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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 SEPTEMBER 30, 2002

OR

     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM      TO      

Commission file number: 000-21137

R&G FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)
     
Puerto Rico   66-0532217

 
(State of incorporation
or organization)
  (I.R.S. Employer
Identification No.)
     
280 Jesús T. Piñero Avenue
Hato Rey, San Juan, Puerto Rico
  00918

 
(Address of principal executive offices)   (Zip Code)

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

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

YES [X]        NO [   ]

Number of shares of Class B Common Stock outstanding as of September 30, 2002: 19,432,687 (Does not include 14,553,056 Class A Shares of Common Stock which are exchangeable into Class B Shares of Common Stock at the option of the holder.)


TABLE OF CONTENTS

PART 1-FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Item 2: Management’s Discussion and Analysis
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II — OTHER INFORMATION
Item 1: Legal Proceedings
Item 2: Changes in Securities
Item 3: Defaults Upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
SIGNATURES
Guarantee Agreement


Table of Contents

R&G FINANCIAL CORPORATION

INDEX

             
        Page
Part I — Financial Information
       
Item 1. Consolidated Financial Statements
    3  
   
Consolidated Statements of Financial Condition as of September 30, 2002 (Unaudited) and December 31, 2001
    3  
   
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2002 and 2001 (Unaudited)
    4  
   
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2002 and 2001 (Unaudited)
    5  
   
Consolidated Statements of Cash Flows for the Nine Months Ended September 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  
Item 4. Controls and Procedures
    30  
Part II — Other Information
       
Item 1. Legal Proceedings
    31  
Item 2. Changes in Securities
    31  
Item 3. Defaults upon Senior Securities
    31  
Item 4. Submission of Matters
    31  
Item 5. Other Information
    31  
Item 6. Exhibits and Reports on Form 8-K
    31  
 
Signatures
    33  

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Table of Contents

PART 1-FINANCIAL INFORMATION

ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS

R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                     
        September 30,   December 31,
        2002   2001
       
 
        (Unaudited)        
ASSETS
               
Cash and due from banks
  $ 100,576,752     $ 79,223,030  
Money market investments:
               
 
Securities purchased under agreements to resell
          15,023,590  
 
Time deposits with other banks
    82,594,524       63,477,978  
Mortgage loans held for sale, at lower of cost or market
    225,007,503       236,434,204  
Mortgage backed securities held for trading, at fair value
    52,196,068       75,796,172  
Trading securities pledged on repurchase agreements, at fair value
    21,743,310       18,151,659  
Mortgage backed and investment securities available for sale, at fair value
    1,874,881,933       1,566,895,312  
Available for sale securities pledged on repurchase agreements
    745,908,244       514,783,468  
Mortgage backed and investment securities held to maturity, at amortized cost (estimated market value: 2002 - $30,947,229; 2001 - $60,682,234)
    30,702,699       60,425,371  
Held to maturity securities pledged on repurchase agreements, at amortized cost (estimated market value: 2002 - $47,676,359; 2001 - $15,445,319)
    47,027,256       15,206,183  
Loans receivable, net
    2,625,828,191       1,802,388,064  
Accounts receivable, including advances to investors, net
    33,355,088       23,056,424  
Accrued interest receivable
    41,769,788       35,426,760  
Servicing asset
    147,553,664       105,146,902  
Premises and equipment
    37,476,521       22,401,045  
Other assets
    103,843,045       30,557,544  
 
   
     
 
 
  $ 6,170,464,586     $ 4,664,393,706  
 
   
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities:
               
 
Deposits
  $ 2,814,349,618     $ 2,061,223,825  
 
Securities sold under agreements to repurchase
    1,509,275,666       1,396,938,849  
 
Notes payable
    196,330,499       195,586,855  
 
Advances from FHLB
    870,725,000       464,125,000  
 
Other borrowings
    10,376,164       7,971,888  
 
Accounts payable and accrued liabilities
    121,211,711       71,867,012  
 
Other liabilities
    9,661,996       7,559,690  
 
   
     
 
 
    5,531,930,654       4,205,273,119  
 
   
     
 
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, 14,553,056 issued and outstanding in 2002 (2001-16,053,056)
    145,531       160,531  
   
Class B — $.01 par value, 60,000,000 shares authorized, 19,432,687 issued and outstanding in 2002 (2001-10,237,675)
    194,327       152,413  
 
Additional paid-in capital
    114,914,423       71,254,084  
 
Retained earnings
    280,337,149       229,997,012  
 
Capital reserves of the Bank
    11,629,328       11,629,328  
 
Accumulated other comprehensive income
    18,313,174       1,927,219  
 
   
     
 
 
    638,533,932       459,120,587  
 
   
     
 
 
  $ 6,170,464,586     $ 4,664,393,706  
 
   
     
 

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R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

                                         
            Three month   Nine month
            period ended   period ended
            September 30,   September 30,
           
 
            2002   2001   2002   2001
           
 
 
 
            (Unaudited)   (Unaudited)
                 
            (Dollars in thousands except for per share data)
Interest income:
                               
 
Loans
  $ 50,086     $ 40,509     $ 127,569     $ 114,292  
 
Money market and other investments
    9,480       8,075       28,113       23,683  
 
Mortgage-backed securities
    29,346       22,792       83,564       60,761  
 
 
   
     
     
     
 
   
Total interest income
    88,912       71,376       239,246       198,736  
 
 
   
     
     
     
 
Interest expense:
                               
 
Deposits
    23,826       22,242       65,416       67,937  
 
Securities sold under agreements to repurchase
    12,708       12,112       37,764       36,628  
 
