mortgage and R-G Premier Bank of Puerto Rico dated February 16, 1990, as amended on August 30, 1991 and March 31, 1995 (4)

10.4		Data Processing Computer Service Agreement between R&G Mortgage and R-G Premier Bank of Puerto Rico dated December 1, 1994 (4)

10.5		Securitization Agreement by and between R&G Mortgage and R-G Premier Bank of Puerto Rico, dated as of July 1, 1995 (4)

10.6		R&G Financial Corporation Stock Option Plan (4)(*)

10.7		Guarantee Agreement between R&G Financial Corporation, R&G Acquisition Holdings Corporation and Wilmington Trust as Guarantee Trustee with respect to the Capital Securities issued by R&G Capital Trust I, dated as of April 10, 2002 (16)


No.		Description
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 Guarantee Agreement, dated as of October 6, 2003, by and between R&G Financial Corporation and Wilmington Trust Company(18)

10.10		Form of Amended and Restated Declaration of Trust, dated as of October 6, 2003, among R&G Financial Corporation, Wilmington Trust Company and the Administrative Trustees named therein(18)

13.0		Pages 33 to 88 and page 90 of the 2003 Annual Report to Stockholders

14.0		Code of Ethics

21.0		Subsidiaries of the Registrant - Reference is made to “Item 1. Business” for the required information

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

32		Certification pursuant to Section 906 of the Sarbanes-Oxley Act


(1)		Incorporated by reference from the Registration Statement on Form S-4 (Registration No. 333-13199) filed by the Registrant with the Securities and Exchange Commission (“SEC”) on October 1, 1996.

(2)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed with the SEC on December 20, 2001.

(3)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed with the SEC on February 28, 2002.

(4)		Incorporated by reference from the Registration Statement on Form S-1 (Registration No. 333-06245) filed by the Registrant with the SEC on June 18, 1996, as amended.

(5)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed with the SEC on November 19, 1999.

(6)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed with the SEC on June 12, 2001.

(7)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed with the SEC on August 31, 1998.

(8)		Incorporated by reference from the Registrant’s Form 10-K filed with the SEC on April 13, 2000.

(9)		Incorporated by reference from the Registrant’s Registration Statement on Form S-3 (Registration No. 333-60923) filed with the SEC on August 7, 1998.

(10)		Incorporated by reference from the Registrant’s Registration Statement on Form S-3 (Registration No. 333-90463) filed with the SEC on November 5, 1999.

(11)		Incorporated by reference from the Registrant’s Registration Statement on Form S-3 (File No. 333-55834) filed with the SEC on February 16, 2001.

(12)		Incorporated by reference from the Registrant’s Form 10-K filed with the SEC on April 2, 2001.

(13)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed with the SEC on March 7, 2002.

(14)		Incorporated by reference from the Registrant’s Registration Statement on Form S-3 (File No. 333-81214) filed with the SEC on January 22, 2002.

(15)		Incorporated by reference from the Registrant’s Current Report on Form 8-K filed with the SEC on June 18, 2002.

(16)		Incorporated by reference from the Registrant’s Form 10-Q filed with the SEC on November 14, 2002.

(17)		Incorporated by reference from the Registrant’s Form 10-Q filed with the SEC on November 14, 2003.

(18)		Incorporated by reference from the Registration Statement on Form S-3 (Registration No. 333-107365) filed with the SEC on July 25, 2003.

(*)		Management contract or compensatory plan or arrangement.

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

(1)		Form 8-K filed on October 7, 2003 with an attached press release announcing the completion of a $100 million 6.95% trust preferred securities offering.

(2)		Form 8-K filed on October 14, 2003 with an attached press release announcing the Registrant’s earnings for the third quarter and nine months ended September 30, 2003.

(3)		Form 8-K filed on October 30, 2003 with an attached presentation that was to be utilized in meetings with analysts and investors throughout the quarter ended December 31, 2003.

(4)		Form 8-K filed on November 25, 2003 with an attached press release announcing the declaration of a three-for-two stock split on the Registrant’s common stock.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	R&G FINANCIAL CORPORATION
March 15, 2004	By:	/s/ Víctor J. Galán
		Víctor J. Galán
		Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

EX-13 3 g87693exv13.txt EX-13 PAGES 33-88 AND 90 OF THE 2003 ANNUAL REPORT EXHIBIT 13 SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF R-G FINANCIAL The following table presents selected consolidated financial and other data of R-G Financial for each of the five years in the period ended December 31, 2003. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of R-G Financial, including the accompanying Notes, presented elsewhere herein. In the opinion of management, this information reflects all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation.

R-G FINANCIAL 2003 ANNUAL REPORT P. 33

(1) Includes FHLB stock. (2) Comprised of cash and due from banks, securities purchased under agreements to resell, time deposits with other banks and federal funds sold, all of which had original maturities of 90 days or less. (3) Comprised of long-term debt, advances from the Federal Home Loan Bank ("FHLB") and other borrowings. (4) Per share information for all periods presented has been retroactively adjusted to reflect a three-for-two stock split declared in November 2003 and effected on January 29, 2004. See Note 13 of the Notes to the Consolidated Financial Statements. (5) Comprised of Bank service charges, fees and other income, and other miscellaneous revenue sources. (6) With the exception of end of period ratios, all ratios for mortgage subsidiaries are based on the average of month end balances while all ratios for banking subsidiaries are based on average daily balances. (7) 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. (8) Includes 14 bank branches of Crown Bank. (9) Includes 10 branches of Mortgage Store of Puerto Rico, Inc., R-G Mortgage's wholly owned mortgage banking subsidiary, one branch of Crown Bank's mortgage lending division, and 4 branches of Continental Capital Corp., Crown Bank's wholly-owned mortgage banking subsidiary. Also includes 25 R-G Mortgage facilities which are located within R-G Premier's offices. (10) Amount is based on weighted average number of shares of Common Stock (Class A and Class B) outstanding. (11) Non-performing loans consist of R-G Financial's non-accrual loans and non-performing assets consist of R-G Financial's non-performing loans and real estate acquired by foreclosure or deed-in-lieu thereof. (12) All of such ratios were in excess of minimum capital requirements of the Federal Reserve Board. In addition, each of Premier Bank and Crown Bank met its applicable minimum capital requirements. P. 34 MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS OF R-G FINANCIAL 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 and securities and insurance brokerage activities. The Company, currently in its 32nd year of operations, was organized in 1972 as R-G Mortgage Corp. ("R-G Mortgage"), and completed its initial public offering in 1996, following its reorganization as a bank holding company. As of December 31, 2003, the Company had total assets of $8.2 billion, total deposits of $3.6 billion and stockholders' equity of $750.4 million. The Company operates 31 bank branches mainly located in the northeastern section of Puerto Rico, 14 bank branches in the Orlando and Tampa/St. Petersburg Florida markets, 5 mortgage and 7 commercial lending offices in the United States, and 47 mortgage offices in Puerto Rico including 25 facilities located within R-G Premier's branches. On June 7, 2002, the Company, through its Florida holding company, R-G Acquisition Holdings Corporation ("RAC"), acquired The Crown Group, Inc., a Florida corporation, and its wholly-owned federal savings bank subsidiary, Crown Bank, F.S.B. (which has since been renamed R-G Crown Bank) for an aggregate of $100.0 million in cash. RAC operates Crown Bank in the Orlando and Tampa/St. Petersburg metropolitan areas through 14 full-service branches and seven commercial lending offices. The Orlando market is one of the fastest growing markets in Florida, both generally and for Hispanics in particular, and provides the Company with what it believes is a cost effective way to access the Hispanic markets in the United States, while providing a strong platform for further expansion in Florida. Crown Bank's balance sheet is complementary to the Company's, and is predominantly secured by real estate. The Company is engaged in providing a full range of banking services through R-G Premier Bank of Puerto Rico ("R-G Premier"), a Puerto Rico commercial bank, and Crown Bank. 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 investment services through private banking. The Company is also engaged in mortgage banking activities. Mortgage banking activities are conducted through R-G Mortgage, Puerto Rico's second largest mortgage banker, and its subsidiary, The Mortgage Store of Puerto Rico, Inc., also a Puerto Rico mortgage company, and Continental Capital Corporation, a 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, 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 began insurance operations in November 2000 with its acquisition of Home & Property Insurance Corp., a Puerto Rico chartered insurance agency, and securities brokerage in early 2002 through its newly created subsidiary, R-G Investments Corporation, a Puerto Rico chartered licensed broker-dealer. R-G Financial has generally sought to achieve long-term financial strength and profitability by increasing the amount and stability of its net interest income and other non-interest income. R-G Financial has sought to implement this strategy by (i) establishing and emphasizing the growth of its mortgage banking activities, including the origination and sale of loans and growing its loan servicing operation; (ii) expanding its retail banking franchise in order to achieve increased market presence and to increase core deposits; (iii) enhancing R-G Financial's net interest income by increasing loans held for investment, particularly single-family residential loans, and investment grade securities; (iv) developing new business relationships through an increased emphasis on commercial real estate and commercial business lending; (v) diversifying retail products and services, including an increase in consumer loan originations (such as credit cards); (vi) meeting the banking needs of its customers through, among other things, the offering of trust and investment services and insurance products; (vii) expanding its operations in the United States; and (viii) emphasizing controlled growth, while pursuing a variety of acquisition opportunities, when appropriate. 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 decreased to approximately $10.9 billion as of December 31, 2003, from $11.0 billion as of the same date a year ago, a decrease of 0.45%. R-G Financial's servicing portfolio at December 31, 2003 includes $3.1 billion served by Crown Bank and its wholly owned subsidiary, Continental Capital. R-G Financial's strategy is to increase the size of its mortgage servicing portfolio by relying principally on internal loan originations. A substantial portion of R-G Financial's total mortgage loan originations has consistently been comprised of refinance loans. R-G Financial's future results could be adversely affected by a significant increase in mortgage interest rates that reduces refinancing activity. However, the Company believes that refinancing activity is less sensitive to interest rate changes in Puerto Rico than in the mainland United States because a significant amount of refinance loans are made for debt consolidation purposes. R-G Financial customarily sells or securitizes into mortgage-backed securities substantially all the loans it originates, except for certain non-conforming conventional mortgage loans and certain consumer, construction, land, and commercial loans which are held for investment and classified as loans receivable. As part of its strategy to maximize net interest income, R-G Financial maintains a substantial portfolio of mortgage-backed and investment securities. At December 31, 2003, the Company held securities available for sale with a fair market value of $3.1 billion. Of this amount, $2.4 billion consisted of mortgage-backed securities, of which $349.5 million consisted primarily 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 2003 ANNUAL REPORT P. 35 CHANGES IN FINANCIAL CONDITION GENERAL. At December 31, 2003, R-G Financial's total assets amounted to $8.2 billion, as compared to $6.3 billion at December 31, 2002. The $1.9 billion or 30.6% increase in total assets during the year ended December 31, 2003 was primarily the result of a $1.3 billion or 46.7% increase in loans receivable, net, and a $564.2 million or 22.1% increase in mortgage-backed securities and investment securities available for sale. LOANS RECEIVABLE AND MORTGAGE LOANS HELD FOR SALE. At December 31, 2003, R-G Financial's loans receivable, net amounted to $4.0 billion or 49.4% of total assets, as compared to $2.8 billion or 44.0% as of December 31, 2002. Loans receivable at December 31, 2003 include $754.2 million of loans held by Crown Bank. The growth in R-G Financial's loans receivable, net reflects R-G Financial's strategy of increasing its loans held for investment, concentrating on residential mortgage, construction, commercial real estate and commercial business loans both in Puerto Rico and Central Florida. During the years ended December 31, 2003, 2002 and 2001, total loans originated and purchased by R-G Financial amounted to $4.5 billion, $2.9 billion and $2.5 billion, respectively. At December 31, 2003, R-G Financial's allowance for loan losses totaled $39.6 million, which represented a $6.9 million or 21.2% increase from the level maintained at December 31, 2002. At December 31, 2003, R-G Financial's allowance represented approximately 0.92% of the total loan portfolio and 46.38% of total non-performing loans, as compared to 1.11% and 41.79% at December 31, 2002. During 2003, the Company made provisions for loan losses of $18.6 million, which exceeded net charge-offs of approximately $11.6 million. The increase in the allowance for loan losses reflected the increase in R-G Financial's commercial real estate and construction loan portfolios, which have higher credit risk compared to residential loans. Non-performing loans amounted to $85.4 million at December 31, 2003, as compared to $78.2 million at December 31, 2002. At December 31, 2003, $57.0 million or 66.8% of total non-performing loans consisted of residential mortgage loans. Because of the nature of the collateral, R-G Financial has historically recognized a low level of loan charge-offs. R-G Financial's aggregate charge-offs amounted to 0.32% of average loans outstanding during 2003, as compared to 0.41% during 2002. Although loan delinquencies have historically been higher in Puerto Rico than in the United States, loan charge-offs have historically been lower than in the United States. While the ratio of non-performing loans to total loans decreased from 2.66% to 1.98% from December 31, 2002 to December 31, 2003, the ratio was nevertheless larger than it would otherwise have been due to loan securitizations during 2001 and 2002, which reduced the amount of loans held in portfolio considered in the calculation of the ratio. Management of R-G Financial believes that its allowance for loan losses at December 31, 2003 was adequate, based upon, among other things, the significant level of single-family residential loans within R-G Financial's portfolio (as compared to commercial real estate, commercial business and consumer loans, which are considered by management to carry a higher degree of credit risk) and the low level of loan charge-offs normally experienced by the Company with respect to its loan portfolio. However, there can be no assurances that additions to such allowance will not be necessary in future periods, which could adversely affect R-G Financial's results of operations. At December 31, 2003 and 2002, mortgage loans held for sale amounted to $315.7 million and $258.7 million, respectively. Mortgage loans held for sale primarily reflects loans which are in the process of being securitized and sold. The level of mortgage banking activities is highly dependent upon market and economic factors. SECURITIES HELD FOR TRADING, AVAILABLE FOR SALE AND HELD FOR INVESTMENT. R-G Financial maintains a substantial portion of its assets in mortgage-backed and investment securities which are classified as either held for trading, available for sale or held to maturity. At December 31, 2003, R-G Financial's aggregate mortgage-backed and investment securities totaled $3.2 billion or 39.5% of total assets, as compared to $2.7 billion or 43.1% at December 31, 2002, respectively. Securities held for trading consist primarily of conventional and FHA and VA loans which have been securitized as FHLMC and GNMA pools, respectively, and are being held for sale to institutions in the secondary market. Securities held for trading are reported at fair value with unrealized gains and losses included in earnings. Securities available for sale consist of mortgage-backed and related securities (tax exempt GNMA pools, FNMA and FHLMC certificates as well as CMOs and CMO residuals), U.S. Government agency securities and interest only strips ("IO's"). At December 31, 2003 and 2002, securities available for sale totaled $3.1 billion and $2.6 billion, respectively. Securities available for sale are reported at fair value with unrealized gains and losses excluded from earnings, and reported in other comprehensive income, a separate component of stockholders' equity. Securities held to maturity consist of mortgage-backed securities (GNMA, FNMA and FHLMC certificates), certain Puerto Rico Government obligations and other Puerto Rico securities. At December 31, 2003 and 2002, securities held to maturity totaled $78.2 million and $75.6 million, respectively. Securities held to maturity are accounted for at amortized cost. At December 31, 2003 and 2002, securities held to maturity had a market value of $80.2 million and $76.8 million, respectively. MORTGAGE SERVICING ASSET. As of December 31, 2003 and 2002, R-G Financial reported servicing assets of $119.6 million and $142.3 million, respectively. R-G Financial recognizes both purchased and originated mortgage servicing rights as assets in its consolidated financial statements. R-G Financial evaluates the fair value of its servicing asset on a quarterly basis to determine any potential impairment. Any future decline in interest rates which results in an acceleration in mortgage loan prepayments could have an adverse effect on the value of R-G Financial's mortgage servicing rights. DEPOSITS. At December 31, 2003, deposits totaled $3.6 billion, as compared to $2.8 billion at December 31, 2002. Deposits at December 31, 2003 include $761.6 million deposits held by Crown Bank. The $753.4 million or 26.9% increase in deposits during the year ended December 31, 2003 was primarily due to promotions in connection with new accounts and P. 36 competitive pricing in certificates of deposit. One of the R-G Financial's strategies is to increase its core deposits, which provide a source of fee income and the ability to cross-sell other products and services. Consolidated core deposits (consisting of passbook, NOW and Super NOW, and regular and commercial checking accounts as well as certificates of deposit under $100,000) increased from $1.8 billion or 64.5% of total deposits at December 31, 2002 to $2.0 billion or 56.9% of total deposits at December 31, 2003. BORROWINGS. Other than deposits, R-G Financial's primary sources of funds consist of securities sold under agreements to repurchase (consisting of agreements to purchase on a specified later date the same or substantially identical securities) ("repurchase agreements"). At December 31, 2003 and 2002, repurchase agreements totaled $2.2 billion and $1.5 billion, respectively. Notes payable consist primarily of warehouse lines of credit (which are used to fund loan commitments of R-G Mortgage and Continental Capital). At December 31, 2003, notes payable amounted to $192.3 million, as compared to $194.6 million at December 31, 2002. Advances from the FHLB amounted to $1.1 billion and $940.7 million at December 31, 2003 and 2002, respectively. At December 31, 2003, FHLB advances were scheduled to mature at various dates commencing on January 1, 2004 until March 2, 2011, with an average interest rate of 3.56%. STOCKHOLDERS' EQUITY. Stockholders' equity increased from $662.2 million at December 31, 2002 to $750.4 million at December 31, 2003. The $88.1 million or 13.3% increase in stockholders' equity during 2003 was primarily due to the $131.0 million net income, partially offset by dividends paid during the year of $30.9 million on common and preferred stock and a $12.2 million other comprehensive loss, recognized during the year. RESULTS OF OPERATIONS GENERAL. R-G Financial's results of operations depend substantially on its net interest income, which is the difference between interest income on interest-earning assets, which consist primarily of loans, money market investments and mortgage-backed and investment securities, and interest expense on interest-bearing liabilities, which consist primarily of deposits and short and long-term borrowings. R-G Financial's results of operations are also significantly affected by its provisions for loan losses, resulting from R-G Financial's assessment of the adequacy of its allowance for loan losses; the level of its non-interest income, including net gain (loss) on sale of loans, unrealized gain (loss) on trading securities and loan administration and servicing fees; the level of its non-interest expenses, such as employee compensation and benefits and office occupancy and equipment expense; and income tax expense. R-G FINANCIAL 2003 ANNUAL REPORT P. 37 The following table reflects the principal revenue sources among banking and mortgage banking operations, and the percentage contribution of each component for the periods presented.

(1) Comprised of service charges, fees and other from banking subsidiaries and other miscellaneous revenue sources from mortgage banking operations. (2) Comprised of interest income earned on investment securities held by R-G Financial at the parent company level. R-G Financial reported net income of $131.0 million, $96.3 million and $66.0 million during the years ended December 31, 2003, 2002 and 2001, respectively. Net income increased by $34.7 million or 36.0% during the year ended December 31, 2003, as compared to 2002, due to a $34.9 million increase in net interest income and a $74.6 million increase in total other income, which were partially offset by a $60.6 million increase in total operating expenses. Net income increased by $30.4 million or 46.0% during the year ended December 31, 2002, as compared to 2001, due to a $56.0 million increase in net interest income and a $40.1 million increase in total other income, which were partially offset by a $52.2 million increase in total operating expenses. Net Interest Income. Net interest income is determined by R-G Financial's interest rate spread (i.e., the difference between the yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income totaled $188.0 million, $153.1 million and $97.0 million during the years ended December 31, 2003, 2002 and 2001, respectively. Net interest income increased by $34.9 million or 22.8% during the year ended December 31, 2003 due to significant increases in the average balance of interest-earning assets, partially offset by a decrease in interest rate-spread from 2.78% in 2002 to 2.62% in 2003. Net interest income increased by $56.0 million or 57.8% during the year ended December 31, 2002, as compared to the year ended December 31, 2001, due to significant increases in the average balance of interest-earning assets together with an increase in the Company's interest rate spread from 2.33% in 2001 to 2.78% in 2002, and an increase in the ratio of average interest-earning assets to average interest-bearing liabilities from 105.56% in 2001 to 105.77% in 2002. P. 38 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 mortgage operations and average daily balances for the banking operations in each case during the periods presented.

(1) At December 31, 2003, the yields earned and rates paid were as follows: cash and cash equivalents, 1.33%; investment securities held to maturity, 4.51%; investment securities available for sale, 3.77%; mortgage-backed securities held for trading, 7.64%; mortgage-backed securities available for sale, 5.45%; mortgage-backed securities held to maturity, 6.49%; mortgage loans held for sale, 6.25%; loans receivable, net, 6.27% FHLB stock, 1.69%; total interest-earning assets, 5.71%; deposits, 2.58%; securities sold under agreements to repurchase, 2.25%; notes payable, 2.29%; other borrowings, 3.55%; total interest-bearing liabilities, 2.62%; interest rate spread, 3.09%. (2) Comprised of cash and due from banks, securities purchased under agreements to resell, time deposits with other banks and federal funds sold. (3) Includes mortgage loans held for sale and non-accrual loans. (4) Interest income on loans include loan fees amounting to $105,000, $308,000 and $297,000 during the years ended December 31, 2003, 2002 and 2001, respectively, or .05%, .17% and .21% of interest income on loans during such respective periods. (footnotes continue on following page) R-G FINANCIAL 2003 ANNUAL REPORT P. 39 (5) Includes federal funds purchased. (6) Comprised of advances from the FHLB and other borrowings. (7) 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. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected R-G Financial's interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume), and (iii) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated in proportion to the absolute dollar amounts of the changes due to rate and volume.

