R&G FINANCIAL CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO .
---------------------

Commission file number: 000-21137

R&G FINANCIAL CORPORATION

- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Puerto Rico 66-0532217
- -------------------------------------------------------------------------------

(State of incorporation (I.R.S. Employer
or organization) Identification No.)

280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

(787) 758-2424

(Registrant's telephone number, including area code)

Indicate by checkmark whether Registrant (a) has filed all reports required to
be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report (s) and (b) has been subject to such filing
requirements for at least 90 days.

YES [X] NO [ ]

Number of shares of Class B Common Stock outstanding as of June 30, 2002:
15,324,553 (Does not include 16,053,056 Class A Shares of Common Stock which are
exchangeable into Class B Shares of Common Stock at the option of the holder.)

R&G FINANCIAL CORPORATION

INDEX

Page
-----

PART I - FINANCIAL INFORMATION

ITEM 1. Consolidated Financial Statements .......................................................................3

Consolidated Statements of Financial Condition as of
June 30, 2002 (Unaudited) and December 31, 2001........................................3

Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2002 and 2001 (Unaudited)........................................4

Consolidated Statements of Comprehensive Income for the Three and Six
Months Ended June 30, 2002 and 2001 (Unaudited)........................................5

Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 (Unaudited) ............................................. 6

Notes to Unaudited Consolidated Financial Statements .......................................... 7

ITEM 2. Management's Discussion and Analysis....................................................................19

ITEM 3 Quantitative and Qualitative Disclosures about Market Risk..............................................29

PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings ......................................................................................30

ITEM 2. Changes in Securities ................................................................................. 30

ITEM 3. Defaults upon Senior Securities ........................................................................30

ITEM 4. Submission of Matters ..................................................................................30

ITEM 5. Other Information ......................................................................................31

ITEM 6. Exhibits and Reports on Form 8-K .......................................................................31

Signatures .........................................................................................31

2

PART 1 - FINANCIAL INFORMATION

ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

June 30, December 31,
2002 2001
-----------------------------------
(Unaudited)

ASSETS
Cash and due from banks $ 90,679,867 $ 79,223,030
Money market investments:
Securities purchased under agreements to resell -- 15,023,590
Time deposits with other banks 34,003,557 63,477,978
Mortgage loans held for sale, at lower of cost or market 229,996,061 236,434,204
Mortgage backed securities held for trading, at fair value 55,047,783 75,796,172
Trading securities pledged on repurchase agreements, at fair value 31,520,214 18,151,659
Mortgage backed and investment securities available for sale, at fair value 2,004,597,788 1,566,895,312
Available for sale securities pledged on repurchase agreements 557,695,642 514,783,468
Mortgage backed and investment securities held to maturity, at amortized cost
(estimated market value: 2002 - $29,457,701; 2001 - $60,682,234) 28,369,680 60,425,371
Held to maturity securities pledged on repurchase agreements, at amortized cost
(estimated market value: 2002 - $49,539,052; 2001 - $15,445,319) 49,936,720 15,206,183
Loans receivable, net 2,438,609,232 1,802,388,064
Accounts receivable, including advances to investors, net 32,320,634 23,056,424
Accrued interest receivable 41,047,062 35,426,760
Servicing asset 146,198,543 105,146,902
Premises and equipment 36,663,903 22,401,045
Other assets 97,467,339 30,557,544
-------------- --------------
$5,874,153,025 $4,664,393,706
============== ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $2,534,721,688 $2,061,223,825
Fed funds purchased 10,000,000 --
Securities sold under agreements to repurchase 1,602,394,036 1,396,938,849
Notes payable 178,801,746 195,586,855
Advances from FHLB 836,725,000 464,125,000
Other borrowings 10,899,373 7,971,888
Accounts payable and accrued liabilities 94,874,356 71,867,012
Other liabilities 9,373,165 7,559,690
-------------- --------------
5,277,789,364 4,205,273,119
-------------- --------------
Company-obligated mandatorily redeemable trust preferred securities 25,000,000 --
-------------- --------------
Stockholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares authorized,
non-cumulative perpetual monthly income preferred stock, $25
liquidation value:
7.40% Series A, 2,000,000 shares authorized, issued and outstanding 50,000,000 50,000,000
7.75% Series B, 1,000,000 shares authorized, issued and outstanding 25,000,000 25,000,000
7.60% Series C, 2,760,000 shares authorized, issued and outstanding 69,000,000 69,000,000
7.25% Series D, 2,760,000 shares authorized, issued and outstanding 69,000,000 --
Common stock:
Class A - $.01 par value, 40,000,000 shares authorized, 16,053,056
issued and outstanding in 2002 (2001-18,440,556) 160,531 160,531
Class B - $.01 par value, 60,000,000 shares authorized, 15,324,553
issued and outstanding in 2002 (2001-10,237,675) 153,220 152,413
Additional paid-in capital 69,362,780 71,254,084
Retained earnings 263,179,181 229,997,012
Capital reserves of the Bank 11,629,328 11,629,328
Accumulated other comprehensive income 14,865,245 1,927,219
-------------- --------------
571,363,661 459,120,587
-------------- --------------
$5,874,153,025 $4,664,393,706
============== ==============

The accompanying notes are an integral part of these statements.

3

R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

Three month Six month
period ended period ended
June 30, June 30,
--------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
(Dollars in thousands except for per share data)

Interest income:
Loans $ 38,980 $ 36,356 $ 77,483 $ 73,784
Money market and other investments 9,594 8,238 18,633 15,608
Mortgage-backed securities 29,041 19,897 54,218 37,968
------------ ------------ ------------ ------------
Total interest income 77,615 64,491 150,334 127,360
------------ ------------ ------------ ------------
Interest expense:
Deposits 20,764 22,619 41,590 45,695
Securities sold under agreements to repurchase 12,713 11,960 25,056 24,516
Notes payable 1,585 2,978 3,357 5,022
Other 6,504 5,513 12,277 12,539
------------ ------------ ------------ ------------
Total interest expense 41,566 43,070 82,280 87,772
------------ ------------ ------------ ------------
Net interest income 36,049 21,421 68,054 39,588
Provision for loan losses (4,550) (2,100) (9,550) (4,100)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 31,499 19,321 58,504 35,488
------------ ------------ ------------ ------------
Other income:
Net gain on origination and sale of loans 15,751 11,948 33,461 26,986
Loan administration and servicing fees 10,320 8,670 19,624 16,693
Service charges, fees and other 4,060 3,380 7,932 5,905
------------ ------------ ------------ ------------
30,131 23,998 61,017 49,584
------------ ------------ ------------ ------------

Total revenues 61,630 43,319 119,521 85,072
------------ ------------ ------------ ------------

Operating expenses:
Employee compensation and benefits 9,544 7,299 19,552 14,849
Office occupancy and equipment 4,706 4,119 8,968 8,021
Other administrative and general 17,550 12,448 33,476 24,324
------------ ------------ ------------ ------------
31,800 23,866 61,996 47,194
------------ ------------ ------------ ------------
Income before income taxes and cumulative effect from
change in accounting principle 29,830 19,453 57,525 37,878
------------ ------------ ------------ ------------
Income tax expense (benefit):
Current 7,199 3,015 12,695 7,211
Deferred (481) 1,000 185 1,900
------------ ------------ ------------ ------------
6,718 4,015 12,880 9,111
------------ ------------ ------------ ------------

Income before cumulative effect
from change in accounting principle 23,112 15,438 44,645 28,767
Cumulative effect from change in accounting principle,
net of income tax benefit of $206 -- -- -- (323)
------------ ------------ ------------ ------------
Net income $ 23,112 $ 15,438 $ 44,645 $ 28,444
============ ============ ============ ============
Earnings per common share before cumulative
effect from change in accounting principle - Basic $ 0.60 $ 0.44 $ 1.19 $ 0.85
Earnings per common share before cumulative
effect from change in accounting principle - Diluted $ 0.59 $ 0.43 $ 1.17 $ 0.82
Earnings per common share - Basic $ 0.60 $ 0.44 $ 1.19 $ 0.83
- Diluted $ 0.59 $ 0.43 $ 1.17 $ 0.81
Weighted average number of shares outstanding - Basic 31,306,700 28,766,054 31,301,387 28,719,992
- Diluted 31,654,798 29,483,654 31,654,636 29,439,720

The accompanying notes are an integral part of these statements.