Notes payable
    1,795       3,523       5,152       8,545  
 
Other
    9,273       5,603       21,550       18,142  
 
 
   
     
     
     
 
   
Total interest expense
    47,602       43,480       129,882       131,252  
 
 
   
     
     
     
 
Net interest income
    41,310       27,896       109,364       67,484  
Provision for loan losses
    (3,970 )     (3,225 )     (13,520 )     (7,325 )
 
 
   
     
     
     
 
Net interest income after provision for loan losses
    37,340       24,671       95,844       60,159  
 
 
   
     
     
     
 
Other income:
                               
 
Net gain on origination and sale of loans
    24,380       17,314       57,841       44,301  
 
Loan administration and servicing fees
    11,193       8,339       30,817       25,031  
 
Service charges, fees and other
    4,539       3,089       12,471       8,994  
 
 
   
     
     
     
 
 
    40,112       28,742       101,129       78,326  
 
 
   
     
     
     
 
   
Total revenues
    77,452       53,413       196,973       138,485  
 
 
   
     
     
     
 
Operating expenses:
                               
 
Employee compensation and benefits
    12,535       8,991       32,087       23,840  
 
Office occupancy and equipment
    5,138       4,270       14,106       12,291  
 
Other administrative and general
    27,712       16,716       61,681       41,040  
 
 
   
     
     
     
 
 
    45,385       29,977       107,874       77,171  
 
 
   
     
     
     
 
Income before income taxes and cumulative effect from change in accounting principle
    32,067       23,436       89,099       61,314  
 
 
   
     
     
     
 
Income tax expense:
                               
 
Current
    5,880       4,795       18,575       12,006  
 
Deferred
    1,139       1,236       1,324       3,136  
 
 
   
     
     
     
 
 
    7,019       6,031       19,899       15,142  
 
 
   
     
     
     
 
Income before cumulative effect from change in accounting principle
    25,048       17,405       69,200       46,172  
Cumulative effect from change in accounting principle, net of income tax benefit of $206
                      (323 )
 
 
   
     
     
     
 
   
Net income
  $ 25,048     $ 17,405     $ 69,200     $ 45,849  
 
 
   
     
     
     
 
   
Earnings per common share before cumulative effect from change in accounting principle — Basic
  $ 0.64     $ 0.48     $ 1.83     $ 1.32  
 
 
   
     
     
     
 
   
Earnings per common share before cumulative effect from change in accounting principle — Diluted
  $ 0.63     $ 0.46     $ 1.81     $ 1.29  
 
 
   
     
     
     
 
Earnings per common share — Basic
  $ 0.64     $ 0.48     $ 1.83     $ 1.31  
 
 
   
     
     
     
 
     
                                      — Diluted
  $ 0.63     $ 0.46     $ 1.81     $ 1.28  
 
 
   
     
     
     
 
Weighted average number of
shares outstanding — Basic
    33,053,988       30,895,298       31,892,007       29,453,062  
       
                      — Diluted
  33,301,846       31,639,707       32,209,740       30,181,107  

The accompanying notes are an integral part of these statements.

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R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                                   
      Three month   Nine month
      period ended   period ended
      September 30,   September 30,
     
 
      2002   2001   2002   2001
     
 
 
 
      (Unaudited)   (Unaudited)
           
      (Dollars in thousands)
Net income
  $ 25,048     $ 17,405     $ 69,200     $ 45,849  
     
 
 
 
Other comprehensive income, before tax:
                               
Unrealized gains (losses):
                               
Cash flow hedges
    (6,749 )     (5,216 )     (7,954 )     (10,958 )
     
 
 
 
Investment securities:
                               
 
Arising during period
    12,651       27,277       35,265       32,324  
 
Less: Reclassification adjustments for (gains) losses included in net income
    (228 )     312       (449 )     (932 )
     
 
 
 
 
    12,423       27,589       34,816       31,392  
     
 
 
 
 
    5,674       22,373       26,862       20,434  
Income tax expense related to items of other comprehensive income
    (2,226 )     (8,725 )     (10,476 )     (7,969 )
     
 
 
 
 
    3,448       13,648       16,386       12,465  
Cumulative effect from change in accounting principle, net of income taxes of $745
                      1,166  
     
 
 
 
Other comprehensive income, net of tax
    3,448       13,648       16,386       13,631  
     
 
 
 
Comprehensive income, net of tax
  $ 28,496     $ 31,053     $ 85,586     $ 59,480  
     
 
 
 

The accompanying notes are an integral part of these statements.

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R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

                       
          Nine month period ended
          September 30,
         
          2002   2001
               
          (Unaudited)
          (Dollars in thousands)
Cash flows from operating activities:
               
 
Net income
  $ 69,200     $ 45,849  
 
 
   
     
 
   
Adjustments to reconcile net income to net cash provided by operating activities:
               
   
Depreciation and amortization
    5,132       4,897  
   
Amortization of premium on investment securities, net
    3,042       349  
   
Amortization of servicing rights
    20,856       11,904  
   
Provision of reserves for impairment on servicing asset
    6,500        
   
Provision for loan losses
    13,520       7,325  
   
Provision for bad debts in accounts receivable
          450  
   
Gain on sales of loans
          (793 )
   
Gain on sales of mortgage-backed and investment securities available for sale
  (449 )     (932 )
   
Unrealized profit on trading securities and derivative instruments
    (151 )     (554 )
   
Increase in mortgage loans held for sale
    (54,181 )     (200,990 )
   
Net decrease (increase) in mortgage-backed securities held for trading
    20,739       (8,968 )
   
Increase in receivables
    (13,896 )     (10,387 )
   
Increase in other assets
    (6,687 )     (4,039 )
   