(1) Comprised of cash and due from banks, securities purchased under agreements to resell, time deposits with other banks and federal funds sold. (2) Includes mortgage loans held for sale. (3) Comprised of long-term debt, advances from the FHLB and other borrowings. P. 40 INTEREST INCOME. Total interest income increased by $47.3 million or 14.3% during the year ended December 31, 2003 as compared to the year ended December 31, 2002, and increased by $60.3 million or 22.3% during the year ended December 31, 2002 over the year ended December 31, 2001. Interest income on loans, the largest component of R-G Financial's interest-earning assets, increased by $50.4 million or 27.9% during the year ended December 31, 2003 as compared to the year ended December 31, 2002, and increased by $28.5 million or 18.7% during 2002 over the year ended December 31, 2001. The increase in 2003 was primarily the result of a $1.1 billion increase in the average balance of loans receivable, partially offset by a decrease in the yield earned thereon from 7.21% in 2002 to 6.37% in 2003. The increase in interest income on loans during the year ended December 31, 2002 was primarily caused by a $613.1 million increase in the average balance of loans receivable, partially offset by a decrease in the yield earned thereon from 8.04% in 2001 to 7.21% in 2002. Interest income on mortgage-backed and investment securities (which, for purposes of this discussion, includes securities held for trading, available for sale and held to maturity) decreased by $3.4 million or 2.4% during the year ended December 31, 2003 as compared to the year ended December 31, 2002, and increased by $31.3 million or 27.5% during the year ended December 31, 2002 over the year ended December 31, 2001. The decrease during 2003 was due primarily to a decrease in the yield earned thereon from 5.95% in 2002 to 4.87% in 2003, partially offset by an increase in the average balance of mortgage-backed securities of $409.4 million, together with a $59.7 million increase in the average balance of investment securities. The increase during the year ended December 31, 2002 was primarily due to a $527.1 million increase in the average balance of mortgage-backed securities, together with a $151.4 million increase in the average balance of investment securities during the period. The increase in investment securities during 2003 and 2002 reflects purchases of approximately $2.3 billion and $1.2 billion, respectively, during such periods, net of maturities and sales. Interest income on cash and cash equivalents increased by $105,000 or 6.9% during the year ended December 31, 2003 as compared to the year ended December 31, 2002, and decreased by $97,000 or 6.0% during the year ended December 31, 2002. The increase in interest earned on money market investments during 2003 reflected an increase in their average balance of $21.3 million during the year. The decrease during 2002 was caused by a decline in the yield earned thereon from 5.18% in 2001 to 1.40% in 2002, partially offset by an increase in their average balance of $78.1 million during the year. The fluctuations in yields earned on money market investments reflect the general fluctuations in short-term market rates of interest during the periods presented. INTEREST EXPENSE. Total interest expense increased by $12.4 million or 7.0% during the year ended December 31, 2003, as compared to the year ended December 31, 2002, and increased by $4.2 million or 2.4% during the year ended December 31, 2002. Interest expense on deposits, the largest component of R-G Financial's interest-bearing liabilities, increased by $3.5 million or 3.9% during the year ended December 31, 2003, as compared to the year ended December 31, 2002, and decreased by $505,000 or 0.6% during the year ended December 31, 2002. The increase during 2003 was due primarily to an increase in the average balance of deposits of $777.7 million, partially offset by a decrease in the average rate paid thereon of 75 basis points during such period. The decrease during the year ended December 31, 2002, as compared to the year ended December 31, 2001, was due primarily to a decrease in the average rate paid thereon of 131 basis points, partially offset by an increase in the average balance of deposits of $652.4 million. The reduction in interest rates paid during 2003 and 2002 were due to a reduction in market rates of interests as a result of consecutive decreases by the Federal Reserve Board. Interest expense on repurchase agreements decreased by $108,000 or 0.2% during the year ended December 31, 2003, as compared to the year ended December 31, 2002, and increased by $1.6 million or 3.3% during the year ended December 31, 2002. The decrease during 2003 was due primarily to a decrease in the average rate paid thereon of 87 basis points partially offset by an increase in the average balance of repurchase agreements of $461.9 million. The increase during the year ended December 31, 2002 was primarily due to an increase in the average balance of repurchase agreements outstanding of $399.5 million, partially offset by a decrease in the average rate paid thereon of 121 basis points. R-G Financial generally uses repurchase agreements to fund part of its investment securities portfolio. These repurchase agreements are collateralized by investment and mortgage-backed securities available for sale. The fluctuations in the average balance of repurchase agreements during the periods presented is therefore mainly a function of the level of investment and mortgage-backed securities which are available to collateralize such agreements. Interest expense on notes payable (consisting of warehouse and other lines of credit) increased by $66,000 or 1.0% during the year ended December 31, 2003, as compared to the year ended December 31, 2002, and decreased by $4.6 million or 40.4% during the year ended December 31, 2002. The increase during the year ended December 31, 2003, as compared to the year ended December 31, 2002, was primarily due to an increase in the average rate paid thereon of 34 basis points, partially offset by a decrease in the average balance outstanding of $23.6 million. The decrease during the year ended December 31, 2002 was due primarily to a decrease in the average rate paid thereon of 207 basis points, partially offset by an increase in the average balance outstanding of $7.9 million, as the Company's mortgage banking subsidiaries made increased use of lines of credit due to an increase in mortgage loan originations during such period. Interest expense on other borrowings (consisting principally of advances from the FHLB) increased by $9.0 million or 28.5% during the year ended December 31, 2003, as compared to the year ended December 31, 2002, and increased by $7.7 million or 32.4% during the year ended December 31, 2002. The increase during the year ended December 31, 2003, as compared to the year ended December 31,2002 was due primarily to a $327.7 million increase in the average balance of such borrowings, partially offset by a decrease in the average rate paid thereon of 54 basis points. The increase during 2002 was due primarily to a $253.5 million increase in the average balance of such borrowings, partially offset by a decrease in the average rate paid thereon of 79 basis points. The increase in the average balance of such borrowings during 2003 and 2002 is primarily due to increased use of FHLB advances to fund growth in the loan portfolio of banking subsidiaries. PROVISION FOR LOAN LOSSES. The provision for loan losses is charged to earnings to bring the total allowance to a level considered appropriate by management based on R-G Financial's loss experience, current delinquency data, known and inherent risks in the portfolio, the estimated value of any underlying collateral and an assessment of current economic conditions. While management endeavors to use the best information available in making its evaluations, future allowance adjustments may be necessary if economic conditions change substantially from the assumptions used in making the initial evaluations. R-G Financial made provisions to its allowance for loan losses of $18.6 million, $18.0 million and $11.1 million during the years ended December 31, 2003, 2002 and 2001, respectively. R-G FINANCIAL 2003 ANNUAL REPORT P. 41 The increase in the provision for loan losses taken by the Company during 2003 and 2002 reflects the increase in the Company's commercial real estate and construction loan portfolios, due to increased emphasis in the origination of such loans by the Company, which have higher inherent credit risk compared to residential loans. Management believes that its allowance for loan losses at December 31, 2003, was adequate based upon, among other things, the significant level of single-family residential loans within R-G Financial's portfolio and the low level of loan charge-offs normally experienced by the Company with respect to its loan portfolio. Nevertheless, there can be no assurances that additions to such allowance will not be necessary in future periods, particularly if the growth in R-G Financial's real estate lending, including commercial lending, continues. NON-INTEREST INCOME. The following table sets forth information regarding non-interest income for the periods shown.

Total non-interest income increased by $74.6 million or 50.0% during the year ended December 31, 2003, as compared to the prior year and increased by $40.1 million or 36.8% during the year ended December 31, 2002. Net gain on sale of loans amounted to $146.9 million, $85.5 million and $62.5 million during the years ended December 31, 2003, 2002 and 2001, respectively. Net gain on sale of loans reflects the income generated from the origination and purchase of single-family residential real estate loans and the subsequent securitization and sale of such loans. During the years ended December 31, 2003, 2002 and 2001, R-G Financial originated and purchased $3.2 billion, $2.2 billion and $1.9 billion, respectively, including $333.1 million, $221.0 million and $90.1 million, respectively, of loan purchases, and sold $1.9 billion, $1.2 billion and $1.2 billion (excluding loans securitized and retained as mortgage-backed securities) of mortgage loans, respectively. Since 2000, the Company has emphasized internal loan originations and reduced its dependence on loan purchases, as a means of achieving higher volume of mortgage loan production through its branch network and increased profitability across its product lines. As a result of this strategy, loan purchases decreased from $583.6 million in 1999 to $274.0 million in 2000, $90.1 million in 2001, $221.0 million in 2002 and $333.1 million in 2003 while its internal loan originations amounted to $1.1 billion in 1999 and 2000, $1.8 billion in 2001, $2.0 billion in 2002 and $2.9 billion in 2003. R-G Financial's mortgage banking operations are highly dependent upon market and economic conditions. During the years ended December 31, 2003, 2002 and 2001, R-G Financial recognized net (loss) profit on trading securities of $(1.3) million, $989,000 and $2.0 million, respectively, which are included in net gains on sale of loans. Such gains and losses primarily reflect fluctuations in the market value of loans which have been securitized into mortgage-backed securities and are being held for trading. During the years ended December 31, 2003, 2002 and 2001, R-G Financial recognized loan administration and servicing fees of $48.2 million, $47.2 million and $33.9 million, respectively. The increase in loan administration and servicing fees over the periods reflects the increase in R-G Financial's loan servicing portfolio from 110,874 loans with an aggregate principal balance of $6.6 billion at January 1, 2001 to 147,981 loans with an aggregate principal balance of $10.9 billion at December 31, 2003. The growth in the Company's servicing portfolio during such period includes approximately $2.6 billion acquired in the acquisition of Crown Bank in June 2002. Service charges, fees and other amounted to $28.7 million, $16.4 million and $12.6 million during the years ended December 31, 2003, 2002 and 2001, respectively. The $12.3 million or 74.9% and the $3.8 million or 30.2% increase during the years ended December 31, 2003 and 2002, respectively, were primarily due to the continued growth of the Company's fee-based insurance and broker-dealer operations which commenced in late 2000, and early 2002, respectively, as well as increased fee income associated with new deposit products and an increasing deposit base. P. 42 NON-INTEREST EXPENSES. The following table sets forth certain information regarding non-interest expenses for the periods shown.

Total non-interest expense increased by $60.6 million or 38.1% during the year ended December 31, 2003, as compared to the year ended December 31, 2002, and increased by $52.2 million or 48.7% during the years ended December 31, 2002 over 2001. The increase in total non-interest expense during the years ended December 31, 2003 and 2002 reflect general growth in the Company's operations, as well as increased costs associated with the opening of new branch offices. The operations of Crown Bank, acquired by the Company in June 2002, were a significant reason for the increase in expenses during the years ended December 31, 2003 and 2002. Total operating expenses of Crown Bank for 2003 were $49.8 million, and $27.0 million for 2002 since its acquisition. Excluding expenses related to Crown Bank during 2002, total non-interest expenses increased by $25.2 million or 23.5% during the year ended December 31, 2002. Employee compensation and benefits expense amounted to $63.6 million, $45.2 million and $33.3 million during the years ended December 31, 2003, 2002 and 2001, respectively. The $18.3 million or 40.5% increase in such expenses during the year ended December 31, 2003 is primarily due to an increase in the number of employees as well as increased bonus payments. The $12.0 million or 35.9% increase in such expenses during the year ended December 31, 2002 is primarily associated with an increase in the number of employees and increased bonus payments associated with increased loan production during the year, as well as employee expenses related to the operations of Crown Bank totaling $5.4 million. Office occupancy and equipment expense amounted to $24.8 million, $19.6 million and $16.6 million during the years ended December 31, 2003, 2002 and 2001, respectively. The $5.1 million or 26.1% increase in office occupancy and equipment expenses during the year ended December 31, 2003 is primarily related to the operation of additional bank branches and additional office space to accomodate growth in the operations of the Company in Puerto Rico. The $3.0 million or 17.9% increase in office occupancy and equipment expenses during the year ended December 31, 2002 is primarily related to the operation of additional bank branches and additional office space to accomodate general growth in the operations of R-G Financial, as well as $1.3 million additional expenses associated with the operations of Crown Bank. Other administrative and general expenses, which consist primarily of advertising, license and property taxes, amortization of servicing asset, insurance, telephone, printing and supplies and other miscellaneous expenses, amounted to $131.5 million, $94.4 million and $57.1 million during the years ended December 31, 2003, 2002 and 2001, respectively. The $37.1 million or 39.3% increase in such expenses during the year ended December 31 2003, is primarily associated with additional expenses associated with the Company's servicing asset of $20.6 million, including impairment charges, as well as additional expenses associated with the operations of Crown Bank and general growth in the operations of R-G Financial. The $37.2 million or 65.2% increase in other administrative and general expenses during the year ended December 31, 2002 was primarily due to a $22.8 million increase in expenses associated with the Company's servicing asset, including impairment charges, as well as additional expenses related to the operations of Crown Bank and general growth in the operations of R-G Financial in Puerto Rico. Unscheduled amortization amounts are a result of higher prepayment speeds in the Company's servicing portfolio. The increases in prepayments reflect decreases in interest rates for new mortgage loans, which reached historically low levels during the second quarter of 2003. During the second half of 2003, however, interest rates for mortgage loans increased compared to the first half of 2003, and prepayment speeds have declined as a result. The value of the Company's servicing portfolio is expected to increase if rates continue to increase due to lower prepayment speeds. Unscheduled amortization amounts are expected to continue, however, although at a lower pace compared to 2003, as a result presently lower prepayment speeds. INCOME TAXES. R-G Financial's income tax provision amounted to $42.4 million during the year ended December 31, 2003, as compared to income tax expense of $28.7 million and $21.6 million during the years ended December 31, 2002 and 2001, respectively. R-G Financial's effective tax rate amounted to 24.4%, 22.9% and 24.6% during the years ended December 31, 2003, 2002 and 2001, respectively. The lower effective tax rates experienced by R-G Financial compared to the maximum statutory rates reflect the exemption under Puerto Rico law of the net interest income derived from certain FHA and VA mortgage loans secured by properties located in Puerto Rico and on GNMA securities backed by such loans. The Company also invests in certain U.S. agency securities that are exempt from Puerto Rico taxation and are not subject to federal income taxation because the Company is entitled to rely on the portfolio interest deduction. Finally, R-G Financial's international banking entities may invest in various U.S. securities the income on which is exempt from Puerto Rico income taxation and are also not subject to federal income taxation on the basis of the portfolio interest deduction. In December 2003, the Puerto Rico Legislature passed legislation to modify the taxation of international banking entities organized under the Puerto Rico Banking Law. Under the new legislation, which affects only those entities organized as divisions (as opposed to those organized as separate subsidiaries), the income generated by international bank divisions will be subject to the regular Puerto Rico statutory tax rate to the extent it exceeds 40% of the combined taxable income of the corporation and its divisions for the period January 1, 2004 to June 30, 2004, 30% for the period July 1, 2004 to December 31, 2004, and 20% thereafter. Based on presently available information, management believes that the impact of the new legislation should not have a significant impact on future results of operations of the Company. R-G FINANCIAL 2003 ANNUAL REPORT P. 43 LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY. Liquidity refers to R-G Financial's ability to generate sufficient cash to meet the funding needs of current loan demand, 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. R-G Financial monitors its liquidity in accordance with guidelines established by R-G Financial and applicable regulatory requirements. R-G Financial's need for liquidity is affected by loan demand, net changes in deposit levels and the scheduled maturities of its borrowings. R-G Financial can minimize the cash required during 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 R-G Financial has limited control. R-G Financial 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 and other short and long-term borrowings. R-G Financial'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 R-G Financial 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 December 31, 2003, R-G Financial had $147.2 million in borrowing capacity under unused warehouse and other lines of credit, $1.1 billion in borrowing capacity under unused lines of credit with the FHLB and $19.0 million available unused fed funds lines of credit. At December 31, 2003, R-G Financial had outstanding commitments (including unused lines of credit) to originate and/or purchase mortgage and non-mortgage loans of $605.3 million. The Company also has agreements with developers to facilitate the mortgage loans to qualified buyers of new housing units on residential projects amounting to $905.8 million. All such agreements are subject to prevailing market rates at time of closing with no market risk exposure to the Company or with firm back-to-back commitments in favor of the mortgagee. Finally, the Company had certificates of deposit which are scheduled to mature within one year totaling $1.1 billion at December 31, 2003, and borrowings that are scheduled to mature within the same period amounting to $1.7 billion. R-G Financial anticipates that it will have sufficient funds available to meet its current loan commitments. CAPITAL RESOURCES. Applicable capital regulations establish a minimum 3.0% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively increases the minimum Tier I leverage ratio for such other banks from 4.0% to 5.0% or more. Under the 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. Regulators also require that banks meet a risk-based capital standard. The risk-based capital standard for banks requires the maintenance of total capital (which is defined as Tier I capital and supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, plus certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier I capital are equivalent to those discussed above under the 3% leverage capital standard. The components of supplementary capital include certain perpetual preferred stock, certain mandatory convertible securities, certain subordinated debt and intermediate preferred stock and general allowances for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital. At December 31, 2003, R-G Premier met each of its capital requirements, with Tier I leverage capital, Tier I risk-based capital and total risk-based capital ratios of 6.97%, 12.50% and 13.46%, respectively. At December 31, 2003 Crown Bank also met each of its capital requirements, with Tier I leverage capital, Tier I risk-based capital and total risk-based capital ratios of 7.32%, 11.12% and 11.89%, respectively. In addition, the Federal Reserve Board has promulgated capital adequacy guidelines for bank holding companies which are substantially similar to those adopted by the FDIC regarding state-chartered banks, as described above. R-G Financial is currently in compliance with such regulatory capital requirements, with Tier I leverage capital, Tier I risk-based capital and total risk-based capital ratios of 10.31%, 15.64% and 16.40%, respectively. ASSET AND LIABILITY MANAGEMENT GENERAL. Changes in interest rates can have a variety of effects on R-G Financial's business. In particular, changes in interest rates affect the volume of mortgage loan originations, the interest rate spread on loans held for sale, the amount of gain on the sale of loans, the value of R-G Financial's loan servicing portfolio and the Company's net interest income. A substantial increase in interest rates could also affect the volume of R-G Financial's loan originations by reducing the demand for mortgages for home purchases, as well as the demand for refinancings of existing mortgages. Conversely, a substantial decrease in interest rates will generally increase the demand for mortgages. The principal objective of R-G Financial's asset and liability management function is to evaluate the interest-rate risk included in certain balance sheet accounts and off-balance sheet commitments, determine the appropriate level of risk given R-G Financial's business focus, operating environment, capital and liquidity requirements and performance objectives, establish prudent asset concentration guidelines and manage the risk consistent with Board approved guidelines. Through such management, R-G Financial seeks to reduce the vulnerability of its operations to changes in interest rates and to manage the ratio of interest rate sensitive assets to interest rate sensitive liabilities within specified maturities or repricing dates. The asset and liability management function for each banking operation is under the guidance of its Interest Rate Risk, Budget and Investments P. 44 Committee ("IRRBICO"), which is chaired by the Chief Executive Officer and comprised principally of members of each bank's senior management and at least three members of each bank's Board of Directors. The IRRBICO meets once a month to review, among other things, the sensitivity of each bank's assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activity and maturities of investments and borrowings. In connection therewith, the IRRBICO generally reviews each bank's liquidity, cash flow needs, maturities of investments, deposits and borrowings and current market conditions and interest rates. The primary IRRBICO monitoring tool is asset/liability simulation models, which are prepared on a monthly basis and are designed to capture the dynamics of balance sheet, rate and spread movements and to quantify variations in net interest income under different interest rate environments. The Company also utilizes market-value analysis, which addresses the change in equity value resulting from movements in interest rates. The market value of equity is estimated by valuing banking assets and liabilities. The extent to which assets have gained or lost value in relation to the gains or losses of liabilities determines the appreciation or depreciation in equity on a market-value basis. Market value analysis is intended to evaluate the impact of immediate and sustained interest-rate shifts of the current yield curve upon the market value of the current balance sheet. A more conventional but limited IRRBICO monitoring tool involves an analysis of the extent to which assets and liabilities are "interest rate sensitive" and measuring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity "gap" is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to affect net interest income adversely. At December 31, 2003, R-G Financial's interest-bearing liabilities which mature or reprice within one year exceeded R-G Financial's interest-earning assets with similar characteristics. During 2003, R-G Financial's fixed rate residential loan portfolio increased significantly as a result of strong loan production during the year. As a result, R-G Financial had a one year negative gap at December 31, 2003 of $116.2 million, or 1.4% of total assets, compared to a positive gap of approximately $498.1 million or 7.9% of total assets at December 31, 2002. R-G Financial's gap position within one year at December 31, 2003 was only 1.4% of total assets at such date, due primarily to a continuous increase in the amount of adjustable rate loans resulting from greater emphasis in commercial and construction lending, as well as to the extension during 2002 and 2003 of the maturity dates of certain borrowings into longer-term maturities at very attractive rates, taking advantage of reduced interest rates during such periods. At December 31, 2003 $2.0 billion or 54.4% of borrowings of the Company mature after one year. While in computing its gap position 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. While a conventional gap measure may be useful, it is limited in its ability to predict trends in future earnings. It makes no presumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the interest rate environment. MORTGAGE BANKING OPERATIONS. The profitability to R-G Financial of its mortgage loan originations for sale is in part a function of the difference between long-term interest rates, which is the rate at which R-G Financial originates mortgage loans for third parties, and short-term interest rates, which is the rate at which R-G Financial finances such loans until they are sold. Generally, short-term interest rates are lower than long-term interest rates and R-G Financial benefits from the difference, or the spread, during the time the mortgage loans are held by R-G Financial pending sale. A decrease in this spread would have a negative effect on R-G Financial's net interest income and profitability, and there can be no assurance that the spread will not decrease. R-G Financial generally attempts to reduce this risk by attempting to limit the amount of mortgage loans held pending sale and, as market conditions permit and as discussed below, entering into forward commitments with respect to a portion of its mortgage loan originations. As a general matter, R-G Financial attempts to limit its exposure to this interest rate risk through the sale of substantially all loans within 180 days of origination. A mortgage-banking company is generally exposed to interest rate risk from the time the interest rate on the customer's mortgage loan application is established through the time the mortgage loan closes, and until the time the company commits to sell the mortgage loan. In order to limit R-G Financial's exposure to interest rate risk through the time the mortgage loan closes, the Company generally does not lock-in or guarantee the customer a specific interest rate on such loans through the closing date but rather offers customers an interest rate that will be based on a prevailing market rate that adjusts weekly. Moreover, in order to limit R-G Financial's exposure to interest rate risk through the time the loan is sold or committed to be sold, R-G Financial may, depending upon market conditions, enter into forward commitments to sell a portion of its mortgage loans to investors for delivery at a future time. At December 31, 2003, R-G Financial had $312.9 million of pre-existing commitments by third-party investors to purchase mortgage loans. To the extent that R-G Financial originates or commits to originate loans without pre-existing commitments by investors to purchase such loans or is not otherwise hedged against changes in interest rates ("unhedged loans"), R-G Financial will be subject to the risk of gains or losses through adjustments to the carrying value of loans held for sale or on the actual sale of such loans (the value of unhedged loans fluctuates inversely with changes in interest rates). Finally, R-G Financial carries an inventory of mortgage-backed and related securities (primarily fixed-rate U.S. Agencies CMO's and GNMA and FHLMC certificates) classified as available for sale of $2.4 billion or 29.3% of its total assets which are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of taxes in other comprehensive income, a separate component of stockholders' equity. Because such interest-earning assets have longer effective maturities than R-G Financial's interest bearing liabilities, the yield of such assets will adjust more slowly than the cost of its interest-bearing liabilities and, as a result, R-G Financial's net interest income generally would be adversely affected by increases in interest rates and positively affected by comparable declines in interest rates. In order to hedge the interest rate risk with respect to R-G Financial's mortgage-backed and related securities portfolio, R-G Financial may utilize a variety of interest rate contracts such as interest rate swaps, collars, caps, options or futures (primarily Eurodollar certificates of deposit and U.S. Treasury note contracts). R-G Financial will use such hedging instruments based upon market conditions as well as the level of market rates of interest. In determining the amount of its portfolio to hedge, R-G Financial will consider the volatility of prices of its mortgage-backed and related securities (Puerto Rican tax-exempt GNMAs are generally less volatile than their U.S. counterparts). For taxable GNMAs, R-G Financial enters into forward sales commitments for 30, 60 and 90 days to reduce its interest rate risk. R-G FINANCIAL 2003 ANNUAL REPORT P. 45 R-G Financial may also use interest rate swaps, caps, collars, options and futures to effectively fix the cost of short-term funding sources which are used to originate and or purchase interest-earning assets with longer effective maturities, such as mortgage-backed securities and fixed rate residential mortgage loans held prior to sale in the secondary market. Such agreements thus reduce the impact of increases in interest rates by preventing R-G Financial from having to replace funding sources at a higher cost prior to the time that the interest-earning asset which was originated or purchased with such source matures, reprices or is sold, and thus can be replaced with a higher-yielding asset. At December 31, 2003 R-G Mortgage was a party to two interest rate swap agreements. An interest rate swap is an agreement where one party (generally the Company) agrees to pay a fixed-rate of interest on a notional principal amount to a second party (generally a broker) in exchange for receiving from the second party a variable-rate of interest on the same notional amount for a predetermined period of time. No actual assets are exchanged in a swap of this type and interest payments are generally netted. R-G Mortgage's existing interest rate swap agreements have a notional amount of approximately $85.0 million and expire between February 2006 and December 2009. With respect to such agreements, R-G Mortgage makes fixed interest payments ranging from 4.80% to 5.60%, and receives payments based upon the three-month London Interbank Offer Rate ("Libor"). The net interest paid relating to R-G Mortgage's fixed-pay interest rate swaps amounted to approximately $3,318,000, $2,835,000 and $858,000 during the year ended December 31, 2003, 2002 and 2001, respectively. Such interest rate contracts have reduced the imbalance between R-G Financial's interest-earning assets and interest-bearing liabilities within shorter maturities, thus reducing R-G Financial's exposure to increases in interest rates that may occur in the future. BANKING OPERATIONS. The results of operations of R-G Financial are substantially dependent on its net interest income, which is the difference between the interest income earned on its interest-earning assets and the interest expense paid on its interest-bearing liabilities. At December 31, 2003, R-G Financial's interest-earning assets included a portfolio of loans receivable, net of $4.0 billion and a portfolio of investment securities and mortgage-backed securities (including held to maturity, available for sale and held for trading) of $3.2 billion. Because R-G Financial's interest-earning assets have longer effective maturities than its interest-bearing liabilities, the yield on R-G Financial's interest-earning assets generally will adjust more slowly than the cost of its interest-bearing liabilities and, as a result, R-G Financial's net interest income generally would be adversely affected by increases in interest rates and positively affected by comparable declines in interest rates. In addition to affecting net interest income, changes in interest rates also can affect the value of R-G Financial's interest-earning assets, which are comprised of fixed and adjustable-rate instruments. At December 31, 2003, $3.1 billion or 96.4% of R-G Financial's mortgage-backed and investment securities were classified as available for sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported net of taxes in other comprehensive income, a separate component of stockholders' equity. In addition to affecting net interest income, changes in interest rates also can affect the value of R-G Financial's mortgage-backed and related securities. Generally, the value of fixed-rate mortgage-backed securities declines when interest rates rise and, conversely, increases when interest rates fall. At December 31, 2003, R-G Financial held $33.2 million of mortgage-backed and related securities (all of which carried fixed interest rates) which were classified as held for trading and reported at fair value, with unrealized gains and losses included in earnings. Accordingly, declines in the value of R-G Financial's securities held for trading would have a negative impact on the Company's earnings regardless of whether any securities were actually sold. The Company has sought to limit its exposure to interest rate risk both internally through the management of the composition of its assets and liabilities and externally through the use of a variety of hedging instruments. Internal hedging through balance sheet restructuring generally involves the attraction of longer-term funds (i.e., certificates of deposit or FHLB advances), the origination of adjustable-rate and/or shorter-term loans (such as commercial real estate, commercial business and consumer loans) or the investment in certain types of mortgage-backed derivative securities such as CMOs and mortgage-backed residuals (which often exhibit elasticity and convexity characteristics which the Company can utilize to hedge other components of its portfolio). External hedging involves the use of interest rate swaps, collars, caps, options and futures to reduce interest rate risk on all mortgage-backed securities (excluding CMOs) which are available for sale. At December 31, 2003, mortgage-backed securities available for sale had a fair value of $2.4 billion. The Company generally uses interest rate swaps, collars, caps, options and futures to effectively fix the cost of short-term funding sources which are used to purchase interest-earning assets with longer effective maturities, such as mortgage-backed securities and fixed-rate residential mortgage loans. Such agreements reduce the impact of increases in interest rates by preventing the Company from having to replace funding sources at a higher cost prior to the time that the interest-earning asset which was acquired with such source matures or reprices and thus can be replaced with a higher-yielding asset. At December 31, 2003, R-G Premier was a party to two interest rate swap agreements with an aggregate notional amount of approximately $60 million and expire between February 2006 and December 2009. With respect to such agreements, R-G Premier makes fixed interest payments ranging from 4.67% to 5.69% and receives payments based upon the three-month Libor. The net interest paid relating to the R-G Premier's fixed-pay interest rate swaps amounted to approximately $2,404,000, $2,318,000 and $868,000 during the years ended December 31, 2003, 2002 and 2001, respectively. Such interest rate contracts have reduced the imbalance between R-G Financial's interest-earning assets and interest-bearing liabilities within shorter maturities, thus, reducing R-G Financial's exposure to increases in interest rates that may occur in the future. In addition, at December 31, 2003 RAC was a party to an interest rate swap agreement with a notional amount of $25.0 million which expires in April 2007 to hedge debt issued for the same amount in April 2002. With respect to such agreement, RAC makes fixed interest payments of 8.77% and receives payments based upon the six-month Libor. Net interest paid during the year ended December 31, 2003 and 2002 amounted to $855,000 and $532,000, respectively. P. 46 The following table summarizes the anticipated maturities or repricing of R-G Financial's interest-earning assets and interest-bearing liabilities as of December 31, 2003, 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 are assumed to mature within one year. In addition, investments held by the Company which have call features are presented according to their expected callable date or contractual maturity date, as the case may be, based on the actual interest rate environment.