4

R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three month Six month
period ended period ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(Unaudited) (Unaudited)
(Dollars in thousands)

Net income $ 23,112 $ 15,438 $ 44,645 $ 28,444
-------- -------- -------- --------

Other comprehensive income, before tax:

Unrealized gains (losses):

Cash flow hedges (3,201) (3,751) (1,205) (5,742)
-------- -------- -------- --------

Investment securities:
Arising during period 36,697 (3,821) 22,614 5,047
Less: Reclassification adjustments for (gains)
losses included in net income (146) 228 (221) (1,244)
-------- -------- -------- --------
36,551 (3,593) 22,393 3,803
-------- -------- -------- --------
34,405 (7,344) 21,188 (1,939)

Income tax (expense) benefit related to items of other
comprehensive income (12,993) 2,864 (8,250) 756
-------- -------- -------- --------
20,357 (4,480) 12,938 (1,183)
Cumulative effect from change in accounting principle,
net of income taxes of $745 -- -- -- 1,166
-------- -------- -------- --------
Other comprehensive income 20,357 (4,480) 12,938 (17)
-------- -------- -------- --------

Comprehensive income, net of tax $ 43,469 $ 10,958 $ 57,583 $ 28,427
======== ======== ======== ========

The accompanying notes are an integral part of these statements.

5

R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

Six month period ended
June 30,
------------------------------
2002 2001
(Unaudited)
Cash flows from operating activities: (Dollars in thousands)

Net income $ 44,645 $ 28,444
--------------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,205 3,180
Amortization of premium on investment securities, net 1,624 208
Amortization of servicing rights 10,922 6,621
Reversal of impairment reserves (459) --
Provision for loan losses 9,550 4,100
Provision for bad debts in accounts receivable -- 450
Gain on sales of loans -- (225)
Gain on sales of mortgage-backed and investment securities available for sale (221) (1,244)
Unrealized (profit) loss on trading securities and derivative instruments (241) 725
Increase in mortgage loans held for sale (26,296) (151,499)
Net decrease (increase) in mortgage-backed securities held for trading 7,604 (40,607)
Increase in receivables (12,139) (11,757)
Increase in other assets (681) (8,856)
(Decrease) increase in notes payable and other borrowings (13,858) 119,094
Increase in accounts payable and accrued liabilities 8,325 7,831
Increase in other liabilities 1,054 4,394
--------------- ---------
Total adjustments (11,611) (67,584)
--------------- ---------
Net cash provided by (used in) operating activities 33,034 (39,140)
--------------- ---------
Cash flows from investing activities:
Purchases of investment securities (663,165) (412,389)
Proceeds from sales of securities available for sale 386,537 158,041
Proceeds from maturities of securities held to maturity -- --
Principal repayments on mortgage-backed securities and redemptions of
investment securities 308,093 208,783
Net assets acquired, net of cash received (63,679) --
Proceeds from sales of loans -- 63,676
Net originations of loans (523,772) (386,181)
Purchases of FHLB stock, net (20,887) (6,833)
Acquisition of premises and equipment (4,244) (2,952)
Acquisition of servicing rights (19,037) (12,350)
--------------- ---------
Net cash used in investing activities (600,154) (390,205)
--------------- ---------
Cash flows from financing activities:
Increase in deposits - net 5,359 163,389
Increase (decrease) in federal funds purchased 10,000 (25,000)
Increase in securities sold under agreements to repurchase - net 185,352 295,209
Advances from (repayments to) FHLB, net 254,500 (96,375)
Proceeds from issuance of preferred stock 90,799 66,602
Proceeds from issuance of common stock 519 28,225
Cash dividends:
Common stock (4,944) (3,549)
Preferred stock (7,506) (4,479)
--------------- ---------
Net cash provided by financing activities 534,079 424,022
--------------- ---------
Net decrease in cash and cash equivalents (33,041) (5,323)
Cash and cash equivalents at beginning of period 157,724 69,090
--------------- ---------
Cash and cash equivalents at end of period $ 124,683 $ 63,767
=============== =========

Cash and cash equivalents include:
Cash and due from banks $ 90,680 $ 34,939
Securities purchased under agreements to resell -- 11,001
Time deposits with other banks 34,003 17,827
--------------- ---------
$ 124,683 $ 63,767
=============== =========

The accompanying notes are an integral part of these statements.

6

R&G FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - REPORTING ENTITY AND BASIS OF PRESENTATION

REPORTING ENTITY

The accompanying unaudited consolidated financial statements include
the accounts of R&G Financial Corporation (the "Company"), a diversified
financial services company, and its wholly-owned subsidiaries, R-G Premier Bank
of Puerto Rico (the "Bank"), a commercial bank, Crown Bank, a Federal Savings
Bank ("Crown Bank"), a federal savings bank, R&G Mortgage Corp. ("R&G
Mortgage"), a Puerto Rico corporation, R&G Investments Corporation, a Puerto
Rico corporation and a licensed securities broker-dealer, and Home & Property
Insurance Corp., a Puerto Rico insurance agency. The Company, currently in its
30th year of operations, operates 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 securities and insurance brokerage through its
subsidiaries.

On June 7, 2002, the Company acquired The Crown Group, Inc., a Florida
corporation, and its wholly-owned savings bank subsidiary, Crown Bank, a Federal
Savings Bank ("Crown Bank"), hereinafter collectively referred to as "Crown,"
for an aggregate of $100.0 million in cash. Crown had total assets of $723.1
million and total deposits of $472.6 million as of June 30, 2002. The
acquisition resulted in goodwill totaling approximately $45.8 million which is
included in other assets in the accompanying consolidated statement of financial
condition as of June 30, 2002.

The Bank and Crown Bank provide a full range of banking services,
including residential, commercial and personal loans and a diversified range of
deposit products. The Bank operates through twenty-six branches located mainly
in the northeastern part of the Commonwealth of Puerto Rico, and Crown Bank
operates in the Orlando and Tampa/St. Petersburg metropolitan areas through 14
full-service offices. The Bank also provides private banking, trust and other
financial services to its customers. The Bank and Crown Bank are subject to the
regulations of certain federal and local agencies, and undergo periodic
examinations by those regulatory agencies.

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. R&G Mortgage pools loans into mortgage-backed
securities and collateralized mortgage obligation certificates for sale to
investors. After selling the loans, it retains the servicing function. R&G
Mortgage is also a seller-servicer of conventional loans. R&G Mortgage is
licensed by the Secretary of the Treasury of Puerto Rico as a mortgage company
and is duly authorized to do business in the Commonwealth of Puerto Rico.

R&G Mortgage also originates FHA insured, VA guaranteed and privately
insured first and second mortgage loans on residential real estate (1 to 4
families), through its wholly-owned subsidiary, The Mortgage Store of Puerto
Rico.

The Company also originates FHA insured, VA guaranteed and privately
insured first and second mortgage loans on residential real estate (1 to 4
families) in the States of New York, New Jersey, Connecticut, North Carolina and
Florida, through Continental Capital Corp. ("Continental Capital"), a
wholly-owned subsidiary of Crown Bank.

The Company also owns R&G Acquisition Holdings Corporation, a Florida
corporation and saving and loan holding company, which is the parent of Crown
Bank. In April 2002, R&G Acquisition Holdings Corporation formed R&G Capital
Trust I, a Delaware statutory business trust, which issued $25.0 million of
trust preferred securities in a private placement. The Company has guaranteed
certain obligations of R&G Acquisition Holdings to R&G Capital Trust I.