(Decrease) increase in notes payable and other borrowings
    (21,852 )     96,650  
   
Increase in accounts payable and accrued liabilities
    22,619       15,698  
   
Increase in other liabilities
    1,343       3,641  
 
 
   
     
 
     
Total adjustments
    (3,465 )     (85,749 )
 
 
   
     
 
     
Net cash provided by (used in) operating activities
    65,735       (39,900 )
 
 
   
     
 
Cash flows from investing activities:
               
 
Purchases of investment securities
    (889,752 )     (567,260 )
 
Proceeds from sales of securities available for sale
    431,949       205,905  
 
Principal repayments on mortgage-backed securities and redemptions of investment securities
    581,476       336,375  
 
Net assets acquired, net of cash received
    (63,679 )      
 
Proceeds from sales of loans
          91,631  
 
Net originations of loans
    (820,786 )     (532,983 )
 
Purchases of FHLB stock, net
    (19,171 )     (13,847 )
 
Acquisition of premises and equipment
    (6,796 )     (5,688 )
 
Acquisition of servicing rights
    (37,285 )     (20,114 )
 
 
   
     
 
     
Net cash used in investing activities
    (824,044 )     (505,981 )
 
 
   
     
 
Cash flows from financing activities:
               
 
Increase in deposits – net
    284,987       198,623  
 
Decrease in federal funds purchased
          (15,000 )
 
Increase in securities sold under agreements to repurchase — net
    92,234       356,903  
 
Advances from (repayments to) FHLB, net
    288,500       (26,375 )
 
Repayment of term notes
          (35,500 )
 
Proceeds from issuance of preferred stock
    90,799       66,602  
 
Proceeds from issuance of common stock
    46,096       31,391  
 
Cash dividends:
               
   
Common stock
    (7,876 )     (5,644 )
   
Preferred stock
    (10,984 )     (7,200 )
 
 
   
     
 
     
Net cash provided by financing activities
    783,756       563,800  
 
 
   
     
 
Net increase in cash and cash equivalents
    25,447       17,919  
Cash and cash equivalents at beginning of period
    157,724       69,090  
 
 
   
     
 
Cash and cash equivalents at end of period
  $ 183,171     $ 87,009  
 
 
   
     
 
Cash and cash equivalents include:
               
 
Cash and due from banks
  $ 100,577     $ 5,382  
 
Securities purchased under agreements to resell
          81,627  
 
Time deposits with other banks
    82,594        
 
 
   
     
 
 
  $ 183,171     $ 87,009  
 
 
   
     
 

The accompanying notes are an integral part of these statements.

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R&G FINANCIAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — REPORTING ENTITY AND BASIS OF PRESENTATION

Reporting entity

         The accompanying unaudited consolidated financial statements include the accounts of R&G Financial Corporation (the “Company”), a diversified financial services company, and its wholly-owned subsidiaries, R-G Premier Bank of Puerto Rico (the “Bank”), a commercial bank, 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 and 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-Biley 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, F.S.B. (“Crown Bank”), hereinafter collectively referred to as “Crown,” for an aggregate of $100.0 million in cash. The acquisition resulted in goodwill totaling approximately $46.3 million which is included in other assets in the accompanying consolidated statement of financial condition as of September 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-seven 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 undergoes 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 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. 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.

         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 (“RAC”), a Florida corporation and savings and loan holding company, which is the parent of Crown Bank. In April 2002, RAC formed R&G Capital Trust I, a Delaware statutory business trust, which issued $25.0 million of trust preferred securities in a private placement. Such securities are included within notes payable in the accompanying Consolidated Statements of Financial Condition. The Company has guaranteed certain obligations of RAC to R&G Capital Trust I.

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         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.”

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 September 30, 2002 and the results of operations and changes in its cash flows for the three and nine months ended September 30, 2002 and 2001.

         The results of operations for the three and nine month periods ended September 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 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.

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.

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During the first quarter of 2002, based on further evaluation of the adoption effects of SFAS No. 142, management determinated 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.

NOTE 2 — EARNINGS PER SHARE

         Basic earnings per common share are computed by dividing net income (less preferred stock dividends) by the weighted average number of shares of common stock outstanding. The weighted average of outstanding stock options granted in connection with the Company’s Stock Option Plan (247,858 and 744,409 during the three month periods ended September 30, 2002 and 2001, respectively, and 317,733 and 728,045 during the nine month periods ended September 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   Nine month
period ended   period ended
September 30,   September 30,

 
2002   2001   2002   2001

 
 
 
$0.086375
  $ 0.06775     $ 0.243875     $ 0.19150  

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.

                   
      September 30,   December 31,
      2002   2001
     
 
      (Unaudited)        
Mortgage-backed securities held for trading:
               
 
GNMA certificates
  $ 9,606,660     $ 18,151,659  
 
FHLMC certificates
    64,332,718       75,796,172  
 
   
     
 
 
  $ 73,939,378     $ 93,947,831  
 
   
     
 

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        September 30, 2002   December 31, 2001
       
 
        Amortized   Fair   Amortized   Fair
        cost   value   cost   value
       
 
 
 
        (Unaudited)                
Mortgage-backed securities available for sale:
                               
Collateralized mortgage obligations (CMO):
                               
   
Due from one to five years
  $ 14,106,119     $ 14,106,119     $     $  
   
Due from five to ten years
    44,613,567       45,291,628       27,211,880       27,316,041  
   
Due over ten years
    389,008,931       394,361,198       202,546,424       202,468,023  
   
 
   
     
     
     
 
 
    447,728,617       453,758,945       229,758,304       229,784,064  
   
 
   
     
     
     
 