(1) Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than 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) Although the Bank's negotiable order of withdrawal ("NOW") and Super NOW accounts, passbook savings accounts and checking accounts are subject to immediate withdrawal, management considers a substantial amount of such accounts to be core deposits having significantly longer effective maturities based on the Bank's retention of such deposits in changing interest rate environments. The table assumes that funds will be withdrawn from the Bank at (footnotes continue on following page) R-G FINANCIAL 2003 ANNUAL REPORT P. 47 annual rates for NOW accounts and for regular and commercial checking accounts, ranging from 10% for 0-12 months, 19% for 1-5 years, 41% for 5-10 years, 65% for 10-20 years and 100% thereafter; and, for passbook savings accounts, ranging from 5% for 0-12 months, 20% for 1-5 years, 40% for 5-10 years, 65% for 10-20 years and 100% thereafter. The percentages used were computed based on actual experience for new accounts and the percentage retained over time. (6) Includes federal funds purchased. (7) Comprised of warehousing lines, notes payable and other borrowings. Although "gap" analysis is a useful measurement device available to management in determining the existence of interest rate exposure, its static focus as of a particular date makes it necessary to utilize other techniques in measuring exposure to changes in interest rates. For example, gap analysis is limited in its ability to predict trends in future earnings and makes no assumptions about changes in prepayment tendencies, deposit or loan maturity preferences or repricing time lags that may occur in response to a change in the interest rate environment. As a result, R-G Financial, through simulation models, also analyzes on a monthly basis the estimated effects on net interest income under multiple rate scenarios, including increases and decreases in interest rates amounting to 200 and 100 basis points. The IRRBICO regularly reviews interest rate risk by forecasting the impact of alternative interest rate scenarios on net interest income and by evaluating such impact against the maximum potential changes in net interest income. The following table sets forth at December 31, 2003 the estimated percentage change in R-G Financial's net interest income based on the indicated changes in interest rates. NET INTEREST INCOME

(1) Assumes an instantaneous uniform change in interest rates at all maturities. (2) Net interest income amounts exclude amortization of deferred loan fees. Management of R-G Financial believes that all of the assumptions used in the foregoing analysis to evaluate the vulnerability of its operations to changes in interest rates approximate actual experience and considers them reasonable; however, the interest rate sensitivity of R-G Financial's assets and liabilities and the estimated effects of changes in interest rates on R-G Financial's net interest income indicated in the above table could vary substantially if different assumptions were used or if actual experience differs from the projections on which they are based. INFLATION AND CHANGING PRICES. R-G Financial's Consolidated Financial Statements and related data presented in this Annual Report 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 R-G Financial are monetary in nature. As a result, interest rates have a more significant impact on R-G Financial'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. P. 48 CONTRACTUAL OBLIGATIONS, COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS The following tables present contractual obligations, commercial commitments and off-balance sheet arrangements of the Company as of December 31, 2003. See notes 9, 10 and 19 of the Notes to the Consolidated Financial Statements (dollars in thousands):

As part of its loan servicing activities, the Company is committed to advance from its own funds any shortage of moneys required to complete timely payments to investors in the Company's GNMA, FNMA and FHLMC servicing portfolio, as well as certain private investors. See Note 5 of the Notes to the Consolidated Financial Statements for further information regarding the Company's commitments under various servicing agreements. The Company is contingently liable under limited recourse provisions resulting from the sale of residential mortgage loans to several investors, principally FHLMC, as part of its mortgage banking activities. On certain sales, the Company is also contingently liable for any losses sustained in the disposition of any future repossessed properties that may result from such loans. All loans subject to these provisions are presently being serviced by the Company, and provisions for loan losses, based on loss experience of the Company, are made at the time the loans are sold. Management estimates that the future liability under these provisions is insignificant at December 31, 2003, as losses upon the completion of the foreclosure process have been minimal to the Company. See Note 19 of the Notes to the Consolidated Financial Statements for further information regarding the Company's commitments under loans sold subject to recourse provisions. Finally, in April 2002, RAC formed R-G Capital Trust I, a Delaware business trust, which issued $25 million of trust preferred securities. In August 2003, RAC formed R&G Capital Trust IV which issued $15 million of trust preferred securities. Each of these transactions were sold in private placements. In October 2003, the Company formed R&G Capital Trust III, which issued $100 million of trust preferred securities in a public offering. The Company has guaranteed certain obligations of RAC to R-G Capital Trust I and IV, mainly related to the payment of interest by RAC on the trust preferred securities and the eventual redemption of the trust preferred securities at maturity. The Company has also guaranteed certain obligations to R-G Capital III. See Note 19 of the Notes to the Consolidated Financial Statements for further information regarding the Company's commitments under trust preferred securities. CRITICAL ACCOUNTING POLICIES. The Company considers its Allowance for Loan Losses policy as a policy critical to the sound operations of the Company. The Company provides for loan losses each period by an amount resulting from both (a) an estimate by management of loan losses that occurred during the period and (b) the ongoing adjustment of prior estimates of losses occurring in prior periods. The provision for loan losses increases the allowance for loan losses which is netted against loans on the consolidated statements of financial condition. As losses are confirmed, the loan is written down, reducing the allowance for loan losses. See Note 1 of the Notes to the Consolidated Financial Statements for further information regarding the Company's provision and allowance for loan losses policy. R-G FINANCIAL 2003 ANNUAL REPORT P. 49 The Company also considers, as critical to the sound operations of the Company, its policy for the measurement and periodic evaluation for impairment of its servicing asset and retained interests resulting from the sale or securitization of residential mortgage loans and/or financial asset transfers of mortgage loans accounted for as sales. As of December 31, 2003 the Company had a servicing asset of $119.6 million, and retained interests (CMO residuals and interest only strips) resulting from financial asset transfers accounted for as sales totaling $108.0 million. Such assets are initially recorded at their fair value at the time of sale or securitization. Once recorded, such assets are periodically evaluated and adjusted accordingly using discounted future cash flows techniques, via Company simulation models and through external consultants. Generally, the value of such assets decline with decreases in interest rates and conversely increases when interest rates increase. An impairment is recognized on the Company's servicing asset whenever the prepayment pattern of the underlying mortgage loans indicates that the fair value of such asset is lower than its carrying amount, or that faster amortization of the asset is required. Retained interests are adjusted periodically to their estimated fair value, and are included within mortgage-backed securities available for sale on the consolidated statements of financial condition with changes in fair value reported as other comprehensive income. See Notes 1 and 3 of the Notes to the Consolidated Financial Statements for further information regarding the Company's servicing asset and retained interests policy. RECENT ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES On April 30, 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 or 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." This Statement is effective for contracts entered into or modified after June 30, 2003. 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 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." FAS 150 represents phase 1 of the FASB's broader project on (1) distinguishing between liability and equity instruments and (2) accounting for instruments that have characteristics of both types of instruments (the "liabilities and equity project"). 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. It is expected that phase 2 of the project will address (1) separating compound financial instruments (including convertible debt and conditionally redeemable stock) that have characteristics of liabilities and equity into their liability and equity components, (2) the definition of an ownership relationship, and (3) the definition of liabilities in FASB Concepts Statement No. 6 (CON 6), "Elements of Financial Statements." Under the provisions of this Statement, SFAS No. 150 was effective July 1, 2003 for the Company. Among the instruments specified by SFAS No. 150, mandatorily redeemable financial instruments must be classified as liabilities. The Company has $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 did not have any effect on the Company's consolidated financial statements. ACCOUNTING FOR CONSOLIDATION OF VARIABLE INTEREST ENTITIES In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). Under FIN 46 entities that would be assessed for consolidation are typically referred to as Special-Purposed Entities ("SPEs"), although non-SPE-type entities may also be subject to the guidance. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entities residual returns, or both. FIN 46 was effective immediately for variable interest entities created after January 31, 2003. For variable interest entities created prior to February 1, 2003, the provisions of FIN 46 became effective July 1, 2003. On October 9, 2003 the FASB opted to defer to October 1, 2003 the effective date for variable interest entities created prior to February 1, 2003. The provisions of FIN 46 continue to apply to variable interest entities created after January 31, 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. 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. Based on interim guidance issued by the Federal Reserve Board, the deconsolidation of these vehicles pursuant to FIN 46 would not impact the Tier 1 capital treatment of the liabilities to the extent permitted under current regulations until notice is given to the contrary. On December 24, 2003, the FASB issued a revision to Fin 46 ("Fin 46R") to modify and clarify certain of the provisions of FIN 46. The provisions of Fin 46R did not affect the accounting treatment of the Company's previously deconsolidated wholly-owned Delaware statutory business trust. 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 creation 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 the adoption of this SOP will not have a significant effect on its consolidated financial statements. P. 50 Report of Independent Auditors [PRICEWATERHOUSECOOPERS LOGO] To the Board of Directors and Stockholders of R&G Financial Corporation: In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of income, of comprehensive income, of changes in stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of R&G Financial Corporation (the Company) and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers, LLP PricewaterhouseCoopers, LLP San Juan, Puerto Rico March 5, 2004 Certified Public Accountants (of Puerto Rico) License No. 216 expires on December 1, 2004 Stamp 1935654 of the P.R. Society of Certified Public Accountants has been affixed to the file copy of this report. R-G FINANCIAL 2003 ANNUAL REPORT P. 51 R-G Financial Corporation Consolidated Statements of Financial Condition December 31, 2003 and 2002

The accompanying notes are an integral part of these financial statements. P. 52 R-G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2003, 2002 and 2001

The accompanying notes are an integral part of these financial statements. R-G FINANCIAL 2003 ANNUAL REPORT P. 53 R-G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, 2003, 2002 and 2001

R-G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years ended December 31, 2003, 2002 and 2001

The accompanying notes are an integral part of these financial statements. P. 54

The accompanying notes are an integral part of these financial statements. R-G FINANCIAL 2003 ANNUAL REPORT P. 55 R-G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2003, 2002 and 2001

(continued) P. 56 R-G FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2003, 2002 and 2001