7

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." The
Company concurrently voluntarily delisted its Class B Common Stock trading on
the NASDAQ National Market under the symbol "RGFC."

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles. However, in the opinion of management, the accompanying
unaudited consolidated financial statements include all adjustments (consisting
of normal recurring accruals) necessary for a fair statement of the Company's
financial condition as of June 30, 2002 and the results of operations and
changes in its cash flows for the three and six months ended June 30, 2002 and
2001.

The results of operations for the three and six month periods ended
June 30, 2002 are not necessarily indicative of the results to be expected for
the year ending December 31, 2002. The unaudited consolidated financial
statements and notes thereto should be read in conjunction with the audited
financial statements and notes thereto for the year ended December 31, 2001.

BASIS OF CONSOLIDATION

All significant intercompany balances and transactions have been
eliminated in the accompanying unaudited financial statements.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Effective January 1, 2001, the Company adopted SFAS No. 133, "
Accounting for Derivative Instruments and Hedging Activities." Upon the adoption
of this Statement, the Company recognized a 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.

NEW ACCOUNTING PRONOUNCEMENTS

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 supersedes 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 supersedes
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 Occuring 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.

On January 1, 2002, the Company adopted also 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.

During the first quarter of 2002, based on further evaluation of the adoption
effects of SFAS No. 142, management determined that the initial adoption of
this Statement on January 1, 2002 had no effect on the financial conditions or
results of operations of the Company.

8

NOTE 2 - EARNINGS PER SHARE

Basic earnings per common share are computed by dividing net income
(less preferred stock dividends) by the weighted average number of shares of
common stock outstanding. Outstanding stock options granted in connection with
the Company's Stock Option Plan (348,098 and 717,600 during the three month
periods ended June 30, 2002 and 2001, respectively, and 353,249 and 719,728
during the six month periods ended June 30, 2002 and 2001, respectively), 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 at diluted earnings per share.

Dividends per share on common stock declared and paid by the Company were as
follows:

Three month Six month
period ended period ended
June 30, June 30,
2002 2001 2002 2001
- --------------------------------------------------

$0.08125 $0.04875 $0.1575 $0.12375

NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES

The carrying value and estimated fair value of investment and
mortgage-backed securities by category are shown below. The fair value of
investment securities is based on quoted market prices and dealer quotes, except
for the investment in Federal Home Loan Bank (FHLB) stock which is valued at its
redemption value.

June 30, December 31,
2002 2001
--------------------- --------------------

(Unaudited)

MORTGAGE-BACKED SECURITIES HELD FOR TRADING:

GNMA certificates $12,457,313 $18,151,659
FHLMC certificates 74,110,684 75,796,172
------------ ---------------
$86,567,997 $93,947,831
============ ===============

9

June 30, 2002 December 31, 2001
-------------------------------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
-------------- -------------- -------------- --------------
(Unaudited)

MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE:

Collateralized mortgage obligations (CMO),
CMO residuals (interest only), interest only strips
(IO's) and other mortgage-backed securities $ 367,442,719 $ 372,506,550 $ 248,894,118 $ 250,208,322
-------------- -------------- -------------- --------------

FNMA certificates:
Due from five to ten years 434,794 450,759 538,047 549,144
Due over ten years 261,131,336 268,881,984 266,495,176 270,935,878
-------------- -------------- -------------- --------------
261,566,130 269,332,743 267,033,223 271,485,022
-------------- -------------- -------------- --------------
FHLMC certificates:
Due within one year 6,840 7,046 -- --
Due from one to five years 43,202 43,999 73,195 74,382
Due from five to ten years 1,175,592 1,218,966 1,264,702 1,292,010
Due over ten years 673,421,180 685,259,781 435,662,149 437,026,277
-------------- -------------- -------------- --------------
674,646,814 686,529,792 437,000,046 438,392,669
-------------- -------------- -------------- --------------
GNMA certificates:
Due from one to five years 25,030 25,155 50,063 50,313
Due from five to ten years 14,849,198 14,864,137 11,053,286 11,172,001
Due over ten years 492,228,988 490,930,098 513,507,515 511,638,456
-------------- -------------- -------------- --------------
507,103,216 505,819,390 524,610,864 522,860,770
-------------- -------------- -------------- --------------

1,810,758,879 1,834,188,475 1,477,538,251 1,482,946,783
-------------- -------------- -------------- --------------

INVESTMENT SECURITIES AVAILABLE FOR SALE:

Mortgage securities portfolio mutual funds 18,079,833 18,158,181 -- --
-------------- -------------- -------------- --------------

Puerto Rico Government and Agencies Obligations-
Due over ten years 15,716,063 15,716,063 -- --
-------------- -------------- -------------- --------------
U.S. Government and Agencies securities:
Due within one year 7,000,000 7,038,850 9,600,000 9,806,480
Due from one to five years 341,320,396 344,994,653 156,522,492 157,408,260
Due from five to ten years 169,709,201 174,563,637 307,109,665 310,937,946
-------------- -------------- -------------- --------------
518,029,597 526,597,140 473,232,157 478,152,686
-------------- -------------- -------------- --------------

Corporate debt obligations:
Due from one to five years 55,984,999 57,301,790 53,636,583 54,502,744
Due from five to ten years 4,103,156 4,126,187 -- --
Over ten years 11,838,514 12,011,527 -- --
-------------- -------------- -------------- --------------
71,926,669 73,439,504 53,636,583 54,502,744
-------------- -------------- -------------- --------------
FHLB stock 94,194,067 94,194,067 66,076,567 66,076,567
-------------- -------------- -------------- --------------
717,946,229 728,104,955 592,945,307 598,731,997
-------------- -------------- -------------- --------------
$2,528,705,108 $2,562,293,430 $2,070,483,558 $2,081,678,780
============== ============== ============== ==============

On January 1, 2001 the Company reclassified mortgage-backed securities available
for sale with a fair value of $75.9 million to held for trading. Upon transfer,
the Company recognized a gain of approximately $833,000.

10

June 30, 2002 December 31, 2001
----------- ----------- ----------- -----------
Amortized Fair Amortized Fair
cost value cost value
----------- ----------- ----------- -----------
(Unaudited)

MORTGAGE-BACKED SECURITIES HELD TO MATURITY:

GNMA certificates:
Due from five to ten years $ 6,268,745 $ 6,208,528 $ 7,180,376 $ 7,111,405
Due over ten years 36,356,768 36,630,553 37,042,861 37,091,537
----------- ----------- ----------- -----------
42,625,513 42,434,089 44,223,237 44,202,942
----------- ----------- ----------- -----------

FNMA certificates:
Due over ten years 6,887,153 7,172,368 7,593,982 7,909,958
----------- ----------- ----------- -----------

FHLMC certificates:
Due over ten years 115,036 115,281 128,335 124,863
----------- ----------- ----------- -----------

49,627,702 50,126,730 51,945,554 52,237,763
----------- ----------- ----------- -----------

INVESTMENT SECURITIES HELD TO MATURITY:

U.S. Government and Agencies obligations-
Due within one year 991,698 991,698 -- --
----------- ----------- ----------- -----------

Puerto Rico Government and Agencies obligations:
Due from one to five years 13,120,000 13,196,500 12,691,000 12,731,365
Due from five to ten years 14,466,000 14,581,825 10,895,000 11,058,425
----------- ----------- ----------- -----------
27,586,000 27,778,325 23,586,000 23,789,790
----------- ----------- ----------- -----------
Other:
Due from one to five years 100,000 100,000 100,000 100,000
----------- ----------- ----------- -----------

28,677,698 28,870,023 23,686,000 23,889,790
----------- ----------- ----------- -----------

$78,305,400 $78,996,753 $75,631,554 $76,127,553
=========== =========== =========== ===========