CMO residuals (interest only), interest only strips (IO’s) and other mortgage-backed securities
    23,200,436       23,013,167       19,135,814       20,424,258  
   
 
   
     
     
     
 
FNMA certificates:
                               
   
Due from five to ten years
    384,010       402,611       538,047       549,144  
   
Due over ten years
    245,084,279       254,274,655       266,495,176       270,935,878  
   
 
   
     
     
     
 
 
    245,468,289       254,677,266       267,033,223       271,485,022  
   
 
   
     
     
     
 
FHLMC certificates:
                               
   
Due within one year
    4,086       4,207              
   
Due from one to five years
    34,630       35,602       73,195       74,382  
   
Due from five to ten years
    1,048,135       1,097,104       1,264,702       1,292,010  
   
Due over ten years
    730,154,660       746,490,853       435,662,149       437,026,277  
   
 
   
     
     
     
 
 
    731,241,511       747,627,766       437,000,046       438,392,669  
   
 
   
     
     
     
 
GNMA certificates:
                               
   
Due from one to five years
                50,063       50,313  
   
Due from five to ten years
    17,601,500       17,759,785       11,053,286       11,172,001  
   
Due over ten years
    486,164,541       491,663,293       513,507,515       511,638,456  
   
 
   
     
     
     
 
 
    503,766,041       509,423,078       524,610,864       522,860,770  
   
 
   
     
     
     
 
 
    1,951,404,894       1,988,500,222       1,477,538,251       1,482,946,783  
   
 
   
     
     
     
 
Investment securities available for sale:
                               
Mortgage securities portfolio mutual funds
    3,261,194       3,223,400              
   
 
   
     
     
     
 
Puerto Rico Government and Agencies Obligations-
                               
 
Due over ten years
    603,191       603,191              
   
 
   
     
     
     
 
U.S. Government and Agencies securities:
                               
   
Due within one year
    20,000,000       20,000,000       9,600,000       9,806,480  
   
Due from one to five years
    286,922,156       292,025,164       156,522,492       157,408,260  
   
Due from five to ten years
    146,791,478       151,659,415       307,109,665       310,937,946  
   
 
   
     
     
     
 
 
    453,713,634       463,684,579       473,232,157       478,152,686  
   
 
   
     
     
     
 
Corporate debt obligations:
                               
   
Due from one to five years
    55,986,973       57,745,706       53,636,583       54,502,744  
   
Due from five to ten years
    3,495,244       3,286,292              
   
Over ten years
    11,292,787       11,269,620              
   
 
   
     
     
     
 
 
    70,775,004       72,301,618       53,636,583       54,502,744  
   
 
   
     
     
     
 
FHLB stock
    92,477,167       92,477,167       66,076,567       66,076,567  
   
 
   
     
     
     
 
 
    620,830,190       632,289,955       592,945,307       598,731,997  
   
 
   
     
     
     
 
 
  $ 2,572,235,084     $ 2,620,790,177     $ 2,070,483,558     $ 2,081,678,780  
   
 
   
     
     
     
 

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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.

                                     
        September 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
  $ 5,889,933     $ 5,893,169     $ 7,180,376     $ 7,111,405  
 
Due over ten years
    34,869,444       35,226,858       37,042,861       37,091,537  
 
 
   
     
     
     
 
 
    40,759,377       41,120,027       44,223,237       44,202,942  
 
 
   
     
     
     
 
FNMA certificates:
                               
 
Due over ten years
    6,683,846       6,976,773       7,593,982       7,909,958  
 
 
   
     
     
     
 
FHLMC certificates:
                               
 
Due over ten years
    108,253       108,484       128,335       124,863  
 
 
   
     
     
     
 
 
    47,551,476       48,205,284       51,945,554       52,237,763  
 
 
   
     
     
     
 
Investment securities held to maturity:
                               
U.S. Government and Agencies obligations- Due within one year
    2,492,479       2,492,479              
 
 
   
     
     
     
 
Puerto Rico Government and Agencies obligations:
                               
   
Due from one to five years
    27,120,000       27,354,000       12,691,000       12,731,365  
   
Due from five to ten years
    466,000       471,825       10,895,000       11,058,425  
 
 
   
     
     
     
 
 
    27,586,000       27,825,825       23,586,000       23,789,790  
 
 
   
     
     
     
 
Other:
                               
 
Due from one to five years
    100,000       100,000       100,000       100,000  
 
 
   
     
     
     
 
 
    30,178,479       30,418,304       23,686,000       23,889,790  
 
 
   
     
     
     
 
 
  $ 77,729,955     $ 78,623,588     $ 75,631,554     $ 76,127,553  
 
 
   
     
     
     
 

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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 September 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
  $ 9,895  
Mortgage-backed and investment securities available for sale, at fair value
    812,259  
Mortgage-backed securities held to maturity, at amortized cost
    423  
 
   
 
 
  $ 822,577  
 
   
 

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans consist of the following:

                     
        September 30,   December 31,
        2002   2001
       
 
        (Unaudited)        
        (Dollars in thousands)
Real estate loans:
               
 
Residential — first mortgage
  $ 1,426,670     $ 996,885  
 
Residential — second mortgage
    41,362       33,321  
 
Land
    39,805       9,188  
 
Construction
    316,324       227,271  
 
Commercial
    577,582       385,171  
 
 
   
     
 
 
    2,401,743       1,651,836  
Undisbursed portion of loans in process
    (94,388 )     (92,935 )
Net deferred loan costs
    170       21  
 
 
   
     
 
 
    2,307,525       1,558,922  
 
 
   
     
 
Other loans:
               
 
Commercial
    157,538       79,909  
 
Consumer:
               