The accompanying notes are an integral part of these financial statements. R-G FINANCIAL 2003 ANNUAL REPORT P. 57 R-G FINANCIAL CORPORATION CONSOLIDATED FINANCIAL STATEMENTS December 31, 2003, 2002 and 2001 1. REPORTING ENTITY AND SIGNIFICANT ACCOUNTING POLICIES REPORTING ENTITY The accompanying consolidated financial statements of R-G Financial Corporation (the "Company") include the accounts of R-G Premier Bank of Puerto Rico ("R-G Premier"), a commercial bank chartered under the laws of the Commonwealth of Puerto Rico, R-G Crown Bank (formerly Crown Bank, F.S.B.) ("Crown Bank"), a federal savings bank, R-G Mortgage Corp. ("R-G Mortgage"), a Puerto Rico mortgage banking corporation, R-G Investments Corporation, a Puerto Rico corporation licensed broker-dealer, and Home & Property Insurance Corp., a Puerto Rico corporation insurance agency. The Company has elected to operate as a financial holding Company, pursuant to the provisions of the Gramm-Leach-Bliley Act of 1999, and is primarily engaged in banking, mortgage banking, and insurance and securities brokerage through its subsidiaries. On June 7, 2002, the Company, through its Florida holding company, R-G Acquisition Holdings Corporation ("RAC"), acquired 100% of the common stock of The Crown Group, Inc., a Florida Corporation, and its wholly-owned federal savings bank subsidiary, Crown Bank for an aggregate of $100.0 million in cash. The acquisition resulted in goodwill totaling approximately $48.5 million which is included in other assets in the accompanying consolidated statement of financial condition. The purchase price was paid based on premiums paid in similar transactions. The acquisition was made pursuant to the Company's expansion strategy of targeting growth in Hispanic (particularly Puerto Rican) markets in the continental United States, and permits the consolidation of the Company's banking and mortgage banking operations in the continental United States to emulate its business model in Puerto Rico. R-G Premier and Crown Bank provide a full range of banking services, including residential, commercial and personal loans and a variety of deposit products. R-G Premier 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 fourteen full service branches and six commercial lending offices. R-G Premier also provides private banking, trust and other financial services to its customers. As discussed in Note 16 to the Consolidated Financial Statements, R-G Premier and Crown Bank are subject to the regulations of certain federal and local agencies, and undergo periodic examinations by those regulatory agencies. Crown Bank also is engaged 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) in the State of New York and Florida through its wholly-owned mortgage-banking subsidiary Continental Capital Corporation. 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 Government National Mortgage Association (GNMA) mortgage-backed securities and collateralized mortgage obligation (CMO) certificates for sale to permanent investors. Upon selling the loans, it retains the rights to service the loans. R-G Mortgage is also a Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) seller-servicer of conventional loans. In April 2002 RAC, a Florida corporation and savings and loan holding company which is the parent of Crown Bank, formed R-G Capital Trust I, a Delaware statutory business trust, which issued $25 million of trust preferred securities in a private placement. In December 2002, RAC formed also R-G Capital Trust II, a Delaware statutory business trust, which issued $10 million of trust preferred securities in a private placement. In August 2003, RAC also formed R&G Capital Trust IV, a Delaware statutory business trust, which issued $15 million of trust preferred securities in a private placement. In addition, in October 2003, the Company formed R&G Capital Trust III, a Delaware statutory business trust, which issued $100 million of trust preferred securities in a public offering. Such securities are redeemable beginning in 2007 and are included within other borrowings in the accompanying Consolidated Statements of Financial Condition. Effective July 12, 2002, the Company began trading of its Class B Common Stock on the New York Stock Exchange ("NYSE") under the new symbol "RGF." At such time, the Company voluntarily delisted its Class B Common Stock from trading on the NASDAQ National Market under the symbol "RGFC." SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America. The following is a description of the significant accounting policies: BASIS OF CONSOLIDATION All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL The Company purchases securities under agreements to resell the same or substantially the same securities. Amounts advanced under these agreements represent short-term loans and are reflected as assets in the consolidated statement of financial condition. It is the Company's policy to take possession over the securities that guarantee such loans. However, the counterparties to these agreements retain effective control over such collateral. INVESTMENT SECURITIES Investments in debt and equity securities are classified at the time of purchase into one of three categories and accounted for as follows: Held to maturity - debt securities which the Company has a positive intent and ability to hold to maturity. These securities are carried at amortized cost. Trading - debt and equity securities that are bought by the Company and held principally for the purpose of selling them in the near term. These securities are carried at fair value, with unrealized gains and losses included in earnings. Available for sale - debt and equity securities not classified as either held-to-maturity or trading. These securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported net of taxes in other comprehensive income. Premiums are amortized and discounts are accreted as an adjustment to interest income over the life of the related securities using a method that approximates the interest method. Realized gains or losses on securities are reported in earnings. Cost of securities sold is determined on the specific identification method. LOANS AND ALLOWANCE FOR LOAN LOSSES Loans are stated at their outstanding principal balance, less unearned interest, deferred loan origination fees and allowance for loan losses. Loan origination and commitment fees and costs incurred in the origination of P. 58 new loans are deferred and amortized over the term of the loans as an adjustment of interest yield using the interest method. Unearned interest on installment loans is recognized as income under a method which approximates the interest method. It is the policy of the Bank to increase its allowance for estimated losses on loans when, based on management's evaluation, a loss becomes both probable and estimable. Major loans and major lending areas are reviewed periodically to determine potential problems at an early date. Also, management's periodic evaluation considers factors such as loss experience, current delinquency data, known and inherent risks in the portfolio, identification of adverse situations which may affect the ability of debtors to repay, the estimated value of any underlying collateral and assessment of current economic conditions. Additions to allowances are charged to income. Any recoveries are credited to the allowance. The Company measures impairment of individual loans, except for loans that are valued at fair value or at the lower of cost or fair value, based on the present value of expected future cash flows discounted at the loan's effective interest rate, or, as a practical method, at the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent. The Company considers loans over $500,000 for individual impairment evaluation. The Company collectively performs impairment evaluations for large groups of small - balance homogeneous loans. Loans are considered impaired when, based on management's evaluation, a borrower will not be able to fulfill its obligation under the original terms of the loan. INTEREST INCOME Interest on loans not made on a discounted basis is credited to income based on the loan principal outstanding at stated interest rates. Recognition of interest on mortgage, consumer and other loans is discontinued when loans are 90 days or more in arrears on payment of principal or interest or when other factors indicate that collection of interest or principal is doubtful. Loans for which the recognition of interest income has been discontinued are designated as non-accruing. Such loans are not reinstated to accrual status until interest is received currently and no other factors indicative of doubtful collection exist. Loan origination fees and costs are deferred as an adjustment to the carrying basis of the loans until sold or securitized, and are amortized as an adjustment to interest income over the related life of the loans. Discounts and premiums on purchased mortgage loans are accreted (amortized) to income over the remaining term of the loans. MORTGAGE LOANS HELD FOR SALE Mortgage loans intended for sale in the secondary market are carried at the lower of cost or estimated market value, computed in the aggregate. The amount by which cost exceeds market value is accounted for as a valuation allowance. Changes in the valuation allowance are included in the determination of income in the period in which the change occurs. LOAN SERVICING FEES Loan servicing fees, which are based on a percentage of the principal balance of the mortgage loans serviced, are credited to income as mortgage payments are collected. Late charges and miscellaneous other fees collected from mortgagors are credited to income when earned, adjusted for estimated amounts not expected to be collected. Loan servicing costs are charged to expense when incurred. SERVICING ASSET The Company capitalizes servicing rights acquired through loan origination activities by allocating a portion of the cost of originating mortgage loans to the mortgage servicing right at the time of sale or securitization based on the relative fair values at such date. To determine the fair value of the servicing rights, the Company uses the market prices of comparable servicing sale contracts, ranging from 1.50% to 2.25% depending on the type of loan. Servicing assets and liabilities are subsequently adjusted by (a) amortization in proportion to and over the period of estimated net servicing income or loss and (b) assessment for asset impairment or increased obligation based on their fair values. Servicing rights are periodically evaluated for impairment given their sensitivity to prepayment risk. For purposes of measuring impairment, mortgage servicing rights are stratified by loan on the basis of certain risk characteristics, including loan type. An impairment is recognized whenever the prepayment pattern of the mortgage loan indicates that the fair value of the related mortgage servicing rights is less than its carrying amount. An impairment is recognized by charging such excess to expense. In determining fair value, the Company considers the fair value of servicing rights with similar risk characteristics. Impairment charges are composed of unscheduled amortization and reserves for impairments. Unscheduled amortization refers to that amortization taken in addition to scheduled amortization amounts due to higher prepayment speeds in the servicing portfolio. Scheduled amortization is determined based on prepayment speeds of the portfolio in a normalized rate environment based on historical experience. The Company determines unscheduled amortization amounts based on actual payoffs of the portfolio using the same stratas of its portfolio to determine valuation impairments. If actual payoffs dictate increased amortization, such amounts are recorded as unscheduled amortization. Reserves for valuation impairments are recorded for temporary decreases in the fair value of the servicing portfolio due to higher prepayment speeds or other factors. The reserves are determined on a stratified basis based on their amortization cost after consideration of scheduled and unscheduled amortization amounts. ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES The Company recognizes on its financial statements financial assets and servicing assets controlled by the Company, and derecognizes financial assets when control has been surrendered. Until March 31, 2001, the Company followed the specific criteria established in SFAS No.125 -"Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," to determine when control had been surrendered in a transfer of financial assets. Liabilities are derecognized when they are extinguished. Liabilities and derivatives incurred or obtained by the Company as part of a transfer of financial assets are initially measured at fair value, if practicable. Servicing assets and other retained interests in the transferred assets are measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of the transfer. Mortgage loans held for sale securitized by the Company into mortgage-backed securities are accounted for as sales, with gains or losses recognized based on readily available quoted market prices at the time of securitization. Such securities are generally subsequently sold to third parties. Sales of non-conforming loans to local financial institutions and FHLMC and FNMA are on recourse basis. The Company establishes a reserve for recourse using the same reserve analysis it would have performed if the loans were still in its portfolio. Generally, the Company retains the right to service all loans sold to third parties. In certain financial asset transfers, interest-only strips are recognized which can be contractually prepaid or settled in such a way that the Company may not recover substantially all of its recorded investment (prepayment risks). The Company recognizes as interest-only strips the right to cash flows remaining over the life of the loans sold after the payment of the related servicing fees and the contractual payments to the buyer of the loans. Interest-only strips are initially, and subsequently periodically, measured based on different valuation techniques, principally the present value of estimated future cash flows. Such techniques incorporate reasonable and supportable assumptions related to the financial assets transferred, including future revenues and expenses, defaults, prepayment speeds and interest rates. All available evidence is considered in developing estimates of expected future cash flows. Gains from the sale of financial assets in securitizations totaled approximately $2.0 million, $20.8 million and $14.1 million during the years ended December 31, 2003, 2002 and 2001, respectively. In addition, interest only strips recognized in securitizations totaled $86,125,000, $16,793,000 and $2,334,000 in 2003, 2002 and 2001, respectively. On April 1, 2001 the Company adopted SFAS No.140, "Accounting for Transfers and Servicing of Financial Assets and Liabilities - A Replacement of SFAS 125." This Statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and R-G FINANCIAL 2003 ANNUAL REPORT P. 59 requires certain disclosures, but it carries over most of the provisions of SFAS 125 without reconsideration. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The adoption of the new standard had no significant effect on the financial statements of the Company. TRANSFERS OF RECEIVABLES WITH RECOURSE Transfers of receivables with recourse are recognized as a sale if the Company surrenders control of the future economic benefits embodied in the receivables, its obligation under the recourse provisions can be reasonably estimated and the transferee cannot require the Company to repurchase the receivables except pursuant to the recourse provisions. Any transfers of receivables with recourse not meeting all of these conditions are recognized as a liability in the consolidated financial statements. Gains and losses realized on the sale of loans are recognized at the time of the sale of the loans or pools to investors, based upon the difference between the selling price and the carrying value of the related loans sold as adjusted for any estimated liability under recourse provisions. In most sales, the right to service the loans sold is retained by the Company. SALE OF SERVICING RIGHTS The sale of servicing rights is recognized upon executing the contract and title and all risks and rewards have irrevocably passed to the buyer. Gains and losses realized on such sales are recognized based upon the difference between the selling price and the carrying value of the related servicing rights sold. FORECLOSED REAL ESTATE HELD FOR SALE Other real estate owned comprises properties acquired in settlement of loans and recorded at fair value less estimated costs to sell at the date of acquisition. Costs relating to the development and improvement of the property are capitalized, whereas those relating to holding the property are expensed as incurred. Valuations are periodically performed by management, and an allowance for losses is established by a charge to operations if the carrying value of a property exceeds its estimated net realizable value. In providing allowances for losses, the cost of holding real estate, including interest costs, are considered. Gains or losses resulting from the sale of these properties are credited or charged to income. ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS On January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," it retains many of the fundamental provisions of that Statement. SFAS No. 144 also superseded the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of by sale, abandonment, or in a distribution to owners or is classified as held for sale. The adoption of this Statement did not have an effect on the consolidated financial position or results of operations of the Company. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful life of each type of asset. Major additions and improvements which extend the life of the assets are capitalized, while repairs and maintenance are charged to expense. The Company evaluates for impairment long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, an estimate of the future cash flows expected to result from the use of the asset and its eventual disposition must be made. If the sum of the future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized for the difference, if any, between the discounted future cash flows and the carrying value of the asset. GOODWILL AND OTHER INTANGIBLES On January 1, 2002 the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over the respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144. The initial adoption of this Statement on January 1, 2002 had no effect on the financial condition or results of operations of the Company. In connection with the acquisition of Crown in June 2002, the Company recognized goodwill totaling $48.5 million as of December 31, 2002, and as a deposit intangible the premium paid over the value of the deposits acquired as a result of the acquisition. The premium paid, totaling $2,276,000, is being amortized over a 10 year period. In addition, the Company has recorded as a deposit intangible the premium paid over the value of deposits acquired resulting from the purchase of certain branches from a commercial bank in 1995. The premium paid is being amortized over a 10 year period. Accumulated amortization related to deposit intangibles of the Company amounted to approximately $2,026,000 and $1,449,000 at December 31, 2003 and 2002, respectively; amortization expense during 2003, 2002 and 2001 was $577,000, $477,000 and $165,000, respectively. Goodwill also resulted from the acquisition of the R-G Premier, a mortgage banking institution and a savings institution in prior years. Goodwill amortization during 2001 was $436,000. In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions." SFAS No. 147 removes financial acquisitions of financial institutions from the scope of both SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," and FASB Interpretation No. 9, "Applying APB Opinions No. 16 and 17, When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method," and requires that those transactions be accounted for in accordance with FASB Statements No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." In addition, SFAS No. 147 amends FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor-and borrower-relationship intangible assets and credit cardholder intangible assets. SFAS No. 147's transition provisions require affected institutions to reclassify their SFAS No. 72 goodwill as SFAS No. 142 goodwill as of the date the company initially applied SFAS No. 142 in its entirety. The adoption of SFAS No. 147 did not have an impact on the Company's financial condition or results of operations. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Company sells securities under agreements to repurchase the same or similar securities. The Company retains effective control over the securities pledged as collateral on these agreements. The securities underlying such agreements were delivered to, and are being held by, the dealers with whom the securities sold under agreement to repurchase were transacted. The dealers may have lent or otherwise disposed of such securities to other parties in the normal course of their operations, but have agreed to resell the Company the same or substantially the same securities at the maturities of the agreements. Accordingly, amounts received under these agreements represent short-term borrowings and the securities underlying the agreements remain in the asset accounts as pledged assets. INTEREST RATE RISK MANAGEMENT The Company enters into interest rate caps and swaps to manage its interest rate exposure. Generally interest rate swaps are designated as P. 60 hedges against future fluctuations in the interest rates of specifically identified assets or liabilities. Net interest settlements on interest rate swaps are recorded as adjustments to interest income or expense. For financial reporting purposes, the Company's designates as cash flow hedges only those derivative transactions that qualify for the shortcut method for measuring effectiveness under SFAS 133, and presents related gains or losses as other comprehensive income in stockholders' equity. If it is determined that the derivative instrument does not meet the shortcut method, the Company designates such instruments as trading derivatives, and adjustment in the fair value of the derivative instrument are recorded in the Company's consolidated statements of income. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Effective January 1, 2001 the Company adopted SFAS No. 133 -"Accounting for Derivative Instruments and Hedging Activities." This Statement, as amended, requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically accounted for as a hedge. The accounting for changes in fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Upon adoption, the Company designated an interest rate SWAP agreement with a notional amount of $70 million which was tied against specifically identified liabilities as cash flow hedges in accordance with the provisions of SFAS No. 133. All other interest rate SWAP agreements held by the Company at such date, with an aggregate notional amount of $60 million, as well as certain interest rate cap agreements with an aggregate notional amount of $200 million, did not qualify for hedge accounting under the provisions of SFAS 133. Upon the adoption of this Statement, the Company recognized an unrealized gain of approximately $1.9 million as other comprehensive income in stockholders' equity related to derivative instruments that were designated as cash flow hedges, and a loss of approximately $529,000 in the income statement related to derivative instruments that did not qualify for hedge accounting. INCOME TAXES The Company follows an asset and liability approach to the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is recognized for any deferred tax asset for which, based on management's evaluation, it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax asset will not be realized. CAPITAL RESERVE The Banking Act of the Commonwealth of Puerto Rico, as amended, requires that a minimum of 10% of net income of the Bank be transferred to capital surplus until such surplus equals the sum of the Bank's common and preferred stock and paid-in capital. Amounts transferred to the legal surplus account from the retained earnings are not available for distribution to stockholders. STOCK OPTION PLAN As discussed in Note 17 to the consolidated financial statements, the Company adopted a Stock Option Plan in June 1996 and granted stock options thereunder to certain employees in conjunction with the Company's initial public offering. Compensation cost on employee stock option plans is measured and recognized for any excess of the quoted market price of the Company's stock at the grant date over the amount an employee must pay to acquire the stock (intrinsic value-based method of accounting). Generally, stock options are granted with an exercise price equal to the face value of the stock at the date of the grant and, accordingly, no compensation cost is recognized. FAIR VALUE OF FINANCIAL INSTRUMENTS The reported fair values of financial instruments are based on a variety of factors. For a substantial portion of financial instruments, fair values represent quoted market prices for identical or comparable instruments. In a few other cases, fair values have been estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of year end or that will be realized in the future. EARNINGS PER SHARE Basic earnings per common share are computed by dividing net income for the year by the weighted average number of shares outstanding during the period. Outstanding stock options granted under the Company's Stock Option Plan are 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 to diluted earnings per share. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks, short-term investments and other highly liquid securities with an original maturity of three months or less. Cash and cash equivalents at December 31, 2003 include non-restricted cash of $8,968,000 pledged as collateral on interest rate SWAP agreements. COMPREHENSIVE INCOME Comprehensive income includes net income and other transactions, except those with stockholders that are recorded directly in equity. In the Company's case, in addition to net income, other comprehensive income results mainly from the changes in the unrealized gains and losses of swaps designated as cash flow hedges, and on securities that are classified as available for sale. SEGMENTS INFORMATION The Company reports financial information about its reportable segments. Operating segments are components of a business about which separate financial information is available and evaluated regularly by management in deciding how to assess performance. The segregation that best fulfills the segment definition described above is by line of business. RECLASSIFICATIONS Certain reclassifications have been made to the 2002 and 2001 consolidated financial statements to conform with 2003 presentation. RECENT ACCOUNTING PRONOUNCEMENTS ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS In June 2002, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this Statement did not have a significant effect on the consolidated financial statements of R-G Financial. ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of this Statement did not have a significant effect on the consolidated financial statements of R-G Financial. ACCOUNTING FOR STOCK-BASED COMPENSATION In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," which amends SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement provides the alternative methods of transition for a voluntary change to a fair-value method of accounting for stock-based employee compensation. Management estimates that the compensation costs that would be recognizable had they been determined based on the fair-value method of accounting are insignificant, and accordingly, the Company continues to follow the disclosure only provisions of SFAS No. 123 and thus, does not recognize compensation costs for the Company's Stock Option Plan. R-G FINANCIAL 2003 ANNUAL REPORT P. 61 ACCOUNTING FOR GUARANTEES OF INDEBTEDNESS OF OTHERS In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees of Indebtedness of Others (an interpretation of FASB Statements No. 5, 57, 107 and rescission of FASB Interpretation No. 34)" ("FIN No. 45"). FIN No. 45 clarifies the requirements of FASB Statement No. 5, "Accounting for Contingencies," relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN No. 45 requires a guarantor of certain guarantees to recognize at its inception a liability for the fair value of the obligation undertaken when issuing the guarantee, and also expands the related disclosures. The provisions of initial recognition were effective for guarantees issued or modified after December 31, 2002. The adoption of FIN No. 45 on January 1, 2003 did not have a significant impact on the Company's consolidated financial statements. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES On April 30, 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 or 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." This Statement is effective for contracts entered into or modified after June 30, 2003. 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 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." FAS 150 represents phase 1 of the FASB's broader project on (1) distinguishing between liability and equity instruments and (2) accounting for instruments that have characteristics of both types of instruments (the "liabilities and equity project"). 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. It is expected that phase 2 of the project will address (1) separating compound financial instruments (including convertible debt and conditionally redeemable stock) that have characteristics of liabilities and equity into their liability and equity components, (2) the definition of an ownership relationship, and (3) the definition of liabilities in FASB Concepts Statement No. 6 (CON 6), "Elements of Financial Statements." Under the provisions of this Statement, SFAS No. 150 was effective July 1, 2003 for the Company. Among the instruments specified by SFAS No. 150, mandatorily redeemable financial instruments must be classified as liabilities. The Company has $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 did not have any effect on the Company's consolidated financial statements. ACCOUNTING FOR CONSOLIDATION OF VARIABLE INTEREST ENTITIES In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). Under FIN 46 entities that would be assessed for consolidation are typically referred to as Special-Purposed Entities ("SPEs"), although non-SPE-type entities may also be subject to the guidance. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entities residual returns, or both. FIN 46 was effective immediately for variable interest entities created after January 31, 2003. For variable interest entities created prior to February 1, 2003, the provisions of FIN 46 became effective July 1, 2003. On October 9, 2003 the FASB opted to defer to October 1, 2003 the effective date for variable interest entities created prior to February 1, 2003. The provisions of FIN 46 continue to apply to variable interest entities created after January 31, 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. 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. Based on interim guidance issued by the Federal Reserve Board, the deconsolidation of these vehicles pursuant to FIN 46 would not impact the Tier 1 capital treatment of the liabilities to the extent permitted under current regulations until notice is given to the contrary. On December 24, 2003, the FASB issued a revision to FIN 46 ("FIN 46R") to modify and clarify certain of the provisions of FIN 46. The provisions of FIN 46R did not affect the accounting treatment of the Company's previously deconsolidated wholly-owned Delaware statutory business trusts. 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 creation 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 the adoption of this SOP will not have a significant effect on its consolidated financial statements. 2. MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale consist of:

P. 62 The aggregate amortized cost and approximate market value of loans held for sale as of December 31, 2003 are as follows:

Substantially all of the loans are pledged to secure various borrowings from lenders under mortgage warehousing lines of credit (see Note 9). The following table summarizes the components of gain on sale of mortgage loans held for sale and mortgage-backed securities held for trading:

Total gross loan origination fees totaled approximately $46,014,000, $40,990,000 and $41,476,000 during the years ended December 31, 2003, 2002 and 2001, respectively. Gross gains of $136,387,000, $80,463,000 and $51,918,000, and gross losses of $3,720,000, $7,681,000 and $8,073,000 were realized on the above sales during the years ended December 31, 2003, 2002 and 2001, respectively. 3. INVESTMENT SECURITIES

R-G FINANCIAL 2003 ANNUAL REPORT P. 63 The carrying value and estimated fair value of investment securities available for sale and held to maturity by category and contractual maturities are shown below. The fair value of investment securities is based on quoted market prices and dealer quotes. Expected maturities on debt securities will differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties.