In addition to the investment and mortgage-backed securities pledged on
repurchase agreements and reported as pledged assets in the statement of
financial condition, at June 30, 2002 the Company had investment securities
pledged as collateral on repurchase agreements where the counterparties do not
have the right to sell or repledge the assets as follows:

Carrying Amount
----------------------
(Unaudited)
(Dollars in thousands)

Mortgage-backed securities held for trading, at fair value $ 10,148

Mortgage-backed and investment securities available for sale,
at fair value 1,099,675
Mortgage-backed securities held to maturity, at amortized
cost 11,479
----------------------
$1,110,303
======================

11

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consist of the following:

June 30, December 31,
2002 2001
-------------------------------
(Unaudited)
(Dollars in thousands)

Real estate loans:
Residential - first mortgage $ 1,307,610 $ 996,885
Residential - second mortgage 41,175 33,321
Land 33,619 9,188
Construction 306,904 227,271
Commercial 517,889 385,171
----------- -----------
2,207,197 1,651,836
Undisbursed portion of loans in process (94,484) (92,935)
Net deferred loan costs (368) 20
----------- -----------
2,112,345 1,558,922
----------- -----------
Other loans:
Commercial 160,114 79,909
Consumer:
Secured by deposits 25,469 26,176
Secured by real estate 77,129 83,509
Other 91,761 71,507
Unearned interest (316) (207)
----------- -----------
354,157 260,894
----------- -----------

Total loans 2,466,502 1,819,816
Allowance for loan losses (27,893) (17,428)
----------- -----------
$ 2,438,609 $ 1,802,388
=========== ===========

The changes in the allowance for loan losses follow:

Six months ended
June 30,
-----------------------------
2002 2001
----------- -----------
(Unaudited)
(Dollars in thousands)
Balance, beginning of period $ 17,428 $ 11,600
Provision for loan losses 9,550 4,100
Acquired reserves 7,463 --
Transferred reserves -- 806
Loans charged-off (6,957) (3,819)
Recoveries 409 289
-------- --------
Balance, end of period $ 27,893 $ 12,976
======== ========

12

The following table sets forth the amounts and categories of R&G Financial's
non-performing assets at the dates indicated.

June 30, December 31,
2002 2001
(Unaudited)
------------------------------------
(Dollars in thousands)

Non-accruing loans:
Residential real estate $44,146 $50,358
Residential construction 1,165 871
Commercial real estate 24,303 16,945
Commercial business 4,063 3,105
Consumer unsecured 690 303

------------------------------------
Total 74,367 71,582
------------------------------------
Accruing loans greater than 90 days delinquent:
Residential real estate -- --
Residential construction -- --
Commercial real estate -- --
Commercial business 684 462
Consumer 563 428
------------------------------------
Total accruing loans greater than
90 days delinquent 1,247 890
------------------------------------

Total non-performing loans 75,614 72,472
------------------------------------
Real estate owned, net of reserves 18,174 10,061
Other repossessed assets 238 362
------------------------------------
18,412 10,423
------------------------------------

Total non-performing assets $94,026 $82,895
------------------------------------
Total non-performing loans as a
percentage of total loans (1) 2.95% 3.79%
------------------------------------

Total non-performing assets as a
percentage of total assets 1.60% 1.78%
------------------------------------

Allowance for loan losses as a percentage
of total non-performing loans (2) 36.89% 24.05%
------------------------------------

Allowance for loan losses as a percentage
of total loans outstanding (2) 1.09% 0.91%
------------------------------------

Net charge-offs to average loans
Outstanding 0.61% 0.32%
------------------------------------

13

(1) The increase in the ratio was partially caused by loan securitizations
undertaken by the Company, which reduced the amount of loans held in
portfolio which are considered in the calculation of the ratio. Without
giving effect to loan securitizations, as of June 30, 2002 and December
31, 2001, the ratio of non-performing loans to total loans would have
been 2.14% and 2.75%, respectively.

(2) Because of the nature of the collateral, R&G Financial's historical
charge-offs with respect to residential real estate loans have been
low. Excluding R&G Financial's residential loan portfolio, the
allowance for loan losses to total loans and to total non-performing
loans at June 30, 2002 and December 31, 2001 would have been 2.31% and
88.6%, respectively, and 1.97% and 78.8%, respectively.

A significant amount of the increase in the Company's non-accruing
commercial real estate and real estate owned is attributable to assets
acquired in connection with the acquisition of Crown Bank in June
2002. Total non-accruing loans and real estate owned acquired in
connection with such acquisition totaled $13.2 million and $5.1
million, respectively. Management believes that it established
appropriate reserves with respect to such assets in connection with
the acquisition.

14

NOTE 5 - MORTGAGE LOAN SERVICING

The changes in the servicing asset of the Company follows:

For the six month period ended June 30,
2002 2001
--------- ---------
(Unaudited)
(Dollars in thousands)
Balance at beginning of period $ 105,147 $ 95,079

Rights originated 12,909 11,535
Rights purchased 43,042 815
Scheduled amortization (7,508) (5,271)
Unscheduled amortization (3,414) (1,350)
Reversal of impairment reserves 459 --
Other adjustments (4,436) --
--------- ---------

Balance at end of period $ 146,199 $ 100,808
========= =========

The portion of the Company's mortgage loans servicing portfolio
consisting of the servicing asset that was originated by the Company prior to
the adoption of SFAS No. 122 is not reflected as an asset on the Company's
Consolidated Financial Statements, and is not subject to amortization or
impairment.

NOTE 6 - DEPOSITS

Deposits are summarized as follows:

June 30, December 31,
2002 2001
---------- ----------
(Unaudited)
(Dollars in thousands)

Passbook savings $ 279,530 $ 199,756
---------- ----------

NOW accounts 89,901 68,412
Super NOW accounts 256,547 236,898
Regular checking accounts
(non-interest bearing) 81,125 78,213
Commercial checking accounts
(non-interest bearing) 190,775 167,781
---------- ----------
618,348 551,304
---------- ----------

Certificates of deposit:
Under $100,000 668,024 429,913
$100,000 and over 964,691 874,495
---------- ----------
1,632,715 1,304,408
---------- ----------

Accrued interest payable 4,129 5,756
---------- ----------

$2,534,722 $2,061,224
========== ==========

15

NOTE 7 - COMMITMENTS AND CONTINGENCIES

At June 30, 2002, the Company was liable under limited recourse
provisions resulting from the sale of loans to several investors, principally
FHLMC. The principal balance of these loans, which are serviced by the Company,
amounts to approximately $578.3 million at June 30, 2002. Liability, if any,
under the recourse provisions at June 30, 2002 is estimated by management to be
insignificant.

In April 2002, R&G Acquisition Holdings Corporation (a wholly-owned
subsidiary of R&G Financial) ("RAC"), a Florida corporation and savings and loan
holding company, formed R&G Capital Trust I ("R&G Capital Trust"), a Delaware
business trust. R&G Capital Trust issued $25.0 million of trust preferred
securities in a private placement. The Company has guaranteed certain
obligations of RAC to R&G Capital Trust.

NOTE 8 - SUPPLEMENTAL INCOME STATEMENT INFORMATION

Employee costs and other administrative and general expenses are shown
in the Consolidated Statements of Income net of direct loan origination costs.
Direct loan origination costs are capitalized as part of the carrying cost of
mortgage loans and are offset against mortgage loan sales and fees when the
loans are sold, or amortized as a yield adjustment to interest income on loans
held for investment.