   
Secured by deposits
    26,163       26,176  
   
Secured by real estate
    72,596       83,509  
   
Other
    91,866       71,507  
Unearned interest
    (414 )     (207 )
 
 
   
     
 
 
    347,749       260,894  
 
 
   
     
 
   
Total loans
    2,655,274       1,819,816  
 
Allowance for loan losses
    (29,446 )     (17,428 )
 
 
   
     
 
 
  $ 2,625,828     $ 1,802,388  
 
 
   
     
 

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The changes in the allowance for loan losses follow:

                 
    Nine months ended
    September 30,
   
    2002   2001
   
 
    (Unaudited)
    (Dollars in thousands)
Balance, beginning of period
  $ 17,428     $ 11,600  
Provision for loan losses
    13,520       7,325  
Acquired reserves
    7,463        
Transferred reserves
          806  
Loans charged-off
    (9,763 )     (4,961 )
Recoveries
    798       399  
 
   
     
 
Balance, end of period
  $ 29,446     $ 15,169  
 
   
     
 

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

                         
            September 30,   December 31,
            2002   2001
           
 
            (Dollars in thousands)
            (Unaudited)
Non-accruing loans:
               
 
Residential real estate
  $ 54,511     $ 50,358  
 
Residential construction
    1,675       871  
 
Commercial real estate
    25,878       16,945  
 
Commercial business
    4,683       3,105  
 
Consumer unsecured
    641       303  
 
   
     
 
   
Total
    87,388       71,582  
 
   
     
 
Accruing loans greater than 90 days delinquent:
               
 
Residential real estate
    9        
 
Residential construction
           
 
Commercial real estate
    682        
 
Commercial business
    540       462  
 
Consumer
    685       428  
 
   
     
 
   
Total accruing loans greater than 90 days delinquent
    1,916       890  
 
   
     
 
   
Total non-performing loans
    89,304       72,472  
 
   
     
 
Real estate owned, net of reserves
    18,660       10,061  
Other repossessed assets
    198       362  
 
   
     
 
 
    18,858       10,423  
 
   
     
 
   
Total non-performing assets
  $ 108,162     $ 82,895  
 
   
     
 
   
Total non-performing loans as a percentage of total loans (1)
    3.25 %     3.79 %
 
   
     
 

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Table of Contents

                         
            September 30,   December 31,
            2002   2001
           
 
            (Dollars in thousands)
            (Unaudited)
   
Total non-performing assets as a percentage of total assets
    1.75 %     1.78 %
 
   
     
 
   
Allowance for loan losses as a percentage of total non-performing loans (2)
    32.97 %     24.05 %
 
   
     
 
     
Allowance for loan losses as a percentage of total loans outstanding (2)
    1.07 %     0.91 %
 
   
     
 
       
Net charge-offs to average loans outstanding
    0.51 %     0.32 %
 
   
     
 

  (1)   While the ratio of non-performing loans to total loans decreased from 3.79% to 3.25% from December 31, 2001 to September 30, 2002, such ratios were nonetheless larger than they would otherwise have been due to loan securitizations during 2000, 2001 and the first nine months of 2002, which reduced the amount of loans considered in the calculation of the ratio. Without giving effect to loan securitizations, as of September 30, 2002 and December 31, 2001, the ratio of non-performing loans to total loans would have been 2.45% and 2.75%, respectively. Non-performing loans at September 30, 2002 exclude $27.3 million delinquent residential mortgage loans sold during the second quarter of 2002.
 
  (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 September 30, 2002 and December 31, 2001 would have been 2.30% and 84.6%, 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.

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NOTE 5 — MORTGAGE LOAN SERVICING

The changes in the servicing asset of the Company follows:

                 
    For the nine month period ended September 30,
   
    2002   2001
   
 
    (Unaudited)
    (Dollars in thousands)
Balance at beginning of period
  $ 105,147     $ 95,079  
Rights originated
    19,041       19,002  
Rights purchased
    22,682       1,112  
Crown acquired
    32,478    
Scheduled amortization
    (13,669 )     (8,210 )
Unscheduled amortization
    (7,187 )     (2,500 )
Reserves for impairment
    (6,500 )     (1,194 )
Other adjustments
    (4,438 )      
 
   
     
 
Balance at end of period
  $ 147,554     $ 103,289  
 
   
     
 

         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 on loans not sold as of the date of the financial statements, 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:

                   
      September 30,   December 31,
      2002   2001
     
 
      (Unaudited)
      (Dollars in thousands)
Passbook savings
  $ 319,238     $ 199,756  
 
   
     
 
NOW accounts
    90,939       68,412  
Super NOW accounts
    332,211       236,898  
Regular checking accounts (non-interest bearing)
    123,550       78,213  
Commercial checking accounts (non-interest bearing)
    259,174       167,781  
 
   
     
 
 
    805,874       551,304  
 
   
     
 
Certificates of deposit:
               
 
Under $100,000
    654,740       429,913  
 
$100,000 and over
    1,030,180       874,495  
 
   
     
 
 
    1,684,920       1,304,408  
 
   
     
 
Accrued interest payable
    4,318       5,756  
 
   
     
 
 
  $ 2,814,350     $ 2,061,224  
 
   
     
 

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NOTE 7 — COMMITMENTS AND CONTINGENCIES

         At September 30, 2002, the Company is liable under limited recourse provisions resulting from the sale of loans to several investors, principally FHLMC. The principal balance of these loans, which are serviced by the Company, amounts to approximately $704.7 million at September 30, 2002. Liability, if any, under the recourse provisions at September 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 statutory 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   Nine month period ended
    September 30,   September 30,
   
 
    2002   2001   2002   2001
   
 
 