P. 64 Mortgage-backed securities available for sale include CMO residuals and interest only strips (IO's) resulting from financial asset transfers accounted for as sales. The key assumptions used in determining the fair values of such securities as of December 31, 2003 and the sensitivity analysis on the fair value of such retained interests as of such date follows:

Anticipated credit losses as of December 31, 2003, as well as credit losses, net of recoveries, during 2003, 2002 and 2001 were insignificant. The fair values presented above were estimated based on a computer model used to structure mortgage-backed securities. The model estimates the present value of the projected excess servicing fees net of normal servicing fees, and projects scheduled and unscheduled principal payments, mortgage interest, servicing fees and excess servicing fees for each mortgage loan on a monthly basis. Values for the excess servicing cash flows are calculated under various scenarios based on different prepayment and internal rate of return assumptions, depending on the type of loan of the underlying mortgages, the coupon rate and seasoning (loan age). Prepayment speed assumptions ("PSA") are based on actual Public Securities Association Dealer Prepayment Estimates in the continental United States as published by Bloomberg Financial News, as adjusted to reflect prepayment speeds in Puerto Rico, which historically have been lower. The following table shows the Company's gross unrealized losses and fair value, aggregated by investment category and length of time, of securities available for sale and held to maturity that have been in a continuous unrealized loss position up to December 31, 2003.

The securities held by the Company are mainly mortgage-backed securities, US Treasury and agency securities. Since a significant portion of such instruments is guaranteed by mortgages and/or the full faith and credit of the US Government, the related principal and interest are deemed recoverable. The Company has the ability to hold these securities until maturity or until the unrealized losses are recovered. As such, no losses have been recognized. R-G FINANCIAL 2003 ANNUAL REPORT P. 65

Unrealized gains and losses on securities held to maturity and available for sale follows:

P. 66 During the years ended December 31, 2003, 2002 and 2001, proceeds from the sale of securities available for sale totaled approximately $165,561,000, $552,732,000 and $372,615,000, respectively; gross gains realized on such sales totaled approximately $1,087,000, $1,208,000 and $3,538,000 during 2003, 2002 and 2001 respectively; gross losses realized in 2003, 2002 and 2001 were approximately $201,000, $225,000 and $1,196,000, respectively. During 2001, the Company reclassified $75.9 million securities available for sale to held for trading, recognizing a gain of $833,000. As discussed in Notes 7, 8 and 10 to the consolidated financial statements, as of December 31, 2003 the Company had investment and mortgage-backed securities amounting to approximately $2.7 billion pledged as collateral of certain deposits, securities sold under agreements to repurchase, and advances from the FHLB and other lines of credit. In addition to the investment and mortgage-backed securities pledged on repurchase agreements and reported as pledged assets in the statements of financial condition, at December 31, 2003 and 2002 the carrying amount of investment securities pledged as collateral on repurchase agreements where the counterparties do not have the right to sell or repledge the assets are as follows:

R-G FINANCIAL 2003 ANNUAL REPORT P. 67 4. LOANS AND ALLOWANCES FOR LOAN LOSSES Loans consist of the following:

The changes in the allowance for loan losses follow:

As of December 31, 2003 and 2002 the Company had commercial loans classified as impaired totaling $20,614,000 and $16,684,000, respectively. At December 31, 2003 and 2002, an impairment reserve of approximately $2,923,000 and $3,598,000, respectively, was allocated to certain impaired loans. As of December 31, 2003, 2002 and 2001, loans on which the accrual of interest income had been discontinued amounted to approximately $84,609,000, $77,167,000 and $71,582,000, respectively. The additional interest income that would have been recognized during 2003, 2002 and 2001 had these loans been accruing interest amounted to approximately $2,227,000, $1,589,000 and $3,254,000, respectively. The Company has no material commitments to lend additional funds to borrowers whose loans were in non-accruing status at December 31, 2003. P. 68 5. SERVICING ASSET The Company's fees for servicing mortgage loans generally range from .25% to ..50% on the declining outstanding principal balances of the mortgage loans serviced. Servicing fees are collected on a monthly basis out of payments from mortgagors. The servicing agreements are cancelable by permanent investors for cause without penalty or after payment of a termination fee ranging from .5% to 1% of the outstanding principal balance of the loans. At December 31, 2003 and 2002, the mortgage loans servicing portfolio amounted to approximately $10,942,821,000 and $10,991,944,000, respectively, including approximately $1,904,797,000 and $1,084,859,000, respectively, serviced for R-G Premier, and $553,009,000 and $470,100,000, respectively, under sub-servicing contracts with an outside party. In addition, the servicing portfolio at December 31, 2003 and 2002 includes $227,466,000 and $100,876,000 serviced for Crown Bank. The changes in the servicing asset of the Company follows:

The changes in the reserve for valuation impairment follows:

As of December 31, 2003 and 2002, the fair value of capitalized mortgage servicing rights was $126,016,000 and $146,855,000, respectively. The major assumptions for the estimated fair value at December 31, 2003 were discount rates ranging from 9% to 13% and a PSA of 122 to 1,266, depending on the type and coupon of the loan, with a weighted average life of 7.19 years. Among the conditions established in its various servicing agreements, the Company is committed to advance from its own funds any shortage of moneys required to complete timely payments to investors in GNMA mortgage-backed securities issued and in its FNMA and FHLMC portfolio, as well as certain private investors. At December 31, 2003, the mortgage loan portfolio serviced for GNMA, FNMA, FHLMC and private investors subject to the timely payment commitment amounted to approximately $2,311,172,000, $2,140,657,000, $2,752,169,000 and $710,020,000, respectively (2002- $2,642,096,000, $2,752,680,000, $2,905,752,000 and $209,083,000, respectively). Total funds advanced as of December 31, 2003 in relation to such commitments amount to $7,047,000, $18,123,000 and $2,890,000 for escrow advances, principal and interest advances and foreclosure advances, respectively (2002 - $6,628,000, $15,719,000 and $2,034,000, respectively). In connection with mortgage servicing activities, the Company holds funds in trust for investors representing amounts collected primarily for the payment of principal, interest, real estate taxes and insurance premiums. Such funds are deposited in separate custodial bank accounts, some of which are deposited in R-G Premier and Crown Bank. At December 31, 2003 and 2002, the related escrow funds include approximately $158,984,000 and $220,024,000, respectively, deposited in banking subsidiaries of the Company; these funds are included in the Company's consolidated financial statements. Escrow funds also include approximately $4,209,000 and $4,347,000 at December 31, 2003 and 2002, respectively, deposited with other banks and excluded from the Company's assets and liabilities. R-G FINANCIAL 2003 ANNUAL REPORT P. 69 6. PREMISES AND EQUIPMENT Premises and equipment consist of:

7. DEPOSITS Deposits are summarized as follows:

The weighted average stated interest rate on all deposits at December 31, 2003 and 2002 was 2.58% and 3.06%, respectively. As of December 31, 2003, the Company had delivered investment securities held to maturity and available for sale with a carrying value of approximately $5.9 million as collateral for public funds' deposits. At December 31, 2003 scheduled maturities of certificates of deposit are as follows: 2004 $1,056,790,320 2005 505,066,197 2006 201,492,952 2007 216,269,828 2008 277,673,806 Thereafter 1,942,685 -------------- $2,259,235,788 ==============