Total employee costs and other expenses before capitalization follows:

Three month period ended Six month period ended
June 30, June 30,
2002 2001 2002 2001
------- ------- ------- -------
(Unaudited) (Unaudited)
(Dollars in thousands)

Employee costs $16,173 $13,349 $32,416 $26,047
======= ======= ======= =======
Other administrative and general expenses $18,784 $13,915 $35,954 $26,630
======= ======= ======= =======

16

NOTE 9 - INDUSTRY SEGMENTS

The following summarized information presents the results of the Company's
operations for its traditional banking and mortgage banking activities:

(Dollars in thousands)
Three month period ended June 30,
---------------------------------------------------------------------------------------------
2002 (Unaudited) 2001
---------------------------------------------------------------------------------------------
Mortgage Segments Mortgage Segments
Banking Banking Other Totals Banking Banking Other Totals
------- ------- ----- ------ ------- ------- ----- ------

Revenues $31,309 $28,760 $2,280 $162,349 $22,653 $20,302 $1,373 $44,328
Non-interest expenses 15,293 16,660 757 32,710 10,669 13,322 286 24,277
Income before income taxes $16,016 $12,100 $1,523 $ 29,639 $11,984 $6,980 $1,087 $20,051

Six month period ended June 30,
---------------------------------------------------------------------------------------------
2002 (Unaudited) 2001
---------------------------------------------------------------------------------------------
Mortgage Segments Mortgage Segments
Banking Banking Other Totals Banking Banking Other Totals
------- ------- ----- ------ ------- ------- ----- ------

Revenues $63,818 $53,252 $3,903 $120,973 $47,450 $38,126 $2,142 $87,718
Non-interest expenses 29,961 32,663 1,482 64,106 21,233 26,978 489 48,700
Income before income taxes
(and cumulative effect from
change in accounting principle
in 2001) $33,857 $20,589 $2,421 $ 56,867 $26,217 $11,148 $1,653 $39,018

In April 2002, the Company through R&G Acquisition Holdings Corporation, formed
R&G Capital Trust I (the "Trust"), a wholly-owned finance subsidiary. The Trust
does not qualify as an operating segment under SFAS No. 131 and has no
independent operations and no other function other than the issuance of its
securities and the related purchase of its junior subordinated debentures from
R&G Acquisition Holdings Corporation, and to distribute payments referred
thereon to the holders of its securities.

17

The following is a reconciliation of reportable segment revenues and income
before income taxes to the Company's consolidated amounts (unaudited):

Three month period ended Six month period ended
March 31, June 30,
2002 2001 2002 2001
----------------------------------------------------------------------------
(Dollars in thousands)

Revenues:

Total revenues for reportable segments $62,349 $44,328 $120,973 $87,718
Elimination of intersegment revenues (1,361) (1,009) (2,701) (2,646)
Corporate revenues 642 -- 1,249 --
----------------------------------------------------------------------------
Total consolidated revenues $61,630 $43,319 $119,521 $85,072
============================================================================

Income before income taxes:

Total income before income taxes for reportable
segments $29,639 $20,051 $56,867 $39,018
Elimination of intersegment profits (200) (301) (217) (780)
Unallocated corporate income (expenses), net 391 (297) 875 (360)
----------------------------------------------------------------------------
Income before income taxes, consolidated $29,830 $19,453 $57,525 $37,878
============================================================================

Total assets of the Company among its industry segments and a reconciliation of
reportable segment assets to the Company's consolidated total assets as of June
30, 2002 and December 31, 2001 follows:

June 30, December 31,
2002 2001
----------------------------------------
(Unaudited)
(Dollars in thousands)
Assets:

Banking $5,115,702 $3,929,980
Mortgage Banking 816,344 843,250
Other 111,839 8,083
----------------------------------------

Total assets for reportable segments 6,043,885 4,781,313
Parent company assets 63,736 81,644
Elimination of intersegment balances (233,468) (198,563)
----------------------------------------

Consolidated total assets $5,874,153 $4,664,394
========================================

18

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

R&G Financial Corporation (the "Company" or "R&G Financial") is a
Puerto Rico chartered diversified financial holding company that, through its
wholly-owned subsidiaries, is engaged in banking, mortgage banking, securities
brokerage and insurance activities. The Company, currently in its 30th year of
operations, operated 82 branch offices (26 bank branches mainly located in the
northeastern section of Puerto Rico, 14 bank branches in the Orlando and
Tampa/St. Petersburg Florida markets, 38 mortgage offices in Puerto Rico and, 4
mortgage offices in the United States) as of June 30, 2002.

On June 7, 2002, the Company, through its Florida holding company, R&G
Acquisition Holdings Corporation, acquired The Crown Group, Inc., a Florida
corporation, and its wholly-owned savings bank subsidiary, Crown Bank, a Federal
Savings Bank, hereinafter collectively referred to as "RAC". RAC, which had
total assets of $731.1 million, and total deposits of $472.6 million as of June
30, 2002, operates Crown Bank in the Orlando and Tampa/St. Petersburg
metropolitan areas through 14 full-service 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 acquisition was accretive to the
Company's earnings per share during the second quarter of 2002 (one month only).

The Company also provides a full range of banking services in Puerto
Rico through R-G Premier Bank of Puerto Rico (the "Bank"), a Puerto Rico
commercial bank. Banking activities include commercial banking services,
corporate and construction lending, consumer lending and credit cards, offering
a diversified range of deposit products and, to a lesser extent, trust and other
services through its private banking department.

Mortgage banking activities are conducted through R&G Mortgage Corp.,
Puerto Rico's second largest mortgage banker, The Mortgage Store of Puerto Rico,
Inc., also a Puerto Rico mortgage company, and Continental Capital Corp.,
a New York mortgage banking company with offices in New York and North Carolina.
Its mortgage banking activities include the origination, purchase, sale and
servicing of mortgage loans on single-family residences, the issuance and sale
of various types of mortgage-backed securities, the holding of mortgage loans,
mortgage-backed securities and other investment securities for sale or
investment, and the purchase and sale of servicing rights associated with such
mortgage loans and, to a lesser extent, the origination of construction loans
and mortgage loans secured by income producing real estate and land (the
"mortgage banking business").

The Company began insurance operations in November 2000 through Home &
Property Insurance Corp., a Puerto Rico insurance agency, and securities
brokerage in early 2002 through R&G Investments Corporation, a Puerto Rico
corporation and a licensed broker-dealer.

The Company is the second largest mortgage loans originator and
servicer of mortgage loans on single family residences in Puerto Rico. R&G
Financial's mortgage servicing portfolio increased to approximately $11.1
billion as of June 30, 2002, from $6.9 billion as of the same date a year ago,
an increase of 60.4%. During the second quarter of 2002 the Company acquired a
servicing portfolio of $2.9 billion as part of the acquisition of Crown Bank.
R&G Financial's strategy is to continue to increase the size of its mortgage
servicing portfolio by relying principally on internal loan originations.

As part of its strategy to maximize net interest income, R&G Financial
maintains a substantial portfolio of mortgage-backed and investment securities.
At June 30, 2002, the Company held securities available for sale with a fair
market value of $2.6 billion, which included $1.8 billion of mortgage-backed

19

securities, of which $505.8 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.

A substantial portion of R&G Financial's total mortgage loan
originations has been comprised of refinance loans. R&G Financial's future
results could be adversely affected by a significant increase in mortgage
interest rates that reduces refinancing activity. However, the Company believes
that refinancing activity is less sensitive to interest rate changes in Puerto
Rico than in the mainland United States because a significant amount of
refinance loans are made for debt consolidation purposes.

R&G Financial customarily sells or securitizes into mortgage-backed
securities substantially all the loans it originates, except for certain
non-conforming conventional mortgage loans and certain consumer, construction,
land, and commercial loans which are held for investment and classified as loans
receivable.

FINANCIAL CONDITION

At June 30, 2002, total assets amounted to $5.9 billion, as compared to
$4.7 billion at December 31, 2001, an increase of $1.2 billion or 25.9%. On June
7, 2002 the Company completed the acquisition of Florida based The Crown Group,
Inc. ("Crown"), with total consolidated assets of $712.3 million at the time of
acquisition. Excluding the increase in assets due to the Crown acquisition,
total assets increased by $497.4 million or 10.7% from December 31, 2001. The
$497.4 million increase in total assets was primarily the result of a $380.1
million or 18.3% increase in mortgage-backed and investment securities available
for sale, and a $185.0 million or 10.3% increase in loans receivable, net.