 
    (Unaudited)   (Unaudited)
         
    (Dollars in thousands)
Employee costs
  $ 19,524     $ 14,811     $ 51,940     $ 40,858  
 
   
     
     
     
 
Other administrative and general expenses
  $ 29,083     $ 18,198     $ 65,530     $ 44,828  
 
   
     
     
     
 

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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 September 30,
   
    2002   2001
   
 
    (Unaudited)
     
            Mortgage           Segments           Mortgage           Segments
    Banking   Banking   Other   Totals   Banking   Banking   Other   Totals
   
 
 
 
 
 
 
 
Revenues
  $ 39,991     $ 35,733     $ 2,310     $ 78,034     $ 30,343     $ 22,526     $ 1,419     $ 54,288  
Non-interest expenses
    18,924       26,333       984       46,241       12,947       17,396       320       30,663  
Income before income taxes
  $ 21,067     $ 9,400     $ 1,326     $ 31,793     $ 17,396     $ 5,130     $ 1,099     $ 23,625  
                                                                 
    Nine month period ended September 30,
   
    2002   2001
   
 
    (Unaudited)
            Mortgage           Segments           Mortgage           Segments
    Banking   Banking   Other   Totals   Banking   Banking   Other   Totals
   
 
 
 
 
 
 
 
Revenues
  $ 103,809     $ 89,067     $ 6,131     $ 199,007     $ 77,793     $ 60,652     $ 3,561     $ 142,006  
Non-interest expenses
    49,378       58,996       2,466       110,840       34,180       44,374       809       79,363  
Income before income taxes (and cumulative effect from change in accounting principle in 2001)
  $ 54,431     $ 30,071     $ 3,665     $ 88,167     $ 43,613     $ 16,278     $ 2,752     $ 62,643  

In April 2002, the Company through RAC, formed R&G Capital Trust, as a wholly-owned finance subsidiary. R&G Capital 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 RAC, and to distribute payments referred thereon to the holders of its securities.

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

                                 
    Three month period ended   Nine month period ended
    September 30,   September 30,
   
 
    2002   2001   2002   2001
   
 
 
 
    (Dollars in thousands)
Revenues:
                               
Total revenues for reportable segments
  $ 78,034     $ 54,288     $ 199,007     $ 142,006  
Elimination of intersegment revenues
    (1,248 )     (1,356 )     (3,949 )     (4,002 )
Corporate revenues
    666       481       1,915       481  
 
   
     
     
     
 
Total consolidated revenues
  $ 77,452     $ 53,413     $ 196,973     $ 138,485  
 
   
     
     
     
 
Income before income taxes:
                               
Total income before income taxes for reportable segments
  $ 31,793     $ 23,625     $ 88,167     $ 62,643  
Elimination of intersegment profits
    (171 )     (479 )     (388 )     (1,259 )
Unallocated corporate income (expenses), net
    445       290       1,320       (70 )
 
   
     
     
     
 
Income before income taxes, consolidated
  $ 32,067     $ 23,436     $ 89,099     $ 61,314  
 
   
     
     
     
 

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

                 
    September 30,   December 31,
    2002   2001
   
 
    (Unaudited)        
    (Dollars in thousands)
Assets:
               
Banking
  $ 5,382,997     $ 3,929,980  
Mortgage Banking
    877,257       843,250  
Other
    114,511       8,083  
 
   
     
 
Total assets for reportable segments
    6,374,765       4,781,313  
Parent company assets
    65,554       81,644  
Elimination of intersegment balances
    (269,854 )     (198,563 )
 
   
     
 
Consolidated total assets
  $ 6,170,465     $ 4,664,394  
 
   
     
 

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Item 2: Management’s Discussion and Analysis

General

         R&G Financial Corporation (the “Company”) is a Puerto Rico chartered diversified financial holding company that, through its wholly-owned subsidiaries, is engaged in banking, mortgage banking, securities brokerage and insurance activities. The Company, currently in its 30th year of operations, operated 86 branch offices (27 bank branches mainly located in the northeastern section of Puerto Rico, 14 bank branches in the Orlando and Tampa/St. Petersburg Florida markets, 40 mortgage offices in Puerto Rico and, 5 mortgage offices in the United States) as of September 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, F.S.B. (“Crown Bank”), hereinafter collectively referred to as “RAC,” 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 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 our earnings per share during the second (one month only) and third quarter of 2002.

         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 and wholly-owned subsidiary of Crown Bank with offices in New York, North Carolina and Florida. 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 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 $11.25 billion as of September 30, 2002, from $7.1 billion as of the same date a year ago, an increase of 63.2%. During the second quarter of 2002 the Company acquired a servicing portfolio of $2.6 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 September 30, 2002, the Company held securities available for sale with a fair market value of $2.6 billion, which included $2.0 billion of mortgage-backed securities, of which $509.4 million consisted primarily of Puerto Rico GNMA securities,

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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 September 30, 2002, total assets amounted to $6.2 billion, as compared to $4.7 billion at December 31, 2001, an increase of $1.5 billion or 32.3%. 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 and deposits of $469.7 million at the time of acquisition. Excluding the increase in assets due to the Crown acquisition, total assets increased by $793.7 million or 17.0% from December 31, 2001. The $793.7 million increase in total assets was primarily the result of a $463.7 million or 22.3% increase in mortgage-backed and investment securities available for sale, and a $358.7 million or 19.9% increase in loans receivable, net.

         At September 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.