P. 70 8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
December 31, ------------------------------------------------------------------------------ 2003 2002 ------------------------------------ ----------------------------------- Approximate market Approximate market Repurchase value of Repurchase value of liability underlying securities liability underlying securities --------- --------------------- --------- --------------------- TYPE OF SECURITY U.S. Government and Agencies securities available for sale $ 454,239,000 $ 467,060,588 $ 219,828,000 $ 252,916,640 GNMA: Held for trading - - 9,448,600 9,740,818 Available for sale 342,986,000 359,559,175 421,184,020 434,446,308 Held to maturity 27,725,000 30,126,251 38,184,000 39,601,693 CMO and CMO residuals available for sale 722,644,000 798,117,946 269,045,271 285,272,762 FHLMC: Held for trading 6,375,000 6,375,209 31,584,500 33,704,170 Available for sale 247,980,000 261,033,462 424,279,000 458,818,162 FNMA: Available for sale 240,652,000 287,721,649 17,401,000 20,424,513 Held to maturity 4,999,000 4,998,749 6,622,000 6,697,814 Corporate debt obligations available for sale 60,196,000 63,272,345 52,182,000 56,149,638 Puerto Rico Government and Agencies securities: Held for trading 165,000 183,225 - - Held to maturity 26,640,000 30,427,892 - - Repledged securities obtained from agreements to resell 86,194,000 92,758,592 - - -------------- -------------- -------------- -------------- $2,220,795,000 $2,401,635,083 $1,489,758,391 $1,597,772,518 ============== ============== ============== ==============
At December 31, 2003, repurchase agreements mature within ninety days, except for repurchase agreements totaling $1,329,351,000 maturing in various dates commencing on April 26, 2004 until February 28, 2011. Expected maturities may differ from contractual maturities because counterparties to the agreements may have call options. At December 31, 2003 repurchase agreements amounting to $424.7 million had call options. Maximum amount of borrowings outstanding at any month-end during 2003 and 2002 under the agreements to repurchase were $2,220,795,000 and $1,602,394,000, respectively. The approximate average aggregate borrowings outstanding during 2003 and 2002 were $1,884,191,000 and $1,437,089,000, respectively. The weighted average interest rate of such agreements was 2.26% and 3.16% at December 31, 2003 and 2002, respectively; the weighted average rate during 2003 and 2002 was 2.71% and 3.56%, respectively. 9. NOTES PAYABLE Notes payable consist of:
December 31, -------------------------------- 2003 2002 ------------- ------------- Warehousing lines, bearing interest at floating rates ranging from .875% to 1.75% over the applicable Libor rate (2.26% in 2003 and 2.51% in 2002) $ 170,508,942 $ 167,957,115 Lines of credit with banks for an aggregate of $27.8 million bearing interest at floating rates ranging from 1.50% to 1.75% over the applicable Libor rate (2.57% at December 31, 2003 and 2.82% at December 31, 2002), collateralized by mortgage servicing rights with a fair value of approximately $29.6 million in 21,750,000 26,650,000 2003 ------------- ------------- $ 192,258,942 $ 194,607,115 ============= =============
As of December 31, 2003, the Company had various credit line agreements permitting the Company to borrow up to $309.9 million in warehousing lines with banks; the unused portion of warehousing lines totaled approximately $139.4 million. Warehousing lines at December 31, 2003 are collateralized by approximately $186.4 million in mortgage loans, mortgage servicing rights with a fair value of $8 million, and a general assignment of mortgage payments receivable. These borrowings bear interest at rates related to the respective counterparty's cost of funds. Several credit line agreements impose certain requirements on the Company, primarily related to maintaining net worth and debt service over certain defined minimums, and limitations on indebtedness and declaration of dividends. R-G FINANCIAL 2003 ANNUAL REPORT P. 71 The following information relates to borrowings of the Company under the credit line agreements:
December 31, (Dollars in thousands) ----------------------------------- 2003 2002 ------------ ----------- Maximum aggregate borrowings outstanding at any month-end $ 218,052 $ 194,607 Approximate average aggregate borrowings outstanding during the year $ 217,750 $ 241,346 Weighted average interest rate during the year computed on a monthly basis 3.15% 2.81% Weighted average interest rate at end of year 2.29% 2.55%
10. ADVANCES FROM THE FEDERAL HOME LOAN BANK At December 31, 2003 advances from the FHLB mature on various dates commencing on January 1, 2004 until March 2, 2011, and bear interest at various rates ranging from 1.04% to 6.31%. The weighted average stated interest rate on advances from the FHLB was 3.56% and 4.23% at December 31, 2003 and 2002, respectively. Scheduled maturities of FHLB advances were as follows as of December 31, 2003:
(in thousands) -------------- 2004 $ 224,000 2005 265,100 2006 265,500 2007 159,000 2008 76,000 Thereafter 140,000 ----------- $ 1,129,600 ===========
Expected maturities may differ from contractual maturities because some of the advances may have call options. At December 31, 2003 FHLB advances amounting to $265.5 million had call options. The Company, through its banking subsidiaries, receives advances from the FHLB under Advances, Collateral Pledge and Security Agreements (the "Agreements"), which allow the Company to borrow up to $2.2 billion as of December 31, 2003. The unused portion under such line of credit was approximately $1.1 billion. Under the Agreements, the Company is required to maintain a minimum amount of qualifying collateral with a market value of at least 110% of the outstanding advances. At December 31, 2003 the Company maintains collateral (principally in the form of first mortgage notes and investment securities) amounting to approximately $1.4 billion with the FHLB as part of the Agreements. At December 31, 2003, the market value of the collateral indicated above was sufficient to comply with the collateral requirements of the FHLB. 11. OTHER BORROWINGS Other borrowings include the following:
December 31, ----------------------------------- 2003 2002 -------------- -------------- Subordinated notes due in 2032, bearing interest at floating rates ranging from 3.25% to 3.70% over the applicable libor rate (4.77% in 2003 and 4.95% in 2002) $ 35,000,00 $ 35,000,000 Subordinated notes due in 2033, bearing interest at a floating rate of 3.10% over three month libor (4.25% in 2003) 15,000,000 - Subordinated notes due in 2033, bearing interest at a fixed rate of 6.95% 100,000,000 - Working capital lines of credit bearing interest ranging from 1.50% to 1.75% over the applicable libor rate (2.82% in 2003 7,670,451 10,065,406 and 3.03% in 2002) -------------- -------------- $ 157,670,451 $ 45,065,406 ============== ==============
Interest expense during 2003 and 2002 totaled approximately $4,004,000 and $1,604,000, respectively. P. 72 12. INCOME TAXES The Company is subject to Puerto Rico income tax on its income derived from all sources within and outside Puerto Rico. R-G Premier is also subject to United States income taxes on certain types of income from such source. However, any United States income tax paid by the Bank is, subject to certain conditions and limitations, creditable as a foreign tax credit against its Puerto Rico income tax liability. Under the Puerto Rico Income Tax Law, entities are not entitled to file consolidated tax returns. Under the Puerto Rico tax law a company's tax liability will be the greater of the tax computed under the regular tax system or the alternative minimum tax (AMT) system. The AMT is imposed based on 22% of regular taxable income after certain adjustments for preference items. An AMT credit may be claimed in future years for tax paid on an AMT basis in excess of the regular tax basis. Crown Bank is subject to United States federal and state income tax on its income derived from all sources within and outside the United States. A portion of the Company's interest income arises from mortgage loans, mortgage-backed securities and other investment securities which are exempt for Puerto Rico income tax purposes. The elimination of exempt income, net of related expenses, from the determination of taxable income results in a reduction of its income tax liability. Deferred tax liabilities (assets) consist of the following:
December 31, ------------------------------ 2003 2002 ------------ ------------ DEFERRED TAX LIABILITIES: Unrealized gain on securities held for trading $ 406,219 $ 1,141,378 Deferred expenses 240,515 240,515 CMO residuals (IOs) 31,530,668 7,760,841 Net deferred loan origination costs 2,186,619 509,198 Servicing asset 7,783,231 14,584,689 Securitization gains on mortgage-backed securities 8,436,989 9,265,347 Unrealized gains on securities available for sale 11,859,563 21,068,038 Leases 822,019 822,019 Core deposit intangible 584,907 755,795 Other - 338,161 ------------ ------------ 63,850,730 56,485,981 ------------ ------------ DEFERRED TAX ASSETS: Net operating loss carryforward (2,727,353) (1,198,676) Allowance for loan losses (15,384,307) (12,727,926) AMT and other tax credits (2,284,537) (2,632,675) Other foreclosed property reserve (1,035,617) (894,152) Unrealized losses on cash flow hedges (5,579,919) (6,993,451) Unrealized losses on derivative instruments held for trading (515,887) (673,116) Deferred gains on sale of investment securities and loans (422,257) (208,785) Recourse reserve (1,554,150) (702,000) Other (439,007) - ------------ ------------ (29,943,034) (26,030,781) ------------ ------------ Net deferred tax liability $ 33,907,696 $ 30,455,200 ============ ============
R-G FINANCIAL 2003 ANNUAL REPORT P. 73 The provision for income taxes of the Company varies from amounts computed by applying the Puerto Rico statutory tax rate to income before taxes as follows:
Year Ended December 31, (Dollars in thousands) ------------------------------------------------------------------------- 2003 2002 2001 ----------------------- ---------------------- ---------------------- % of pretax % of pretax % of pretax Amount Income Amount Income Amount Income -------- ----------- -------- ----------- -------- ----------- Computed income tax at Puerto Rico's statutory rate $ 67,624 39% $ 48,751 39% $ 34,073 39% Effect on provision of: Tax-exempt interest (24,263) (14) (19,603) (15) (11,968) (14) Amounts expected to reverse at tax rates lower than the statutory rate (508) (1) - - (576) (1) Other (non-taxable) / non-deductible items, net (481) - (488) (1) 73 1 -------- ----------- -------- ----------- -------- ----------- $ 42,372 24% $ 28,660 23% $ 21,602 25% ======== =========== ======== =========== ======== ===========
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. 13. STOCKHOLDERS' EQUITY On November 21, 2003, the Company's Board of Directors authorized a three-for-two stock split on the Company's Class A and Class B common stock (the "common stock"). The split was effected on January 29, 2004 in the form of stock dividend of one additional share of common stock for each two shares of common stock held of record as of January 16, 2004. Prior to the stock split, the Company had 34,044,222 shares of common stock outstanding (comprised of 14,373,056 Class A non-registered common shares and 19,671,166 Class B publicly traded common shares). As a result of the split, 17,022,077 shares (comprised of 7,186,528 Class A non-registered common shares and 9,835,549 Class B publicly traded common shares) were issued and $170,220 was transferred from additional paid-in-capital to common stock. The stock split did not dilute shareholders' voting rights or their proportionate interest in the Company. The split has been retroactively reflected on the Company consolidated financial statements as of December 31, 2003 as if the split had been effected prior to such date. Accordingly, all share and per share data included herein has been retroactively adjusted to reflect the stock split. After giving effect to the Company's January 29, 2004 stock split on the Company's Consolidated Financial Statements, the Company's average number of common shares outstanding used in the computation of basic earnings per common share was 51,057,651 in 2003 (2002 - 48,631,316; 2001 - 44,807,958); the weighted average number of shares outstanding for the computation of diluted earnings per share was 51,281,379 in 2003 (2002 - 49,059,698; 2001 -45,828,605) after giving effect to outstanding stock options granted under the Company's Stock Option Plan. During 2003, cash dividends were paid of $0.294 (2002 - -$0.224; 2001 - $0.176) per common share amounting to $15,011,000 (2002 - $11,003,000; 2001 - $7,897,000). Non-cumulative perpetual preferred stocks at December 31, 2003 may be redeemed in whole or in part at various redemption prices ranging from $26.00 to $25.00 at the Company's sole option as follows:
Redemption date --------------- ~~Series A October 1, 2003 Series B January 1, 2005 Series C April 1, 2006 Series D March 1, 2007~~
No redemptions have been made as of December 31, 2003. P. 74 14. NON-INTEREST EXPENSES Non-interest expenses consist of the following:
Year Ended December 31, ------------------------------------------ 2003 2002 2001 ------------ ------------ ------------ Stationery and supplies $ 4,966,158 $ 4,064,341 $ 2,304,214 Advertising and promotion 15,460,959 11,662,034 8,559,121 Telephone 2,626,751 2,226,061 1,767,115 License and other taxes 5,393,707 4,915,995 4,282,639 Deposit insurance 733,796 569,730 318,790 Other insurance 1,939,287 1,186,844 858,572 Legal and other professional services 5,068,298 3,752,660 2,527,347 Amortization and impairment of mortgage servicing asset 60,152,016 39,520,530 16,670,856 Goodwill amortization - - 435,626 Guaranty fees 2,426,110 2,813,167 3,218,576 Other 32,718,389 23,651,249 16,190,317 ------------ ------------ ------------ $131,485,741 $ 94,362,611 $ 57,133,173 ============ ============ ============
15. RELATED PARTY TRANSACTIONS The Company leases some of its facilities from an affiliate, mostly on a month-to-month basis. The annual rentals under these agreements during 2003 were approximately $3,588,000 (2002 - $3,006,000; 2001 - $2,352,000). Loans to directors, officers and employees of the Company were made in the ordinary course of business. Interest rates on such loans were substantially the same as those prevailing at the time for comparable transactions with unrelated parties and did not involve more than a normal risk of collectibility. At December 31, 2003 the aggregate amount of loans outstanding to officers, directors, and principal stockholders' of the Company and its subsidiaries was insignificant. 16. REGULATORY REQUIREMENTS The Company is approved by the Board of Governors of the Federal Reserve System (Federal Reserve Board) as a registered bank holding company pursuant to the Bank Holding Company Act of 1956, as amended. The Company, as a bank holding company, is subject to regulation and supervision by the Federal Reserve Board. The Federal Reserve Board has established guidelines regarding the capital adequacy of bank holding companies, such as the Company. These requirements are substantially similar to those adopted by the FDIC for depository institutions, as set forth below. R-G Premier is organized under the Puerto Rico Banking Act, as amended, and is subject to extensive regulation and examination by the Commission (the "Commissioner") of the Officer of Financial Institutions of the Commonwealth of Puerto Rico, the FDIC and certain requirements established by the Federal Reserve Board. Crown Bank is a federal savings bank organized under the laws of the State of Florida, and is subject to extensive regulation and examination by the Banking Department of Florida, the Office of Thrift Supervision ("OTS") and certain requirements established by the Federal Reserve Board. The mortgage banking business conducted by R-G Mortgage is subject to the rules and regulations of FHA, VA, FNMA, FHLMC, GNMA and the Commissioner with respect to originating, processing, selling and servicing mortgage loans and the issuance and sale of mortgage-backed securities. R-G Mortgage's affairs are also subject to supervision and examination by FNMA, FHA, FHLMC, GNMA, HUD and VA at all times to assure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real Estate Settlement Procedures Act and the regulations promulgated thereunder. R-G Mortgage is a U.S. Department of Housing and Urban Development (HUD) approved non-supervised mortgagee. The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Failure to meet capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. As of December 31, 2003, the Company meets all capital adequacy requirements to which it is subject. As of December 31, 2003, the most recent notifications from the FDIC and the OTS categorized R-G Premier and Crown Bank, respectively, as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized R-G Premier and Crown Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed R-G Premier's or Crown Bank's category. R-G FINANCIAL 2003 ANNUAL REPORT P. 75 The following table reflects the Company's, R-G Premier's and Crown Bank's actual capital amounts and ratios, and applicable regulatory capital requirements at December 31, 2003 and 2002:
(Dollars in thousands) ------------------------------------------------------------------------ to be well capitalized for capital under prompt corrective actual adequacy purposes action provisions -------------------- ---------------------- ---------------------- amount ratio amount ratio amount ratio -------- ----- -------- ----- -------- -------- As of December 31, 2003 Total capital (to risk weighted assets): Consolidated $858,525 16.40% $418,812 8% N/A N/A R-G Premier Bank only $453,160 13.46% $269,298 8% $336,623 10% Crown Bank only $ 95,108 11.89% $ 63,974 8% $ 79,967 10% Tier I capital (to risk weighted assets): Consolidated $818,911 15.64% $209,406 4% N/A N/A R-G Premier Bank only $420,613 12.50% $134,649 4% $201,974 6% Crown Bank only $ 90,454 11.12% $ 31,987 4% $ 47,980 6% Tier I capital (to average assets): Consolidated $818,911 10.31% $317,807 4% N/A N/A R-G Premier Bank only $420,613 6.97% $241,337 4% $301,671 5% Crown Bank only $ 90,454 7.32% $ 49,457 4% $ 61,822 5% As of December 31, 2002 Total capital (to risk weighted assets): Consolidated $635,263 17.72% $286,857 8% N/A N/A R-G Premier Bank only $339,127 13.94% $194,582 8% $243,227 10% Crown Bank only $ 79,293 14.09% $ 45,031 8% $ 56,289 10% Tier I capital (to risk weighted assets): Consolidated $602,587 16.81% $143,429 4% N/A N/A R-G Premier Bank only $313,764 12.90% $ 97,291 4% $145,936 6% Crown Bank only $ 73,006 12.97% $ 22,515 4% $ 33,773 6% Tier I capital (to average assets): Consolidated $602,587 9.80% $246,061 4% N/A N/A R-G Premier Bank only $313,764 6.79% $184,823 4% $231,029 5% Crown Bank only $ 73,006 9.08% $ 32,159 4% $ 40,199 5%
Effective December 31, 2002, the federal banking regulatory agencies imposed a new dollar for dollar capital requirement on residual interests retained in sale or securitization transactions and a 25% limit on Tier 1 Capital that may consist of credit enhancing IO's. The capital ratios set forth above as of December 31, 2003 and 2002 include the impact of this capital rule. 17. STOCK OPTION PLAN The Company has a Stock Option Plan designed to attract and retain qualified personnel in key positions, provide officers and key employees with a proprietary interest in the Company as an incentive to contribute to the success of the Company, and reward key employees for outstanding performance and the attainment of targeted goals. An amount of Company common stock equal to 10% of the aggregate number of Class B Shares sold in the Company's initial public offering (241,500 shares, equivalent to 1,304,100 shares after giving effect to stock splits) was authorized under the Stock Option Plan, which may be filled by authorized but unissued shares, treasury shares or shares purchased by the Company on the open market or from private sources. The Stock Option Plan provides for the grant of stock options at an exercise price equal to the fair market value of the Class B shares at the date of the grant. Stock options are available for grant to key employees of the Company and any subsidiaries. No options were issued prior to the public offering. The maximum term of the options granted are ten years. Under the provisions of the Stock Option Plan, options can be exercised as follows: 20% after one year, 40% after two years, 60% after three years, 80% after four years and 100% after five years. P.76 Stock options granted, cancelled and exercised during 2001, 2002 and 2003 were as follows (as adjusted to reflect stock split on January 29, 2004):
weighted average price ------------- Outstanding stock options, January 1, 2001 1,105,200 $ 3.83 Granted 75,000 $ 10.00 Exercised (622,080) $ 2.81 Cancelled (18,000) $ 10.83 Outstanding stock options, December 31, 2001 540,120 $ 5.64 Exercised (258,900) $ 2.75 Cancelled - $ - Outstanding stock options, December 31, 2002 281,220 $ 8.02 Granted 18,750 $ 14.57 Exercised (74,520) $ 2.68 Cancelled - $ - Outstanding stock options, December 31, 2003 225,450 $ 10.33
Outstanding stock options excercisable at December 31, 2003 amount to 108,600 at prices ranging from $2.68 to $10.75. Outstanding stock options at December 31, 2003 have a remaining weighted average contractual life of 6.25 years. The Company follows the disclosure only provisions of SFAS No. 123 - "Accounting for Stock-Based Compensation" (SFAS 123) and thus, no compensation cost has been recognized for the Company's Stock Option Plan. Had compensation cost for the Company's Stock Option Plan been determined based on the fair value of the options at the grant date consistent with the provisions of SFAS 123, the Company's net earnings and earnings per share for the years ended December 31, 2003, 2002 and 2001 would have been reduced to the pro-forma amounts indicated below:
2003 2002 2001 ------------- ------------ ------------ Net earnings - as reported $ 131,023,565 $ 96,342,156 $ 65,970,843 Net earnings - pro forma $ 130,921,253 $ 96,187,642 $ 65,816,329 Basic earnings per share - as reported $ 2.26 $ 1.67 $ 1.25 Basic earnings per share - pro forma $ 2.25 $ 1.67 $ 1.25 Diluted earnings per share - as reported $ 2.25 $ 1.66 $ 1.22 Diluted earnings per share - pro forma $ 2.24 $ 1.65 $ 1.22
18. PROFIT SHARING PLAN The Company has a profit sharing plan (the Plan) which covers substantially all regular employees. Annual contributions to the Plan are based on matching percentages up to 5% of employee salaries, based on the employee's years of service and on operational income, as defined by the Plan, and are deposited in a trust. Contributions to the Plan during the years ended December 31, 2003, 2002 and 2001 amounted to approximately $382,000, $288,000 and $257,000, respectively. The Company and its subsidiaries have no post retirement benefit plans for its employees. R-G FINANCIAL 2003 ANNUAL REPORT P. 77 19. COMMITMENTS AND CONTINGENCIES Commitments to buy and sell GNMA certificates and mortgage loans As of December 31, 2003, the Company had open commitments to issue GNMA certificates in the amount of approximately $75.3 million. In addition, the Company had commitments to sell mortgage loans to third party investors amounting to approximately $312.9 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 year ended December 31, 2003. LEASE COMMITMENTS The Company is obligated under several noncancellable 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. As of December 31, 2003, minimum annual rental commitments under noncancellable operating leases for certain office space and equipment, including leases with an affiliate, were as follows:
Year Amount ---- ------ 2004 $ 6,237,148 2005 5,142,081 2006 4,581,945 2007 4,226,277 2008 3,316,337 Later years 15,744,778 ------------ $ 39,248,566 ============
Rent expense amounted to approximately $8,829,000 in 2003, $7,185,000 in 2002 and $5,752,000 in 2001. LITIGATION The Company is a defendant in legal proceedings arising from normal business activities. Management believes, based on the opinion of legal counsel, that the final disposition of these matters will not have a material adverse effect on the Company's financial position or results of operations. OTHERS At December 31, 2003, the Company is liable under limited recourse provisions resulting from the sale of residential mortgage loans to several third party investors, principally FHLMC. The principal balance of these loans, which are serviced by the Company, amounts to approximately $1.1 billion at December 31, 2003. As of December 31, 2003 the Company has an allowance for recourse provisions of $4.0 million included under accounts payable and accrued liabilities in its Consolidated Statements of Financial Condition. 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, the Company formed R&G Capital Trust III, which issued $100 million of trust preferred securities in a public offering (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. 20. SUPPLEMENTAL DISCLOSURE ON THE STATEMENTS OF CASH FLOWS During 2003, 2002 and 2001, the Company paid interest amounting to approximately $189,491,000, $183,704,000 and $177,254,000, respectively, and income taxes of approximately $24,860,000, $13,348,000 and $7,409,000, respectively. 21. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK In the normal course of business, the Company uses various off-balance sheet financial instruments to satisfy the financing needs of its customers, mostly loan commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial condition. The contract or notional amounts of these instruments, which are not included in the statements of financial condition, are an indicator of the Company's activities in particular classes of financial instruments. Unused lines of credit and commitments to extend financial standby letters of credit totaled $194.5 million and $15.3 million, respectively, as of December 31, 2003. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Contractual commitments to extend credit are legally binding agreements to lend money to customers at predetermined interest rates for a specified period of time. Since many of the loan commitments may expire without P.78 being drawn upon, the total commitment amount does not necessarily represent future cash requirements. To extend credit the Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. A geographic concentration exists within the Company's mortgage loans portfolio since most of the Company's business activity is with customers located in Puerto Rico. 22. INTEREST RATE RISK MANAGEMENT As part of its interest rate risk management, the Company enters into interest rate caps and swaps. Interest rate swap agreements involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal. Entering into interest rate agreements involves the risk of dealing with counterparties and their ability to meet the terms of the contracts, and also the interest rate risk associated with unmatched positions. For interest rate swaps, the contract or notional amounts do not represent exposure to credit loss. Instead, the amount potentially subject to credit loss is substantially less. A detail of interest rate swaps by contractual maturity at December 31, 2003 follows. Expected maturities will differ from contractual maturities because counterparties to the agreements may have the right to call the swaps.
notional pay fixed receive designation/ Call Hedged item amount maturity rate rate floating description option - ----------- ----------- ----------------- --------- ------------- ------------------ --------------------------------- Repurchase agreements $15,000,000 February 6, 2006 4.80% 3 month Libor cash flow hedge callable quarterly after one year FHLB Advance 50,000,000 February 6, 2006 4.67 3 month Libor cash flow hedge callable quarterly after one year Long-term debt 25,000,000 April 22, 2007 8.77 6 month Libor cash flow hedge N/A Repurchase agreements 70,000,000 December 8, 2009 5.60 3 month Libor cash flow hedge callable quarterly after one year N/A 10,000,000 December 15, 2009 5.69 3 month Libor trading derivative callable quarterly after one year
The following table summarizes the changes in notional amounts of swaps outstanding during 2003: ~~Beginning balance $ 180,000,000 New swaps - Maturities (10,000,000) ------------- Ending balance $ 170,000,000 -------------~~

As of December 31, 2003, interest rate swap maturities are as follows: ~~2006 $ 65,000,000 2007 25,000,000 2009 80,000,000 ------------ $170,000,000 ------------~~

Net interest settlements on swap agreements are recorded as an adjustment to interest expense on notes payable and repurchase agreements. Net interest paid during 2003, 2002 and 2001 amounted to approximately $6,576,000, $5,685,000 and $1,727,000, respectively. R-G FINANCIAL 2003 ANNUAL REPORT P. 79 At December 31, 2003 and 2002, swap agreement designated as cash flow hedges had a negative fair value of $14,373,000 and $18,011,000, respectively, that has been recorded as a liability in the accompanying consolidated statements of financial condition. For the years ended December 31, 2003, 2002 and 2001, mark-to-market gains (losses) of $307,000, ($176,000) and ($1,503,000) respectively, were recorded in the accompanying consolidated statements of income related to swaps designated as trading. Also, unrealized gains (losses) related to the fair value of swaps designated as cash flow hedges amounting to approximately $3,638,000, ($9,975,000) and ($9,947,000) were recorded as part of other comprehensive income in the consolidated statements of stockholders' equity at December 31, 2003, 2002 and 2001, respectively. The Company had no contemplated transactions or other events that could result in the reclassification into earnings of gains or losses that are reported in other comprehensive income. The Company purchases various interest rate caps to limit its exposure to rising interest rates. Under these agreements, the Company pays an up front premium or fee for the right to receive cash flow payments in excess of the predetermined cap rate; thus, effectively capping its interest rate cost for the duration of the agreement. The following table summarizes interest rate caps outstanding at December 31, 2003 (dollars in thousands).
Notional Amount Maturity Date Corridor Fair Value - -------- ------------- -------- ---------- $ 50,000 May 2008 4%-7% $ 1,079 25,000 July 2008 4%-7% 579 25,000 September 2008 4%-7% 626 50,000 September 2008 4%-6% 1,013
As of December 31, 2003, the Company has designated these interest rate cap agreements as trading derivatives. The fair value of the interest rate caps, totaling approximately $3,297,000, has been recorded as other assets in the accompanying consolidated statements of financial condition; changes in the fair value of the interest rate caps are reported as trading gains or losses in the consolidated statements of income. Trading losses during 2003 related to interest rate cap agreements amounted to approximately $135,000; no gains or losses were recorded in 2002 or 2001. 23. SUPPLEMENTAL INFORMATION ON BUSINESS COMBINATION As discussed on Note 1 to the consolidated financial statements, on June 7, 2002 the Company acquired 100% of the common stock of The Crown Group, Inc. and its wholly-owned federal savings bank subsidiary, Crown Bank, F.S.B., for an aggregate of $100 million in cash. The condensed balance sheet of the acquired entity detailing the amounts assigned to each major asset and liability at the time of acquisition follows:
(Dollars in thousands) ---------------------- ASSETS Cash $ 36,321 Loans held for sale 14,721 Investment securities 80,585 Loans receivable, net 464,774 Premises and equipment 12,899 Other assets 103,045 --------- $ 712,345 ========= LIABILITIES AND STOCKHOLDER'S EQUITY Deposits $ 468,138 Borrowings 138,203 Other liabilities and accrued expenses 6,004 Stockholder's equity 100,000 --------- $ 712,345 =========
P. 80 The supplemental pro forma consolidated income statement information as though the business combination had been completed as of January 1, 2001 follows:
Year ended December 31, (dollars in thousands except for per share data) ------------------------------------------------------------------------ 2002 2001 ---------------------- ---------------------- As reported Pro forma As reported Pro forma ----------- --------- ----------- --------- Net interest income after provision for loan losses $135,069 $141,206 $ 85,920 $ 98,126 Non-interest income 149,170 153,567 109,047 120,396 -------- -------- -------- -------- Total revenues $284,239 $294,773 $194,967 $218,522 -------- -------- -------- -------- Non-interest expenses $159,238 $170,784 $107,072 $130,559 -------- -------- -------- -------- Income before extraordinary items and cumulative effect of change in accounting principle $ 96,342 $ 95,678 $ 66,294 $ 66,351 -------- -------- -------- -------- Net income $ 96,342 $ 95,678 $ 65,971 $ 66,028 -------- -------- -------- -------- Earnings per common share before cumulative effect of change in accounting principle: Basic $ 1.67 $ 1.66 $ 1.26 $ 1.26 Diluted $ 1.66 $ 1.65 $ 1.23 $ 1.23 Earnings per common share: Basic $ 1.67 $ 1.66 $ 1.25 $ 1.25 Diluted $ 1.66 $ 1.65 $ 1.22 $ 1.23
24. 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 follow:
Year Ended December 31, -------------------------------------------------------- 2003 2002 2001 ------------ ------------ ------------ Employee costs $ 99,385,815 $ 71,829,758 $ 56,181,507 ------------- ------------ ------------ Other administrative and general expenses $ 138,350,638 $ 99,785,058 $ 62,000,927 ------------- ------------ ------------
R-G FINANCIAL 2003 ANNUAL REPORT P. 81 Set forth below are the direct loan origination costs that were capitalized as part of the carrying cost of mortgage loans inventory or offset against mortgage loan sales and fees and interest income.
Year Ended December 31, ------------------------------------------ 2003 2002 2001 ------------ ------------ ------------ Offset against mortgage loan sales and fees $ 10,099,266 $ 11,072,074 $ 6,263,810 ----------- ------------ ------------ Offset against interest income on loans $ 7,097,732 $ 4,603,135 $ 4,243,213 ------------ ------------ ------------ Capitalized as part of loans held for sale and loans held for investment $ 25,468,836 $ 16,332,620 $ 17,251,866 ------------ ------------ ------------
25. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments is the amount at which the instruments may be exchanged in a current transaction between willing parties. The estimated fair value of the Company's financial instruments as of December 31 are as follows:
December 31, (dollars in thousands) ---------------------------------------------------- 2003 2002 ------------------------ ------------------------ Amortized Fair Amortized Fair cost value cost value ---------- ---------- ---------- ---------- FINANCIAL ASSETS Cash and due from banks $ 114,916 $ 114,916 $ 128,086 $ 128,086 Time deposits with other banks 34,349 34,349 65,401 65,401 Securities purchased under agreements to resell 85,052 85,052 - - Mortgage loans held for sale 315,691 324,586 258,738 265,502 Mortgage-backed securities held for trading 38,355 38,355 74,757 74,757 Investment and mortgage-backed securities available for sale 3,020,647 3,020,647 2,472,576 2,472,576 Investment in Federal Home Loan Bank stock 100,461 100,461 84,337 84,337 Investment and mortgage-backed securities held to maturity 78,200 80,188 75,591 76,810 Loans, net 4,048,507 4,180,796 2,759,689 2,928,281 Accounts receivable and accrued interest 80,722 80,722 72,501 72,501 Trading derivative instruments 3,297 3,297 - - FINANCIAL LIABILITIES Deposits: Non-interest bearing demand $ 394,273 $ 394,273 $ 390,355 $ 390,355 Savings and NOW accounts 896,809 848,176 764,534 768,926 Certificates of deposit 2,264,683 2,272,114 1,647,435 1,669,561 Securities sold under agreements to repurchase 2,220,795 2,213,759 1,489,758 1,513,860 Notes payable 192,259 192,259 194,607 194,607 Advances from FHLB 1,129,600 1,132,664 940,725 977,339 Other borrowings 157,670 158,098 45,065 45,343 Accounts payable and accrued liabilities 158,006 158,006 134,426 134,426 Trading derivative instruments 1,278 1,278 1,584 1,584 Derivative instruments accounted for as cash flow hedges 14,373 14,373 18,011 18,011 Forward sales commitments 12 12 - -
P.82 The following methods and assumptions were used to estimate the fair value of each class of financial instruments: SHORT-TERM FINANCIAL INSTRUMENTS Short-term financial instruments, which include cash and due from banks, money market investments, securities purchased under agreements to resell, accounts receivable and accrued interest, a portion of securities sold under agreements to repurchase, warehousing lines included in notes payable and accounts payable and accrued interest, have been valued at their carrying amounts reflected in the Consolidated Statements of Financial Condition as these are reasonable estimates of fair value given the relatively short period of time between origination of the instruments and their expected realization. INVESTMENT SECURITIES The fair value of investment securities is based on quoted market prices or dealer quotes except for the investments in FHLB stock which is valued at its redemption value. LOANS The fair value for loans has been estimated for groups of loans with similar financial characteristics. Loans were classified by type such as commercial, commercial real estate, residential mortgage, and consumer. These asset categories were further segmented into various maturity groups, and by accruing and non-accruing groups. The fair value of accruing loans was calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. Prepayment experienced in previous periods when interest rates were at levels similar to current levels was assumed to occur for mortgage loans, adjusted for any differences in the outlook of interest rates. Other loans assume little or no prepayments. Non-accruing loans were assumed to be repaid after one year. Presumably this would occur either because the loan is repaid or collateral has been sold to satisfy the loan. The value of non-accruing loans was therefore discounted for one year at the going rate for new loans. Mortgage loans held for sale have been valued based on market quotations or committed selling prices in the secondary market. Loans held for sale from the Bank have been valued using the same methodology described in the first paragraph above. DEPOSITS The fair value of deposits with no stated maturity, such as non-interest bearing checking accounts, is equal to the amount payable on demand. The fair value of savings, money market and NOW accounts, as well as certificates of deposit, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates of deposits do not include the fair value of core deposits intangible. BORROWINGS The fair value of non short-term securities sold under agreements to repurchase, notes payable, advances from FHLB, trust preferred securities and other borrowings, was determined using discounted cash flow analysis over the remaining term of the obligations using market rates for similar instruments. INTEREST RATE SWAP AND CAP AGREEMENTS The fair value of interest rate swap and cap agreements was determined taking into account interest rates at December 31, 2003 and 2002. This value represents the estimated amount the Company would pay to terminate the contract or agreement taking into account current interest rates and, when appropriate, the current credit worthiness of the counterparties. LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the fair values presented do not attempt to estimate the value of the Company's fee generating businesses and anticipated future business activities, that is, they do not represent the Company's value as a going concern. Furthermore, the differences between the carrying amounts and the fair values presented may not be realized since, in many cases, the Company generally intends to hold these financial instruments to maturity and realize the recorded values. Reasonable comparability of fair values among financial institutions is not likely due to the wide range of permitted valuation techniques and numerous estimates that must be made in the absence of secondary market prices. This lack of objective pricing standards introduces a greater degree of subjectivity to these derived or estimated fair values. Therefore, while disclosure of estimated fair values of financial instruments is required, readers are cautioned in using this data for purposes of evaluating the financial condition of the Company. R-G FINANCIAL 2003 ANNUAL REPORT P. 83 26. R-G FINANCIAL CORPORATION (HOLDING COMPANY ONLY) FINANCIAL INFORMATION The following condensed financial information presents the financial position of R-G Financial Corporation (the "Holding Company") only as of December 31, 2003 and 2002 and the results of its operations and its cash flows for each of the three years ended on December 31, 2003:
December 31, ---------------------------- STATEMENTS OF FINANCIAL CONDITION 2003 2002 - --------------------------------- ------------ ------------ ASSETS Cash $ 25,923,299 $ 16,213,087 Mortgage-backed and investment securities held to maturity, at amortized cost (market value: 2003 - $27,372,667; 2002 - $35,739,706) 26,773,215 35,166,516 Investment securities available for sale, at fair value - 48,617 Investment in preferred stocks of subsidiaries 100,000,000 - Investment in R-G Premier Bank, at equity 359,136,821 341,344,348 Investment in R-G Acquisition Holdings Corporation, at equity 103,320,713 87,441,650 Investment in R-G Mortgage, at equity 226,365,947 188,519,169 Investment in Home & Property Insurance Corp., at equity 13,715,386 8,221,475 Investment in R-G Investment Corporation, at equity 5,523,089 4,439,908 Investment in R-G International Corp., at equity 1,496,450 500,000 Investment in R-G Portfolio Management Corporation, at equity 1,000,000 - Investment in R-G Capital Trust III common stock 3,092,783 - Accrued interest receivable 257,465 174,029 Accounts receivable - subsidiaries 9,038,109 11,219,953 Other assets 4,928,411 148,371 ------------ ------------ Total assets $880,571,688 $693,437,123 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Advances from subsidiaries $ 26,492,245 $ 30,381,040 Other liabilities and accrued expenses 634,033 837,905 Long-term debt 103,092,783 - Stockholders' equity 750,352,627 662,218,178 ------------ ------------ Total liabilities and stockholders' equity $880,571,688 $693,437,123 ============ ============