At June 30, 2002, R&G Financial had $2.6 billion of borrowings
(consisting of securities sold under agreements to repurchase, notes payable,
FHLB advances and other borrowings), compared to $2.1 billion at December 31,
2001. R&G Financial utilized repurchase agreements and FHLB Advances to fund its
growth during the period. Crown Bank had total deposits of $472.6 million as of
June 30, 2002.

At June 30, 2002, R&G Financial's allowance for loan losses totaled
$27.9 million, which represented a $10.5 million or 60.0% increase from the
level maintained at December 31, 2001. The allowance for loan losses at June 30,
2002 includes $7.5 million of acquired reserves from the Crown acquisition. At
June 30, 2002, R&G Financial's allowance represented approximately 1.09% of the
total loan portfolio and 36.89% of total non-performing loans. However,
excluding R&G Financial's residential loan portfolio, which has minimal
charge-off experience, the allowance for loan losses to total loans and to total
non-performing loans would have been 2.31% and 88.6%, respectively. The increase
in the allowance for loan losses reflects the increase in R&G Financial's
commercial real estate and construction loan portfolio.

Non-performing loans amounted to $75.6 million at June 30, 2002, a
decrease of $3.1 million when compared to $72.5 million at December 31, 2001.
During the quarter ended June 30, 2002, the Company sold approximately $27.3
million of non-performing residential mortgage loans. At June 30, 2002, $44.1
million or 58.4% of non-performing loans consisted of residential mortgage
loans. Management attributes the increase in recent years to increased delays in
the foreclosure process in Puerto Rico. Because of the nature of the real estate
collateral, R&G Financial has historically recognized a low level of loan
charge-offs. R&G Financial's aggregate charge-offs as a percentage of average
loans outstanding amounted to 0.32% during 2001 and 0.17% during 2000. Although
loan delinquencies have historically been higher in Puerto Rico than in the
United States, actual foreclosures and any resulting loan charge-offs have
historically been lower than in the United States. While the ratio of
non-performing loans to total loans decreased from 3.79% to 2.95% from December
31, 2001 to June 30, 2002, such ratios were nonetheless larger than they would
otherwise have been due to loan securitizations undertaken by the Company, which
have reduced the amount of loans considered in the calculation of the ratio.
Without giving effect to loan securitizations, at June 30, 2002 and December 31,
2001, the ratio of non-performing loans to total loans would have been 2.14% and
2.75%, respectively.

Stockholders' equity increased from $459.1 million at December 31, 2001
to $571.4 million at June 30, 2002. The $112.2 million or 24.4% increase was due
primarily to the issuance of 2,760,000 shares of

20

the Company's 7.25% Monthly Income Preferred Stock, Series D, during the first
half of 2002 for aggregate net proceeds of $66.6 million, the net income
recognized during the period, net of dividends declared, and a $12.9 million
increase in other comprehensive income, due to unrealized gains on securities
available for sale during the period of $22.6 million ($13.8 million net of
taxes).

RESULTS OF OPERATIONS

During the three and six months ended June 30, 2002, R&G Financial
reported net income of $23.1 million and $44.6 million, or $0.59 and $1.17 of
earnings per diluted share, respectively, compared to net income before the
cumulative effect of a change in accounting principle of $15.4 million and $28.8
million or $0.43 and $0.81 of earnings per diluted share for the comparative
periods in 2001, which reflects an increase in earnings per share of 37.2% and
44.4% for the three and six months periods ending June 30, 2002 over the
comparable periods in 2001.

Net interest income increased by $28.5 million or 71.9% during the six
month period ended June 30, 2002 to $68.1 million, primarily due to an increase
in the average balance of interest-earning assets, together with a 67 basis
point increase in the net interest margin from 2.29% to 2.96%. The provision for
loan losses amounted to $9.6 million during the six months ended June 30, 2002,
a 232.9% increase over the prior comparable period, as R&G Financial increased
it general reserves to reflect the expected continued growth in commercial
lending, which involves greater credit risk than residential lending.

R&G Financial also experienced an increase in non-interest income
during the six months ended June 30, 2002 over the prior comparable period. Net
gain on sale of loans increased significantly, by $6.5 million or 24.0% over the
prior comparable period, which was due both to an increased volume of loans
originated and sold as well as increased profits made on loans sold. Loan
administration and servicing fees also increased by $2.9 million or 17.6% over
the comparable periods, due to the growth in the loan servicing portfolio.

Net interest income increased by $14.6 million or 68.3% to $36.0
million during the quarter ended June 30, 2002, due to an increase in the
average balance of interest-earning assets, together with a 61 basis points
increase in the net interest margin from 2.39% to 3.00%. Net gain on sale of
loans increased 31.8% to $15.8 million during the three month ended June 30,
2002.

Total expenses increased by $14.8 million or 31.4% during the six
months ended June 30, 2002 over the prior comparable period, primarily due to a
$9.2 million or 37.6% increase in other administrative and general expenses,
primarily due to increased amortization of the Company's servicing asset and
increased advertising expenses to increase loan production and other marketing
initiatives. Employee compensation and benefits increased by $4.7 million or
31.7% associated with general growth in Company operations as well as increased
loan production. These increases were accompanied by a $947,000 or 11.8%
increase in occupancy expenses.

Total expenses increased by $7.9 million or 33.2% during the three
month period ended June 30, 2002 over the prior comparable period, due to a $5.1
million or 41.0% increase in other general and administrative expenses, a $2.2
million or 30.8% increase in employee compensation and benefits, and a $587,000
or 14.3% increase in occupancy expenses.

INTEREST RATE RISK MANAGEMENT

21

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 R&G Mortgage and average daily
balances for the Bank in each case during the periods presented.

22

For the three month period ended June 30,
2002 2001
---------------------------------------------------------------------------------
Average Yield/ Average Yield /
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------

Interest-earning assets:

Cash and cash equivalents(1) $69,505 $364 2.09% $36,761 $412 4.48%
Investment securities available for sale 561,682 8,167 5.82 411,499 6,981 6.79
Investment securities held to maturity 24,137 329 5.45 5,013 72 5.75
Mortgage-backed securities held for trading 82,130 1,113 5.42 118,935 1,603 5.39
Mortgage-backed securities available for sale 1,739,599 27,199 6.25 1,113,737 18,023 6.47
Mortgage-backed securities held to maturity 50,087 729 5.82 18,517 271 5.85
Loans receivable, net (2) 2,195,686 38,980 7.10 1,826,157 36,356 7.96
FHLB of New York stock 76,726 734 3.83 48,079 773 6.43
---------------------------------------------------------------------------------

Total interest-earning assets 4,799,552 $77,615 6.47% 3,578,698 $64,491 7.21%
---------------------------------------------------------------------------------

Non-interest-earning assets 312,196 320,984
---------------------------------------------------------------------------------

Total assets $5,111,748 $3,899,682
=================================================================================

Interest-bearing liabilities:

Deposits $2,255,429 $20,764 3.68% $1,758,890 $22,619 5.14%
Securities sold under agreements to
repurchase (3) 1,512,876 12,713 3.36 974,468 11,960 4.91
Notes payable 269,535 1,585 2.35 248,511 2,978 4.79
Other borrowings(4) 604,288 6,504 4.31 418,551 5,513 5.27
---------------------------------------------------------------------------------

Total interest-bearing liabilities 4,641,828 $41,566 3.58% 3,400,420 $43,070 5.07%
---------------------------------------------------------------------------------

Non-interest-bearing liabilities 130,047 105,971
---------------------------------------------------------------------------------

Total liabilities 4,771,875 3,506,391
---------------------------------------------------------------------------------

Stockholders' equity 339,873 393,291
---------------------------------------------------------------------------------

Total liabilities and stockholders' equity $5,111,748 $3,899,682
=================================================================================