         At September 30, 2002, R&G Financial’s allowance for loan losses totaled $29.4 million, which represented a $12.0 million or 69.0% increase from the level maintained at December 31, 2001. The allowance for loan losses at September 30, 2002 includes $7.5 million of acquired reserves from the Crown acquisition. At September 30, 2002, R&G Financial’s allowance represented approximately 1.07% of the total loan portfolio and 32.97% 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 2.30% and 84.6%, 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 $89.3 million at September 30, 2002, an increase of $16.8 million when compared to $72.5 million at December 31, 2001. Such increase is net of $27.3 million non-performing residential mortgage sold during the second quarter of 2002. At September 30, 2002, $54.5 million or 61.0% 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 0.51% during the first nine-months of 2002, 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 3.25% from December 31, 2001 to September 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 September 30, 2002 and December 31, 2001, the ratio of non-performing loans to total loans would have been 2.45% and 2.75%, respectively.

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         Stockholders’ equity increased from $459.1 million at December 31, 2001 to $638.5 million at September 30, 2002. The $179.4 million or 39.1% increase was due primarily to the issuance of 2,760,000 shares of 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 issuance of 2,525,000 shares of Class B common stock in August 2002 for aggregate net proceeds of $45.2 million, the $69.2 million net income recognized during the period, net of dividends declared, and a $16.4 million increase in other comprehensive income, due mainly to unrealized gains on securities available for sale during the period of $35.3 million ($21.5 million net of taxes).

Results of Operations

         During the three and nine months ended September 30, 2002, R&G Financial reported net income of $25.0 million and $69.2 million, or $.63 and $1.81 of earnings per diluted share, respectively, compared to net income before the cumulative effect of a change in accounting principle of $17.4 million and $45.8 million or $0.46 and $1.28 of earnings per diluted share for the comparative periods in 2001, which reflects an increase in earnings per share of 37.0% and 41.4% for the three and six months periods ending September 30, 2002 over the comparable periods in 2001.

         Net interest income increased by $41.9 million or 62.1% during the nine month period ended September 30, 2002 to $109.4 million, primarily due to an increase in the average balance of interest-earning assets, together with a 47 basis point increase in the net interest margin from 2.49% to 2.96%. The provision for loan losses amounted to $13.5 million during the nine months ended September 30, 2002, a 84.6% 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 increased its non-interest income by $22.8 million or 29.1% during the nine months ended September 30, 2002 over the prior comparable period to $101.1 million. Net gain on sale of loans increased significantly, by $13.5 million or 30.6% 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 $5.8 million or 23.1% over the comparable periods, due to the growth in the Company’s loan servicing portfolio.

         Net interest income increased by $13.4 million or 48.1% to $41.3 million during the quarter ended September 30, 2002, due to an increase in the average balance of interest-earning assets, together with a 10 basis points increase in the net interest margin from 2.86% to 2.96%. Net gain on sale of loans increased 40.8% to $24.4 million during the three month ended September 30, 2002.

         Total expenses increased by $30.7 million or 39.8% during the nine months ended September 30, 2002 over the prior comparable period, primarily due to a $20.6 million or 50.3% increase in other administrative and general expenses, primarily due to increased amortization of $10.1 million of the Company's servicing asset, together with a $7.0 million provision for valuation impairment reserves during the third quarter of 2002, and increased advertising expenses to increase loan production and other marketing initiatives. Employee compensation and benefits increased by $8.2 million or 34.6% associated with general growth in Company operations as well as increased loan production. These increases were accompanied by a $1.8 million or 14.8% increase in occupancy expenses.

         Total expenses increased by $15.4 million or 51.4% during the three month period ended September 30, 2002 over the prior comparable period, due to a $11.0 million or 65.8% increase in other general and administrative expenses, comprised primarily of the $7.0 million provision for valuation impairment reserves of the Company’s servicing asset, a $3.5 million or 39.4% increase in employee compensation and benefits, and a $868,000 or 20.3% increase in occupancy expenses.

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Interest Rate Risk Management

         The following table summarizes the anticipated maturities or repricing or R&G Financial’s interest-earning assets and interest-bearing liabilities as of September 30, 2002, based on the information and assumptions set forth in the notes below. For purposes of this presentation, the interest earning components of loans held for sale and mortgage-backed securities held in connection with the Company’s mortgage banking business as well as all securities held for trading, are assumed to mature within one year. In addition, investments held by the Company which have call features are presented according to their contractual maturity date.

                                                   
      Within   Four to   More Than   More Than                
      Three   Twelve   One Year to   Three Years   Over Five        
(Dollars in Thousands)   Months   Months   Three Years   to Five Years   Years   Total
   
 
 
 
 
 
Interest-earning assets(1):
                                               
Loans receivable
  $ 1,153,448     $ 249,875     $ 372,741     $ 234,100     $ 645,354     $ 2,655,518  
Mortgage loans held for sale
    59,673       165,335                         225,008  
Mortgage-backed securities(2)(3)
    164,755       459,435       316,316       260,650       906,817       2,107,973  
Investment Securities(3)
    234,571       150,320       199,883       73,243       6,469       664,486  
Other interest-earning assets(4)
    82,595                               82,595  
 
   
     
     
     
     
     
 
Total
  $ 1,695,042     $ 1,024,965     $ 888,940     $ 567,993     $ 1,558,640     $ 5,735,580  
 
   
     
     
     
     
     
 
Interest bearing liabilities:
                                               
Deposits (5)
                                               
 
NOW and Super NOW accounts
  $ 20,994     $ 59,263     $ 65,149     $ 52,771     $ 224,973     $ 423,150  
 
Passbook savings accounts
    7,980       23,144       57,622       46,098       184,394       319,238  
 
Regular and commercial checking
    19,137       53,583       58,901       47,710       203,393       382,724  
 