Year Ended December 31, -------------------------------------------- STATEMENTS OF INCOME 2003 2002 2001 - -------------------- ------------ ------------ ------------ Income: Interest income $ 1,735,106 $ 2,428,039 $ 1,006,040 Dividend income on preferred stock from subsidiaries 1,544,444 - - Other 1,157,956 902,558 549,382 ------------ ------------ ------------ 4,437,506 3,330,597 1,555,422 Operating expenses 2,595,194 820,507 503,496 ------------ ------------ ------------ Income before income taxes and equity earnings in unconsolidated subsidiaries 1,842,312 2,510,090 1,051,926 Income taxes 41,867 25,000 17,803 ------------ ------------ ------------ Income before equity earnings in unconsolidated subsidiaries 1,800,445 2,485,090 1,034,123 Equity earnings in unconsolidated subsidiaries: Bank 73,659,269 49,768,507 37,653,767 Non-bank 55,563,851 44,088,559 27,282,953 ------------ ------------ ------------ Net income $131,023,565 $ 96,342,156 $ 65,970,843 ============ ============ ============
The Holding Company had no operations during the years ended December 31, 2003, 2002 and 2001. The principal source of income for the Holding Company consists of dividends from R-G Premier Bank of Puerto Rico and R-G Mortgage Corp. The payment of dividends by the Bank to the Holding Company may be affected by certain regulatory requirements and policies, such as the maintenance of certain minimum capital levels. P.84
Year Ended December 31, ------------------------------------------------- STATEMENTS OF CASH FLOWS 2003 2002 2001 - ------------------------ ------------- ------------- ------------- Cash flows from operating activities: Net income $ 131,023,565 $ 96,342,156 $ 65,970,843 Adjustments to reconcile net income to cash (used in) provided by operating activities: Amortization of premium on investment securities 140,029 136,376 - Equity earnings in unconsolidated subsidiaries (129,223,120) (93,857,066) (64,936,720) (Increase) decrease in accounts receivable - subsidiaries 2,181,844 4,039,289 (15,241,378) (Increase) decrease in other assets (1,243,026) 197,226 (353,839) (Decrease) increase in other liabilities and accrued expenses (204,623) 665,656 41,237 ------------- ------------- ------------- Total adjustments (128,348,896) (88,818,519) (80,490,700) ------------- ------------- ------------- Net cash provided by (used in) operating activities 2,674,669 7,523,637 (14,519,857) ------------- ------------- ------------- Cash flows from investing activities: Purchase of investment securities (10,446,728) (25,613,272) (36,382,555) Proceeds from sales of investment securities available for sale 48,617 21,599,255 - Principal repayments on and redemptions of investment securities 18,700,000 4,750,000 295,063 Investment in R-G Portfolio Management Corporation (1,000,000) - - Investments in R-G Acquisition Holdings Corporation common stock (15,794,596) (94,551,561) - Investments in Home & Property common stock - - (1,500,000) Investments in R-G Premier common stock (15,000,000) (31,199,569) (35,000,000) Investments in R-G Investment Corporation common stock (1,200,000) (5,000,000) (1,500,000) Investments in R-G International Corp. common stock (1,000,000) - (500,000) Investment in preferred stocks of subsidiaries (100,000,000) - - Dividends on common stock from subsidiaries 70,895,120 25,957,877 17,817,222 ------------- ------------- ------------- Cash used in investing activities (54,797,587) (104,057,270) (56,770,270) ------------- ------------- ------------- Cash flows from financing activities: Issuance of common stock 237,495 46,132,787 32,877,745 Net proceeds from issuance of long-term debt 96,379,550 - - Net proceeds from issuance of preferred stock - 66,590,747 66,601,925 Cash dividends (30,895,120) (25,957,877) (17,817,222) Net (repayments) advances from subsidiaries (3,888,795) (3,795,960) 19,177,000 ------------- ------------- ------------- Net cash provided by financing activities 61,833,130 82,969,697 100,839,448 ------------- ------------- ------------- Net increase (decrease) in cash 9,710,212 (13,563,936) 29,549,321 Cash at beginning of year 16,213,087 29,777,023 227,702 ------------- ------------- ------------- Cash at end of year $ 25,923,299 $ 16,213,087 $ 29,777,023 ============= ============= =============
R-G FINANCIAL 2003 ANNUAL REPORT P. 85 27. INDUSTRY SEGMENTS The following summarized financial information presents the results of the Company's operations for each of the three years ended December 31, 2003 for its traditional banking and mortgage banking activities:
2003 ------------------------------------------------------------ Mortgage Segment Banking Banking Other Totals ------------ ------------ ------------ ------------ REVENUES: Net interest income after provision for loan losses $152,469,668 $ 14,485,254 $ 757,332 $167,712,254 Non-interest income: Net gain on origination and sale of loans 46,402,174 101,952,232 - 148,354,406 Loan administration and servicing fees - 51,107,371 - 51,107,371 Service charges, fees and other 13,242,460 1,303,029 15,947,343 30,492,832 ------------ ------------ ------------ ------------ 212,114,302 168,847,886 16,704,675 397,666,863 ------------ ------------ ------------ ------------ NON-INTEREST EXPENSES: Employee compensation and benefits 37,114,036 23,325,742 3,145,100 63,584,878 Office occupancy and equipment 17,034,918 7,336,946 389,069 24,760,933 Other 41,512,287 90,086,039 2,357,101 133,955,427 ------------ ------------ ------------ ------------ 95,661,241 120,748,727 5,891,270 222,301,238 ------------ ------------ ------------ ------------ Income before income taxes $116,453,061 $ 48,099,159 $ 10,813,405 $175,365,625 ============ ============ ============ ============
The following is a reconciliation of reportable segment revenues and income before income taxes to the Company's consolidated amounts:
Year Ended December 31, ------------------------------------------------- 2003 2002 2001 ------------- ------------- ------------- Revenues: Total revenues for reportable segments $ 397,666,863 $ 286,296,191 $ 199,081,343 Elimination of intersegment revenues (6,154,677) (4,460,799) (5,120,252) Corporate revenues 1,714,669 2,404,008 1,006,040 ------------- ------------- ------------- Total consolidated revenues $ 393,226,855 $ 284,239,400 $ 194,967,131 ============= ============= =============

Year Ended December 31, ------------------------------------------------ 2003 2002 2001 ------------- ------------- ------------- Income before income taxes: Total income before income taxes for reportable segments $ 175,365,625 $ 123,258,403 $ 88,484,896 Elimination of intersegment (profits) costs (1,106,751) 159,611 (1,092,364) Unallocated corporate (expenses) income, net (863,571) 1,583,501 502,544 ------------- ------------- ------------- Income before income taxes, consolidated $ 173,395,303 $ 125,001,515 $ 87,895,076 ============= ============= =============
P.86
2002 ------------------------------------------------------ Mortgage Segment Banking Banking Other Totals ------------ ------------ ------------ ------------ REVENUES: Net interest income after provision for loan losses $114,393,807 $ 18,428,547 $ 9,290 $132,831,644 Non-interest income: Net gain on origination and sale of loans 23,741,648 61,796,484 - 85,538,132 Loan administration and servicing fees - 49,038,894 - 49,038,894 Service charges, fees and other 8,621,984 1,993,029 8,272,508 18,887,521 ------------ ------------ ------------ ------------ 146,757,439 131,256,954 8,281,798 286,296,191 ------------ ------------ ------------ ------------ NON-INTEREST EXPENSES: Employee compensation and benefits 25,887,852 17,723,778 1,632,746 45,244,376 Office occupancy and equipment 12,900,045 6,372,644 358,209 19,630,898 Other 28,997,949 67,804,660 1,359,905 98,162,514 ------------ ------------ ------------ ------------ 67,785,846 91,901,082 3,350,860 163,037,788 ------------ ------------ ------------ ------------ Income before income taxes $ 78,971,593 $ 39,355,872 $ 4,930,938 $123,258,403 ============ ============ ============ ============ 2001 ------------------------------------------------------ Mortgage Segment Banking Banking Other Totals ------------ ------------ ------------ ------------ REVENUES: Net interest income after provision for loan losses $ 71,695,814 $ 13,582,462 $ - $ 85,278,276 Non-interest income: Net gain on origination and sale of loans 27,391,951 35,119,978 - 62,511,929 Loan administration and servicing fees - 35,935,370 - 35,935,370 Service charges, fees and other 7,879,251 2,655,998 4,820,519 15,355,768 ------------ ------------ ------------ ------------ 106,967,016 87,293,808 4,820,519 199,081,343 ------------ ------------ ------------ ------------ NON-INTEREST EXPENSES: Employee compensation and benefits 16,514,946 16,071,621 703,805 33,290,372 Office occupancy and equipment 10,654,129 5,848,499 145,882 16,648,510 Other 20,516,364 39,540,600 600,601 60,657,565 ------------ ------------ ------------ ------------ 47,685,439 61,460,720 1,450,288 110,596,447 ------------ ------------ ------------ ------------ Income before income taxes $ 59,281,577 $ 25,833,088 $ 3,370,231 $ 88,484,896 ============ ============ ============ ============
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 December 31, 2003 and 2002 follows:
December 31, ----------------------------------- 2003 2002 --------------- --------------- Assets: Banking $ 7,387,475,155 $ 5,453,320,931 Mortgage Banking 890,022,358 908,660,313 Other 168,294,162 111,004,542 Total assets for reportable segments 8,445,791,675 6,472,985,786 Parent company assets 66,920,499 62,970,573 Elimination of intersegment balances (313,832,667) (258,710,678) --------------- --------------- Consolidated total assets $ 8,198,879,507 $ 6,277,245,681 =============== ===============
R-G FINANCIAL 2003 ANNUAL REPORT P. 87 28. QUARTERLY FINANCIAL DATA (UNAUDITED): Following is a summary of selected financial information of the unaudited quarterly results of operations. In the opinion of management, all adjustments necessary for a fair presentation have been made.
(dollars in thousands, except for per share data) ------------------------------------------------------ 2003 March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- Interest income $ 88,256 $ 92,558 $ 95,347 $ 102,017 Interest expense (46,035) (47,989) (47,604) (48,567) --------- --------- --------- --------- Net interest income 42,221 44,569 47,743 53,450 Provision for loan losses (4,220) (4,444) (4,292) (5,600) --------- --------- --------- --------- Income before income taxes 38,548 42,052 45,644 47,151 Income tax expense (9,407) (10,602) (11,352) (11,011) --------- --------- --------- --------- Net income 29,141 31,450 34,292 36,140 ========= ========= ========= ========= Earnings per common share - Basic $ 0.49 $ 0.54 $ 0.59 $ 0.64 Earnings per common share - Diluted $ 0.49 $ 0.54 $ 0.59 $ 0.63