Net interest income; interest rate spread (5) $36,049 2.89% $21,421 2.14%
========================== =========================

Net interest margin 3.00% 2.39%
========== ===========

Average interest-earning assets to average
interest-bearing liabilities 103.40% 105.24%
========== ===========

(footnote on page 26)

23

For the six month period ended June 30,
2002 2001
-----------------------------------------------------------------------------------
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
-----------------------------------------------------------------------------------

Interest-earning assets:

Cash and cash equivalents(1) $ 54,935 $ 596 2.17% $ 40,503 $ 1,021 5.04%
Investment securities available for sale 551,936 15,921 5.77 380,788 12,919 6.79
Investment securities held to maturity 23,913 651 5.44 4,354 125 5.74
Mortgage-backed securities held for trading 87,556 2,374 5.42 105,868 3,315 6.26
Mortgage-backed securities available for sale 1,617,957 50,354 6.22 1,066,664 34,087 6.39
Mortgage-backed securities held to maturity 50,725 1,490 5.87 18,976 566 5.97
Loans receivable, net (2) 2,136,038 77,483 7.25 1,792,861 73,784 8.23
FHLB of New York Stock 72,078 1,465 4.07 47,165 1,543 6.54
------------------------------------------------------------------------------

Total interest-earning assets 4,595,138 $ 150,334 6.54% 3,547,179 $127,360 7.37%
------------------------------------------------------------------------------

Non-interest-earning assets 367,492 322,423
------------------------------------------------------------------------------

Total assets $4,962,630 $3,779,602
==============================================================================

Interest-bearing liabilities:

Deposits $2,159,265 $ 41,590 3.85% $1,723,751 $ 45,695 5.30%
Securities sold under agreements to
repurchase (3) 1,411,513 25,056 3.55 909,610 24,582 5.40
Notes payable 263,155 3,357 2.55 213,504 5,022 4.70
Other borrowings(4) 549,516 12,277 4.47 453,043 12,473 5.51
------------------------------------------------------------------------------

Total interest-bearing liabilities 4,383,449 $ 82,280 3.75% 3,299,908 $ 87,772 5.32%
------------------------------------------------------------------------------

Non-interest-bearing liabilities 247,559 114,555
------------------------------------------------------------------------------

Total liabilities 4,631,008 3,414,463
------------------------------------------------------------------------------

Stockholders' equity 331,622 365,139
------------------------------------------------------------------------------

Total liabilities and stockholders' equity $4,962,630 $3,779,602
==============================================================================

Net interest income; interest rate spread (5) $ 68,054 2.79% $ 39,588 2.05%
==============================================================================

Net interest margin 2.96% 2.29%
==============================================================================

Average interest-earning assets to average
interest-bearing liabilities 104.83% 104.77%
==============================================================================

(footnotes on following page)

24

- ----------------------

(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 and non-accrual loans.

(3) Includes federal funds purchased.

(4) Comprised of long-term debt, advances from the FHLB of New York and
other borrowings.

(5) Interest rate spread represents the difference between R&G Financial's
weighted average yield on interest-earning assets and the weighted
average rate on interest-bearing liabilities. Net interest margin
represents net interest income as a percent of average interest-earning
assets.

- ----------------------

MORTGAGE LOAN SERVICING

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

At or for the six months ended
June 30,
------------------------------
2002 2001
------------ -----------
(Dollars in thousands)

Composition of Servicing Portfolio at period end:
GNMA $ 2,801,568 $ 2,974,223
FNMA/FHLMC 5,402,976 2,175,019
Other mortgage loans (3) 2,906,365 1,778,375
------------ -----------
Total servicing portfolio (3) $ 11,110,909 $ 6,927,617
============ ===========

Activity in the Servicing Portfolio:
Beginning servicing portfolio $ 7,224,571 $ 6,634,059
Add: Loan originations and purchases 970,064 936,008
Servicing of portfolio loans acquired (4) 3,756,870 1,736
Less: Sale of servicing rights(1) (105,090) (103,746)
Run-offs(2) (735,506) (540,440)
------------ -----------
Ending servicing portfolio(3) $ 11,110,909 $ 6,927,617
============ ===========
Number of loans serviced 162,311 112,098
Average loan size $ 68 $ 62
Average servicing fee rate 0.48% 0.51%

- --------------------

(1) Corresponds to loans sold, servicing released, by Continental Capital.

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

25

(3) At the dates shown, included $913.7 million and $986.2 million of loans
serviced for the Bank, respectively, which constituted 8.2% and 14.5%
of the total servicing portfolio, respectively, and $392.7 million of
loans in Crown Bank's own portfolio as of June 30, 2002, or 3.5% of the
total servicing portfolio at such date.

(4) Includes $2.9 billion acquired through Crown Bank acquisition in June
2002.

- --------------------

A large portion of the mortgage loans in R&G Financial's servicing
portfolio are secured by single (one-to-four) family residences secured by real
estate located in Puerto Rico. At June 30, 2002, 62.4% of the Company's mortgage
servicing portfolio was related to mortgages secured by real property located in
Puerto Rico.

The Company reduces the sensitivity of its servicing income to
increases in prepayment rates through a strong retail origination network that
has increased or maintained the size of R&G Financial's servicing portfolio even
during periods of high prepayments. In addition, a substantial portion of the
Company's servicing portfolio consists of tax-exempt FHA/VA mortgage loans in
Puerto Rico which carry lower interest rates than those on conventional loans,
which tends to reduce risks related to R&G Financial's servicing portfolio.
During the six month periods ended June 30, 2002 and 2001, the Company
recognized $3.4 million and $1.4 million, respectively, of unscheduled
amortization on mortgage servicing rights.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY - Liquidity refers to the Company's ability to generate
sufficient cash to meet the funding needs of current loan demand, savings
deposit withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required in order to be in a position to fund loan
purchases and originations, to meet withdrawals from deposit accounts, to make
principal and interest payments with respect to outstanding borrowings and to
make investments that take advantage of interest rate spreads. The Company
monitors its liquidity in accordance with guidelines established by the Company
and applicable regulatory requirements. The Company's need for liquidity is
affected by loan demand, net changes in deposit levels and the scheduled
maturities of its borrowings. The Company can minimize the cash required during
the times of heavy loan demand by modifying its credit policies or reducing its
marketing efforts. Liquidity demand caused by net reductions in deposits are
usually caused by factors over which the Company has limited control. The
Company derives its liquidity from both its assets and liabilities. Liquidity is
derived from assets by receipt of interest and principal payments and
prepayments, by the ability to sell assets at market prices and by utilizing
unpledged assets as collateral for borrowings. Liquidity is derived from
liabilities by maintaining a variety of funding sources, including deposits,
advances from the FHLB of New York and other short and long-term borrowings.

The Company's liquidity management is both a daily and long-term
function of funds management. Liquid assets are generally invested in short-term
investments such as securities purchased under agreements to resell, federal
funds sold and certificates of deposit in other financial institutions. If the
Company requires funds beyond its ability to generate them internally, various
forms of both short and long-term borrowings provide an additional source of
funds. At June 30, 2002, the Company had $113.2 million in borrowing capacity
under unused warehousing and other lines of credit, $696.2 million in borrowings
capacity under unused lines of credit with the FHLB of New York and $25 million
under unused fed funds lines of credit. The Company has generally not relied
upon brokered deposits as a source of liquidity.

At June 30, 2002, the Company had outstanding commitments to originate
and/or purchase mortgage and non-mortgage loans of $105.0 (including unused
lines of credit) million. Certificates of deposit which are scheduled to mature
within one year totaled $949.0 million at June 30, 2002, and borrowings that are
scheduled to mature within the same period amounted to $1.5 billion. The Company
anticipates that it will have sufficient funds available to meet its current
loan commitments.

26

CAPITAL RESOURCES - The Company issued $25 million in Trust Preferred
Securities in April 2002 through R&G Capital Trust I, a subsidiary of R&G
Acquisition Holdings Corporation. The Trust Preferred Securities increased the
Company's regulatory capital, which allows for the continued growth of our
franchise. The ability to treat these Trust Preferred Securities as regulatory
capital under Federal Reserve guidelines, coupled with the Federal income tax
deductibility of the related expense, provides the Company with a cost-effective
form of capital.

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

The FDIC also requires that banks meet a risk-based capital standard.
The risk-based capital standard for banks requires the maintenance of total
capital (which is defined as Tier I capital and supplementary (Tier 2) capital)
to risk weighted assets of 8%. In determining the amount of risk-weighted
assets, all assets, plus certain off-balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item. The components of Tier 1 capital are equivalent to
those discussed above under the 3% leverage capital standard. The components of
supplementary capital include certain perpetual preferred stock, certain
mandatory convertible securities, certain subordinated debt and intermediate
preferred stock and general allowances for loan and lease losses. Allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted
toward supplementary capital cannot exceed 100% of core capital. At June 30,
2002, the Bank met each of its capital requirements, with Tier 1 leverage
capital, Tier 1 risk-based capital and total risk-based capital ratios of 6.61%,
12.46% and 13.38%, respectively. At June 30, 2002 Crown Bank also met each of
its capital requirements, with Tier 1 (core) capital, Tier 1 risk-based capital
and total risk-based capital ratios of 8.61%, 12.01% and 13.23%, respectively.

In addition, the Federal Reserve Board has promulgated capital adequacy
guidelines for bank holding companies which are substantially similar to those
adopted by FDIC regarding state-chartered banks, as described above. The Company
is currently in compliance with such regulatory capital requirements.

CRITICAL ACCOUNTING POLICIES

The Company considers its Allowance for Loan Losses policy as a policy
critical to its sound operations. 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 as of December 31, 2001 for
further information regarding the Company's provision and allowance for loan
losses policy.

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.

27

As of June 30, 2002, the Company had a servicing asset of $146.2
million, and retained interests (CMO residuals and interest only strips)
resulting from financial asset transfers accounted for as sales totaling $19.2
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.
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. See Notes 1 and 3 of the Notes
to the Consolidated Financial Statements as of December 31, 2001 for further
information regarding the Company's servicing asset and retained interests
policy.

RECENT LEGISLATION

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act
of 2002, or the SOA. The stated goals of the SOA are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws.

The SOA is the most far-reaching U.S. securities legislation enacted in
some time. 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, or the SEC, under the Securities Exchange Act of 1934, or
the Exchange Act. Given the extensive SEC role in implementing rules relating to
many of the SOA's new requirements, the final scope of these requirements
remains to be determined.

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 certain 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.

This SOA addresses, among other matters: audit committees;
certification of financial statements by the chief executive officer and the
chief financial officer; the forfeiture of bonuses and profits made by directors
and senior officers in the twelve month period covered by restated financial
statements; a prohibition on insider trading during pension plan black out
periods; disclosure of off-balance sheet transactions; a prohibition on personal
loans to directors and officers; expedited filing requirements for Forms 4s;
disclosure of a code of ethics and filing a Form 8-K for a change or waiver of
such code; "real time" filing of periodic reports; the formation of a public
accounting oversight board; auditor independence; and various increased criminal
penalties for violations of securities laws.

The SOA contains provisions which became effective upon enactment on
July 30, 2002 and provisions which will become effective from within 30 days to
one year from enactment. The SEC has been delegated the task of enacting rules
to implement various of the provisions with respect to, among other matters,
disclosure in periodic filings pursuant to the Exchange Act.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures about market risks at December
31, 2001 are presented in Item 7A of the Company's Annual report on Form 10-K.
Information at June 30, 2002 is presented on page 21 of this Report. Management
believes there have been no material changes in the Company's market risk since
December 31, 2001.

28

PART II - OTHER INFORMATION

ITEM 1: Legal Proceedings

The Registrant is involved in routine legal proceedings
occurring in the ordinary course of business which, in the
aggregate, are believed by management to be immaterial to the
financial condition and results of operations of the
Registrant.

ITEM 2: Changes in Securities

Not applicable

ITEM 3: Defaults Upon Senior Securities

Not applicable

ITEM 4: Submission of Matters to a Vote of Security Holders

The Company's Annual Meeting of Stockholders was held on April
30, 2002.

1. With respect to the election of four directors to serve
three-year terms expiring at the Annual Meeting of
Stockholders to be held in the year 2005 or until their
respective successors are elected and qualified, the following
were the number of shares voted for each nominee:

Victor J. Galan Class A - For 16,053,056 Withheld 0 Against 0
Class B - For 11,842,000 Withheld 0 Against 1,443,597

Ramon Prats Class A- For 16,053,056 Withheld 0 Against 0
Class B - For 13,052,243 Withheld 0 Against 233,354

Enrique Umpierre-Suarez Class A- For 16,053,056 Withheld 0 Against 0
Class B- For 11,874,321 Withheld 0 Against 1,411,276

Eduardo McCormack Class A- For 16,053,056 Withheld 0 Against 0
Class B - For 13,087,016 Withheld 0 Against 198,581

2. With respect to the ratification of the appointment of
PricewaterhouseCoopers, LLP as the Company's independent
auditors for the fiscal year ending December 31, 2002, the
following are the number of shares voted:

Class A - For 16,053,056 Withheld 0 Against 0
Class B - For 13,197,390 Withheld 2,190 Against 86,017

3. With respect to the amendment of the Company's Certificate of
Incorporation to increase the authorized number of shares of
preferred stock from 10,000,000 to 20,000,000, the following
are the number of shares voted:

Class A - For 16,053,056 Withheld 0 Against 0
Class B - For 3,629,268 Withheld 5,558,441 Against 4,097,888

29

4. With respect to the amendment of the Company's Certificate of
Incorporation to increase the authorized number of shares of
Class B Common Stock from 30,000,000 to 60,000,000, the
following are the number of shares voted:

Class A - For 16,053,056 Withheld 0 Against 0
Class B - For 12,717,736 Withheld 21,201 Against 546,660

ITEM 5: Other Information

Not applicable.

ITEM 6: Exhibits and Reports on Form 8-K

(a) Exhibits

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

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

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

(6) Incorporated by reference from the Registrants Current Report on Form
8-K filed with the SEC on August 31, 1998.

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

(8) Incorporated by reference from Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-3 (File NO. 333-55834),
filed with the SEC on March 7, 2001.

(9) Incorporated by reference from the Registrant's Registration Statement
on Form S-3 (Registration No. 333-60923), as amended, 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 Form 10-K filed with
the SEC on April 14, 2001.

(12) Incorporated by reference from the Registrant's Form 10K filed with the
SEC on April 14, 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 From 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.

(*) Management contract or compensatory plan or arrangement.

(b) Reports on Form 8K

(1) The Registrant filed a current report on Form 8-K on April 15,
2002, announcing the completion of the sale by R&G Capital Trust I of $25.0
million of trust preferred securities in a private placement.

(2) The Registrant filed a current report on Form 8-K on April 23,
2002, with respect to its first quarter earnings release.

(3) The Registrant filed a current report on Form 8-K on June 7,
2002, announcing the closing of its acquisition of The Crown Group, Inc. and
fling the third amendment to the Agreement and Plan of Reorganization concerning
the acquisition of The Crown Group, Inc.

(4) The Registrant filed a current report on Form 8-K on June 18,
2002, filing the Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the Registrant as filed with the Department of
State of the Commonwealth of Puerto Rico on May 9, 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

R&G FINANCIAL CORPORATION

Date: August 14, 2002 By:/S/ VICTOR J. GALAN
---------------------------------------
Victor J. Galan, Chairman
and Chief Executive Officer
(Principal Executive Officer)

By: /S/ JOSEPH R. SANDOVAL
--------------------------------------
Joseph R. Sandoval
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)

30