(dollars in thousands, except for per share data) --------------------------------------------------- 2002 March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- Interest income $ 72,719 $ 77,615 $ 88,912 $ 91,615 Interest expense (40,714) (41,566) (47,602) (47,890) -------- -------- -------- -------- Net interest income 32,005 36,049 41,310 43,725 Provision for loan losses (5,000) (4,550) (3,970) (4,500) -------- -------- -------- -------- Income before income taxes 27,695 29,337 32,067 35,903 Income tax expense (6,162) (6,718) (7,019) (8,761) -------- -------- -------- -------- Net income 21,533 22,619 25,048 27,142 ======== ======== ======== ======== Earnings per common share - Basic $ 0.39 $ 0.40 $ 0.43 $ 0.45 Earnings per common share - Diluted $ 0.39 $ 0.39 $ 0.42 $ 0.45
P. 88 GENERAL INQUIRIES & REPORTS R-G Financial is required to file an annual report on Form 10K for its fiscal year ended December 31, 2003 with the Securities and Exchange Commission. Copies of its Annual Report and Quarterly Reports may be obtained without charge through our investors relations page in our website or by contacting our Investor Relations Department, Attention Ms. Llamara Cruz at 787-756-2801. STOCK LISTINGS Common RGF-NYSE Preferred RGFCP-NASDAQ RGFCO-NASDAQ RGFCN-NASDAQ RGFCM-NASDAQ At December 31, 2003, the Company had 149 stockholders of record, which does not take into consideration approximately 6,000 investors who hold their stock through brokerage and other firms. The high and low prices and dividends paid per share for the Company's Class B common stock during each quarter of the last two fiscal years, adjusted for our 3 for 2 stock split paid in January 2004, were as follows:
MAR 31 JUN 30 SEPT 30 DEC 31 MAR 31 JUN 30 SEPT 30 DEC 31 2003 2003 2003 2003 2002 2002 2002 2002 ------ ------ ------- ------ ------ ------ ------- ------ High 15.46 20.23 21.85 26.73 14.77 16.83 15.93 16.62 Low 14.43 14.82 18.10 19.93 10.93 12.55 12.73 13.00 Dividends Paid 0.0657 0.0707 0.0760 0.0817 0.0510 0.0542 0.0576 0.0613
P. 90 EX-14 4 g87693exv14.txt EX-14 CODE OF ETHICS EXHIBIT 14.0 R & G FINANCIAL CORPORATION CODE OF ETHICS STANDARDS OF PERSONAL CONDUCT I. PURPOSE This policy establishes the standards of ethical business behavior and personal conduct for officers, directors and employees of R&G Financial Corporation and its subsidiaries. Fundamental to our continued success is the perpetuation of integrity and the highest ethical standards. The intent of this policy is to safeguard R&G's tradition of strong moral, ethical and social standard of conduct. II. SCOPE This policy applies to all officers, directors and employees of R&G. III. OVERALL POLICY R&G, as a business built upon public trust and confidence, depends upon a favorable perception of conduct of its business by customers, federal and state regulators, stockholders, and others in both the business and general community. It is imperative that each officer, director and employee of R&G views his/her business and personal actions, intentions and impressions upon others objectively. Each of us must assure that no one observing our actions, intentions or impressions would have reason to believe that even the slightest irregularity in conduct exists or could be implied. To this end, this policy will address twenty eight (28) specific areas that need immediate and continuing attention on the part of each officer, employee and director of R&G, as follows: 1. Equal Employment Opportunity. 2. Employee Relations. 3. Sexual and Unlawful Harassment. 4. Employment Applications. 5. Employment Reference Checks. 6. Life Threatening Illnesses in the Workplace. 7. Protection of Confidential Information. 8. Investments and Insider Trading. 9. Conflicts of Interest. 1 10. Outside Activities. 11. Board Directorships and Partnerships. 12. Improper Payments. 13. Money Laundering. 14. Trade Associations and Relations with Competitors. 15. Fair Dealing. 16. Separation of the Trust Department. 17. Advertising Policy. 18. Political Action Committees/Corporate Payments. 19. Public Statements. 20. Recommendations to Customers. 21. Financial Responsibility. 22. Personal Conduct. 23. Provision of Federal Legislation Prohibiting Bribery. 24. Employment of Institution Staff by Other Parties. 25. Protection and Proper Use of Company Assets. 26. Corporate Opportunities. 27. Standard for Disclosure of Information. 28. Other Personnel Standards. IV. COMPLIANCE WITH LAWS, RULES AND REGULATIONS Obeying the law, both in letter and in spirit, is the foundation on which R&G's ethical standards are built. All officers, directors and employees of R&G must respect and obey all federal, state and local laws, rules and regulations. Although not every individual is expected to know all the details of these laws, it is important to know enough to determine when to seek advice from supervisors, managers, company legal counsel or other appropriate personnel. If a law conflicts with a policy in this Code, you must comply with the law; however, if there is a conflict between the requirements of this Code and the customs or practices of a 2 particular area, you should consult with management and company legal counsel to determine the most appropriate course of action. V. SPECIFIC POLICIES 1. Equal Employment Opportunity a. In order to provide equal employment and advancement opportunities to all individuals, employment decisions at R&G will be based on merit, qualifications and abilities. R&G does not discriminate in employment opportunities or practices on the basis of race, color, religion, sex, national origin, age, disability, sexual orientation or any other characteristics protected by law. b. R&G will make reasonable accommodations for qualified individuals with known disabilities unless doing so would result in an undue hardship. This policy governs all aspects of employment, including selection, job assignment, compensation, discipline, separation and access to benefits and training. c. Any employees with questions or concerns about any type of discrimination in the workplace are encouraged to bring these issues to the attention of their respective Department Head or to the Human Resources Department. Employees can raise concerns and make reports without fear of reprisal. Anyone found to be engaging in any type of unlawful discrimination will be subject to disciplinary action, up to and including termination of employment. 2. Employee Relations a. R&G believes that the working conditions, compensation and benefits it offers are highly competitive with those offered by other employers in this area and in this industry. If employees have concerns about any aspect of their employment, they are strongly encouraged to voice these concerns openly and directly to their respective Department Head. b. Our experience has shown that when employees deal openly and directly with supervisors, the work environment can be excellent, communications can be clear and attitudes can be positive. We believe that R&G amply demonstrates its commitment to employees by responding effectively to employee concerns. 3. Sexual and Other Unlawful Harassment a. R&G is committed to providing a work environment that is free of discrimination and unlawful harassment. Actions, words, jokes or comments based on an individual's sex, race, ethnicity, age, religion or any other legally protected characteristic will not be tolerated. As an 3 example, sexual harassment (both overt and subtle) is a form of employee misconduct that is demeaning to another person, undermines the integrity of the employment relationship, and is strictly prohibited. b. Any employee who wants to report an incident of sexual or other unlawful harassment should promptly report the matter to any of the designated officers established in the Company's Human Resources Policy Manual. Employees can raise concerns and make reports without fear of reprisal. c. Any respective Department Head who becomes aware of possible sexual or other unlawful harassment should promptly advise the Director of Human Resources who will investigate the matter in a timely and confidential manner. Anyone engaging in sexual or other unlawful harassment will be subject to disciplinary action, up to and including termination of employment. 4. Employment Applications a. R&G relies upon the accuracy of information contained in the employment application, as well as the accuracy of other data presented throughout the hiring process and employment. Any misrepresentations, falsifications or material omissions in any of this information or data may result in our exclusion of the individual from further consideration for employment or if the person has been hired, termination of employment. 5. Employment Reference Checks a. To ensure that the individuals who join R&G are well qualified and have a strong potential to be productive and successful, it is the policy of R&G to check the employment references of all applicants. b. R&G will respond to reference check inquiries from other employers. Responses to such inquiries will confirm only dates of employment, compensation and position held at time of leavings, provided that the individual has given R&G written authorization and a release. 6. Life Threatening Illnesses in the Workplace a. Employees with life threatening illnesses, such as cancer, heart disease, and AIDS, often wish to continue their normal pursuits, including work, to the extent allowed by their condition. R&G supports these endeavors as long as employees are able to meet acceptable performance standards. As in the case of other disabilities, R&G will make reasonable accommodations in accordance with all legal requirements, to allow qualified employees with life threatening illnesses to perform the essential functions of their jobs. 4 b. Medical information on individual employees is treated as confidential. R&G will take reasonable precautions to protect such information from inappropriate disclosure. Managers and other employees have a responsibility to respect and maintain the confidentiality of employee medical information. Anyone inappropriately disclosing such information is subject to disciplinary action, up to and including termination of employment. c. Employees with questions or concerns about life threatening illnesses are encouraged to contact the Director of Human Resources for information and referral to appropriate services and resources. 7. Protection of Confidential Information a. Financial institutions by their very name are privy to a variety of confidential information which includes plans, forecasts, decisions, problems, capabilities, intentions, contingencies and timing of actions by many individual and company clients of R&G, and R&G itself. The proper use of this type of information is to enable sound business decisions to be made by R&G personnel regarding either the business of a client, prospective client or R&G itself. b. Under no circumstances will confidential information be used for the personal benefit of an officer, director or employee. To do so violates statutes and the policy of R&G. In addition to the penalties imposed by any statutes, such actions, if proven, will subject the officer, director or employee to removal from his/her position. The general rule is that such confidential information not be divulged to any person outside R&G, except for attorneys or other agents in furtherance of a legitimate business objective. This would include a family member or associate of any officer, director or employee. It applies even to other members of R&G staff unless that person has a need to know in discharging his/her duties. It is understood that all sensitive information that R&G has is considered confidential to R&G and R&G's activities. This includes electronic records containing such information. All officers, directors and employees of R&G, as well as attorneys or other agents, are bound to maintain the confidentiality of R&G's sensitive information. Management, from time to time to the extent required or otherwise deemed appropriate, can request attorneys or other agents to sign a nondisclosure agreement. c. No financial or other information regarding R&G or any of its activities that could reasonably be expected to affect R&G's position in the general community is to be related to any person not employed by R&G Financial, and other types of information that are normally disclosed to the public as part of disclosure requirement applicable to publicly held companies are 5 not to be related to any person not an officer, director, employee or responsible agent working on R&G's behalf until it has been published in reports to stockholders or otherwise made available to the general public in accordance with specific procedures established by R&G for the dissemination of such information. d. Information regarding current or former employees is confidential. e. Inquiries for such information, whether by tax authorities, law enforcement agencies, attorneys or private parties involved in litigation, must not be divulged unless R&G has received either the written consent of the customer, employee, officer or shareholder or the appropriate court order or subpoena and release has been authorized under normal operational procedures. f. The protection of the confidentiality of customer provided information is the responsibility of R&G. Refer to R&G Customer Confidentiality policies for specific standards, requirements and guidelines. 8. Investments and Insider Trading a. No investment interests, direct or indirect, in any of R&G's customers or suppliers are permitted except as outlined below in paragraphs b and c. Any exceptions must be approved in advance and in writing by the Chairman of the Board or President. This prohibition applies to all officers, directors, and employees and their families and to all forms of investment including, but not limited to, securities, investment in a proprietorship, joint venture or similar business activities. Investments that qualify as material should be promptly reported to the Chairman of the Board or the President. Officers may be asked to disclose such information in an annual statement. b. Investments are permitted in companies who are customer and/or suppliers if such securities are listed on an organized exchange or are traded in the over the counter market or if it is otherwise evident and clear that such investments are not being made on any terms that are more favorable than those terms available to the general public; subject, however, to the following restrictions: i. Caution should be exercised by each officer, director or employee to assure that the nature and amount of such permitted investments are in such amounts as are prudent for a person maintaining a conservative and passive investment. ii. Acceptance of an allocation of securities from a broker or investment banker that are or become "hot" issues may involve or lead to the perception of favorable treatment and is therefore prohibited. 6 c. Investments in "limited partnership interests" will be permitted if it is evident that such investments are not being made on terms more favorable than those that are available to the general public. In the case of "limited partnership investments" an individual's investment should be only one of several such interests sold to the general public and in such amounts as are consistent with a conservative and passive investment. d. R&G has adopted an Insider Trading Policy which specifically governs trading in the securities of R&G. All officers and employees must follow the Company's Insider Trading Policy. 9. Conflicts of Interest a. Officers, directors and employees of R&G are expected to conduct their private business and personal activities in a manner that avoids a conflict of interest either with R&G or R&G's customers. "Conflict of interest" is defined as any situation where an individual has two or more duties or interests that are mutually incompatible. Example: An officer, director or employee has a personal financial interest in a business or venture that conducts business with R&G. That individual's judgment might reasonably be influenced by that non-bank relationship. No lending officer or employee should loan, review a loan or make any decision regarding a loan of any customer, syndicate or corporation in which he or she has a present or a prospective financial interest. b. No officer, director or employee nor any member of his/her family (including spouse, parents, children, brothers, sisters or other immediate relatives) shall solicit, accept or retain any personal benefit from any of the following: i. A customer of R&G. ii. Any individual or organization that is, or seeks to be a borrower, supplier or competitor of R&G. A personal benefit is defined as any type of gift, favor, service, loan, fee or other compensation. Exceptions to those prohibitions are limited strictly to normal business courtesies where there is no concealment and where no improper influence to the performance of an officer, director or employee of R&G, is present or could be implied. c. All officers, directors and employees should disclose any outside activities, financial interests, material transactions or relationships that may present or that reasonably could be expected to give rise to a possible conflict of interest or the appearance of a conflict to the Internal Auditor. Any known or potential conflict of others should also be promptly disclosed to the Internal Auditor or directly to the Audit Committee of the Board of Directors. 7 d. All officers, directors and employees should exercise good judgment in all personal and business dealings outside R&G and avoid actions or relationships which might conflict or appear to conflict with the responsibilities of such person's job or position or the interests of R&G. 10. Outside Activities a. Officers, directors and employees have been and are encouraged to be active and involved participants in the community. Such activities should be limited by the persons' own interests, and reasonable time requirements; any major outside commitments must be approved in advance by the immediate supervisor or other designated member of Management. Other than the community activity described above, officers, directors and employees are discouraged from engaging in any outside interest which will divert time or attention from his/her duties. 11. Board Directorships and Partnerships a. No officer, director or employee shall serve as a director of a board, except of a church or well-known nonprofit organization, without the prior written approval of the Chairman of the Board after deliberation by the Board of Directors. Likewise, no officer, director or employee shall become a partner in an economic venture involving banking or mortgage banking at all, or otherwise in an amount exceeding 5% of the venture's capital without prior approval of the Chairman of the Board after deliberation by the Board of Directors. 12. Improper Payments a. All officers, directors and employees are expected to comply with all laws and regulations (federal, state and local). The use of any R&G person or resource which is in violation of any federal, state or local law or regulation is strictly prohibited. Our policy is to not make any improper payments to any governmental, political, business or labor organization or any individual. b. All transactions of R&G are required to be identified precisely and recorded in the financial records of R&G in accordance with generally accepted accounting practices. 13. Money Laundering a. All officers, directors and employees are expected to comply with all applicable money laundering laws. All employees should follow the rules concerning acceptable forms of payments and learn to identify payments and deposits that have become associated with money laundering activity. Any concerns should be promptly raised with supervisory personnel and, 8 if appropriate, company legal counsel, and should be resolved before proceeding further with the transaction. 14. Trade Associations and Relations with Competitors a. R&G will act with trade associations and competitors only on behalf of ethical and beneficial social objectives and will not participate in business activities that are or could be constructed to be in violation of anti-trust laws. 15. Fair Dealing a. Each officer, director and employee should endeavor to respect the rights of and deal fairly with the company's customers, suppliers, competitors and employees. No officer, director or employee should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice. 16. Separation of the Trust Department a. Various financial regulatory agencies require a separate identity for the commercial banking and Trust Department. The essential distinction between these departments arises out of the fiduciary responsibilities assumed by the Trust Department. The fiduciary relationship between the Trust Department and its customers and beneficiaries creates a moral and legal obligation beyond the usual business standard. It is the responsibility of every officer, director and employee to be mindful of the separation of the trust and commercial banking functions so that all exchange of information and treatment of a customer adheres to the separation of these two functions. 17. Advertising Policy a. R&G advertising will insure that the ethical content and moral impact of any advertising in any type media made for or on behalf of R&G is made in accordance with social values and accepted good taste. Advertisements will comply with all regulatory consumer compliance regulations and will be affirmed by review of the internal audit department and R&G attorneys, as applicable. 18. Political Action Committees/Corporate Payments a. It is R&G's policy not to contribute money, property, or services to any government official, political party, or candidate, whether local, state or federal. 9 b. It follows that R&G is prohibited from offering or allowing the use of its facilities, equipment and personnel in connection with any federal, state or local election or campaign. c. Officers, directors and employees may, and are encouraged to, engage in any governmental, regulatory and elective process in which they are interested. This participation may be on an individual basis, group basis or as a member of a political action committee. Since R&G is without preference as to political parties, candidates, and opinion, each officer, director and employee must act only on his/her own behalf and not give any representation that he/she represent anyone other than himself/herself. Written approval must be obtained from the Chairman of the Board or the President before seeking or accepting nomination or appointment to any public office, whether paid or unpaid. 19. Public Statements a. Although R&G has a policy of maintaining good relations with all news media and tries to accommodate media inquiries, there is much information concerning R&G that should not be made available to the public. This includes information about corporate customers which R&G has a responsibility not to divulge as well as information which would be valuable to a competitor. b. For these and other reasons, any inquiry made to officers, employees or directors about R&G or about a customer or stockholder of R&G by the news media should be referred to the Chairman of the Board or the President for proper action. 20. Recommendations to Customers a. Officers, directors and employees of R&G are not to recommend attorneys, accountants, insurance agents, stock brokers, real estate agents or similar individuals or companies to customers or others asking R&G's input unless several names are provided without indication of favorites. 21. Financial Responsibility a. All officers, directors and employees of R&G should conduct their financial affairs in such a responsible manner as to be above criticism. The following list is intended to be a guide, but not a complete nor exhaustive list: i. Prompt payment of personal bills and debts. ii. Avoid overdrafts in personal checking accounts. 10 iii. Use of any R&G credit cards, expense account reimbursements, equipment and supplies only for official R&G use. iv. Discourage of salary advances, even if allowed by R&G policy. v. Employee loans are to be in strict compliance with internal lending policies (Refer to R&G's Credit Policy). vi. Incurring indebtedness only for legitimate purposes made in accordance with the requirements of Regulation O and any other applicable laws, regulations or guidelines. 22. Personal Conduct a. Dishonesty This institution is required by its various regulatory agencies to consider ineligible for initial employment or continued employment any individual who fails to fulfill his or her legal and ethical duties and obligations. Any employee who commits an act constituting breach of trust or dishonesty, i.e., theft, fraud or falsification of R&G records, will be subject to disciplinary action up to and including termination. b. Major Infractions It is the policy of R&G to thoroughly investigate the occurrence of any major infraction, and to take appropriate and reasonable disciplinary action involving any individual(s) connected with R&G, up to and including termination or removal from the Board, as applicable. Major infractions include but are not limited to the following: i. Any action which renders an officer, director or employee an unacceptable security risk, adversely affects R&G's public image or causes embarrassment to R&G or its customers. ii. Release of confidential information or use of confidential information for personal gain. iii. Unauthorized possession, distribution or use of any drug or illegal narcotic. iv. Inability to perform work due to consumption of alcohol or any other controlled chemical substance. v. Fighting. vi. Removal or borrowing R&G property without permission. 11 vii. Persistent financial irresponsibility. viii. Willful failure to follow instructions, insubordination, ix. Unauthorized possession of weapons. x. Willful destruction or waste of property belonging to R&G, fellow employees or customers. xi. Failure to report to work without proper notification to management or leaving R&G without proper authority. xii. Any other major violation as established in the Company's Human Resources Policy Manual 23. Provision of Federal Legislation Prohibiting Bribery a. All officers, directors and employees agree to report the receipt of "anything of value" from a customer of R&G in accordance with R&G's policy. While this policy may be revised from time to time as circumstances warrant, the basic requirements is that no disinterested third party could reasonably feel that the officer, director or employee would have his/her judgment impaired or compromised by the acceptance of such a gift. b. All officers, directors and employees should avoid giving lavish gifts, meals or entertainment to other officers, directors or employees of any federal or state commercial bank, savings bank, savings and loan association, bank and savings and loan holding company or federally insured credit union. Gifts intended to influence or that might give the appearance of influencing a business decision should be avoided. c. An officer, director or employee should never give any gift, meal, or entertainment, if it could pose danger of compromising the receiver's or attendee's judgment. 24. Employment of Institution Staff by Other Parties a. All officers and employees of R&G shall refrain from seeking and obtaining employment in any other business organization which has an ongoing relationship with R&G. The purpose of this section is to avoid the possibility of a conflict of interest situation arising from the above-described circumstances. 12 25. Protection and Proper Use of Company Assets a. All officers and employees of R&G are responsible for the safeguarding of all the property and records of the company in a prudent and effective manner. b. All officers and employees should endeavor to protect the company's assets and ensure their efficient use. Theft, carelessness, and waste have a direct impact on the company's profitability. Any suspected incident of fraud or theft should be immediately reported for investigation. Company equipment should not be used for non-company business, though incidental personal use may be permitted. c. No officer, director or employee may use official R&G stationery for personal or non-job related purposes, particularly when such use would imply endorsement by R&G or make references to R&G employment in matters of personal dispute. 26. Corporate Opportunities a. All officers, directors and employees are prohibited from taking for themselves personally opportunities that are discovered through the use of corporate property, information or position without the consent of the Board of Directors. No officer, director or employee may use corporate property, information, or position for improper personal gain, and no employee may compete with the company directly or indirectly. Officers, directors and employees owe a duty to the company to advance its legitimate interests when the opportunity to do so arises. 27. Standards for Disclosure of Information a. All officers, employees, directors, attorneys and agents are expected to produce full disclosure of any transactions and/or activities of any nature which are relative to R&G's operations to the Board of Directors and to the appropriate regulatory agency, provided that submitting the aforementioned information by itself does not violate any privacy act or any other law which protects the confidentiality of some acts or activities. b. All officers, directors and employees should maintain complete and accurate records and accounts, and provide timely and candid forecasts and assessments to management to ensure full, fair, accurate, timely and understandable disclosure in documents filed with or submitted to the SEC or other regulatory agencies and in other public communications. 13 28. Other Personnel Standards a. Other specific personnel standards requirements and guidelines are outlined in the personnel manual provided to all employees of R&G. b. Written acknowledgment of receipt and contents, including the code of ethics is required by all R&G personnel. VI. ADMINISTRATION AND RESPONSIBILITIES The primary accountability and responsibility for the Code of Ethics and Standards of Personal Conduct rests with each individual officer, director or employee. However, each supervisor and manager has the additional responsibility to demonstrate by example what compliance with this policy means. VII. EXCEPTIONS TO THIS POLICY Exemptions to this Policy can be made in cases in which the underlying objective of the Policy will not be violated and only for just cause. In those cases, prior written approval from the Board of Directors will have to be obtained. Any amendment to or grant of a waiver from a provision of this Policy to any director or executive officer will be promptly disclosed to the extent and as required by law. VIII. REPORTING ANY ILLEGAL OR UNETHICAL BEHAVIOR All officers, directors and employees of R&G should promptly report any concerns about possible violations of the Code or any laws, rules or regulations and any observed illegal or unethical behavior to the Internal Auditor or directly to the Audit Committee of the Board of Directors. Officers, directors and employees of R&G are encouraged to talk to the Internal Auditor, supervisors, managers or other appropriate personnel, including legal counsel when deemed appropriate by senior management, when they have questions about the application of any policy or when in doubt about the best course of action in a particular situation. R&G prohibits any individual from retaliating or taking adverse action against anyone for reporting misconduct or for raising or helping to resolve an ethics concern. Every officer, director and employee of R&G is expected to cooperate in internal investigations of misconduct. IX. COMPLIANCE Any officer, director or employee of R&G who violates the letter or spirit of R&G's Code of Ethics will be subject to disciplinary action, up to and including termination of employment or removal from the Board, as applicable. Conduct that may result in discipline includes failure to promptly report a known or suspected violation of the Code of Ethics, failure to cooperate in internal investigations of possible violations, and retaliation of any kind against anyone who reports an ethics concern or violation. Violation of a policy can also mean breaking the law and subject the individual to criminal penalties or civil sanctions. 14 EX-31.1 5 g87693exv31w1.txt EX-31.1 302 CERTIFICATION OF THE CEO EXHIBIT 31.1 CERTIFICATION I, Victor J. Galan, certify that: 1. I have reviewed this annual report on Form 10-K of R&G Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 15, 2004 /s/ Victor J. Galan - -------------------------------- Victor J. Galan Chief Executive Officer EX-31.2 6 g87693exv31w2.txt EX-31.2 302 CERTIFICATION OF THE CFO EXHIBIT 31.2 CERTIFICATION I, Joseph R. Sandoval, certify that: 1. I have reviewed this annual report on Form 10-K of R&G Financial Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 15, 2004 /s/ Joseph R. Sandoval - --------------------------------- Joseph R. Sandoval Chief Financial Officer EX-32 7 g87693exv32.txt EX-32 906 CERTIFICATION OF THE CEO AND CFO EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of R&G Financial Corporation (the "Company") on Form 10-K for the period ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the undersigned's best knowledge and belief: (a) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated this 15th day of March, 2004. R&G Financial Corporation ------------------------------ ("Company") /s/ Victor J. Galan ------------------------------ Victor J. Galan Chief Executive Officer /s/ Joseph R. Sandoval ------------------------------ Joseph R. Sandoval Chief Financial Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO THE COMPANY AND WILL BE RETAINED BY THE COMPANY AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. -----END PRIVACY-ENHANCED MESSAGE-----


	December 31,
	2003					2002					2001
	Average		Average			Average		Average			Average		Average
	Balance		Rate Paid			Balance		Rate Paid			Balance		Rate Paid
	(Dollars in Thousands)
Passbook	$	336,577		1.72	%	$	283,497		2.84	%	$	131,729		3.55	%
NOW and Super NOW accounts		503,155		1.82			360,596		2.84			188,545		3.75
Checking		39,388		—			78,626		—			43,621		—
Commercial checking(1)		417,928		—			266,869		—			165,541		—
Certificates of deposit		1,951,697		3.94			1,481,449		4.18			1,289,193		5.98

Total deposits	$	3,248,745		2.83	%	$	2,471,037		3.58	%	$	1,818,629		4.89	%


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

Total	$	1,527,581

(1)		Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 2003 are incorporated into Parts II and IV.

(2)		Portions of the definitive proxy statement for the Annual Meeting of Stockholders are incorporated into Part III.

	•		the strength of the United States economy in general and the strength of the regional and local economies within Puerto Rico and Florida;

	•		the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

	•		inflation, interest rate, market and monetary fluctuations;

	•		our timely development of new products and services in a changing environment, including the features, pricing and quality of our products and services compared to the products and services of our competitors;

	•		the willingness of users to substitute competitors’ products and services for our products and services;

	•		the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;

	•		technological changes;

	•		changes in consumer spending and savings habits; and

	•		regulatory or judicial proceedings.


/s/ Laureno Carús Abarca		March 15, 2004

Laureno Carús Abarca
Director

/s/ Eduardo McCormack		March 15, 2004

Eduardo McCormack
Director

/s/ Gilberto Rivera-Arreaga		March 15, 2004

Gilberto Rivera-Arreaga
Director

/s/ Benigno R. Fernández		March 15, 2004

Benigno R. Fernández
Director

/s/ Ileana M. Colón-Carlo		March 15, 2004

Ileana M. Colón-Carlo
Director

/s/ Robert Gorbea		March 15, 2004

Roberto Gorbea
Director