Certificates of deposit
    305,327       614,898       452,917       309,524       2,254       1,684,920  
FHLB advances
    87,000       64,000       285,725       294,000       140,000       870,725  
Securities sold under agreements to repurchase (6)
    280,458       592,036       258,582       378,200             1,509,276  
Other borrowings(7)
    47,905       133,596       206                   181,707  
 
   
     
     
     
     
     
 
Total
    768,801       1,540,520       1,179,102       1,128,303       755,014       5,371,740  
 
   
     
     
     
     
     
 
Effect of hedging instruments
    180,000       (10,000 )           (90,000 )     (80,000 )      
 
   
     
     
     
     
     
 
Excess (deficiency) of interest-earning assets over interest-bearing liabilities
  $ 1,106,241     $ (525,555 )   $ (290,162 )   $ (650,310 )   $ 723,626     $ 363,840  
 
   
     
     
     
     
     
 
Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities
  $ 1,106,241     $ 580,686     $ 290,524     $ (359,786 )   $ 363,840        
 
   
     
     
     
     
     
 
Cumulative excess (deficiency) of interest-earning assets over interest-bearing liabilities as a percent of total assets
    17.93 %     9.41 %     4.71 %     (5.83 )%     5.90 %      
 
   
     
     
     
     
     
 

(footnotes on following page)

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(1)   Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather that in the period in which they are due, and fixed-rate loans are included in the periods in which they are scheduled to be repaid, based on scheduled amortization, in each case as adjusted to take into account estimated prepayments.
(2)   Reflects estimated prepayments in the current interest rate environment.
(3)   Includes securities held for trading, available for sale and held to maturity.
(4)   Includes securities purchased under agreement to resell, time deposits with other banks and federal funds sold, if any.
(5)   Does not include non-interest-bearing deposit accounts.
(6)   Includes federal funds purchased, if any.
(7)   Comprised of warehousing lines, notes payable, trust preferred securities and other borrowings.

         As of September 30, 2002, the Company had a one year positive gap of approximately $580.7 million which constituted 9.41% of total assets at such date, compared to a positive gap of approximately $462.6 million or 9.92% of total assets at December 31, 2001. R&G Financial’s positive gap within one year at September 30, 2002 and December 31, 2001 is due primarily to an increasing amount of adjustable rate loans resulting from greater emphasis in commercial and construction lending as well as to the extension during 2001 and 2002 of the maturity dates of certain borrowings of the Company into longer-term maturities at very attractive rates, taking advantage of reducted interest rates during such period. The Company estimates that as of September 30, 2002, approximately 53% of all borrowings of the Company had maturity dates longer than one year. In addition, the Company has entered into certain derivative instruments and increased its portfolio of investment securities held for trading, reducing its gap exposure.

         While the above table presents the Company’s loans receivable portfolio held for investment purposes according to its maturity date, from time to time the Company may negotiate special transactions with FHLMC and/or FNMA or other third party investors for the sale of such loans. There can be no assurance, however, that the Company will be successful in consummating any such transactions.

         The following table presents for the periods indicated R&G Financial’s total dollar amount of interest from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities expressed both in dollars and rates, and the net interest margin. The table does not reflect any effect of income taxes. All average balances are based on the average of month-end balances for R&G Mortgage and Crown Bank, and average daily balances for the Bank in each case during the periods presented.

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    For the three month period ended September 30,
   
    2002   2001
   
 
    Average           Yield/   Average           Yield/
(Dollars in thousands)   Balance   Interest   Rate   Balance   Interest   Rate
   
 
 
 
 
 
Interest-Earning Assets:
                                               
Cash and cash equivalents(1)
  $ 164,721     $ 306       0.74 %   $ 30,431     $ 324       4.26 %
Investment securities available for sale
    586,240       8,029       5.48       420,479       6,851       6.52  
Investment securities held to maturity
    27,414       369       5.38       13,706       200       5.84  
Mortgage-backed securities held for trading
    77,719       1,106       5.69       113,846       1,802       6.33  
Mortgage-backed securities available for sale
    1,795,230       27,547       6.14       1,209,321       20,255       6.70  
Mortgage-backed securities held to maturity
    48,520       693       5.71       48,868       735       6.02  
Loans receivable, net (2)
    2,784,689       50,086       7.19       2,011,547       40,509       8.06  
FHLB of New York Stock
    93,066       776       3.34       55,380       700       5.06  
 
   
     
     
     
     
     
 
Total interest-earning assets
    5,577,599     $ 88,912       6.38 %     3,903,578     $ 71,376       7.31 %
 
   
     
     
     
     
     
 
Non-interest-earning assets
    203,668                       309,390                  
 
   
     
     
     
     
     
 
Total assets
  $ 5,781,267                     $ 4,212,968                  
 
   
     
     
     
     
     
 
Interest-Bearing Liabilities:
                                               
Deposits
  $ 2,698,319     $ 23,826       3.53 %   $ 1,872,192     $ 22,242       4.75 %
Securities sold under agreements to repurchase (3)
    1,376,646       12,708       3.69       1,098,472       12,135       4.42  
Notes payable
    232,472       1,795       3.09       266,811       3,523       5.28  
Other borrowings(4)
    827,888       9,273       4.48       433,739       5,580       5.15  
 
   
     
     
     
     
     
 
Total interest-bearing liabilities
    5,135,325     $ 47,602       3.71 %     3,671,214     $ 43,480       4.74 %
 
   
     
     
     
     
     
 
Non-interest-bearing liabilities
    40,993                       116,462                  
 
   
     
     
     
     
     
 
Total liabilities
    5,176,318                       3,787,676                  
 
   
     
     
     
     
     
 
Stockholders’ equity
    604,949                       425,292                  
 
   
     
     
     
     
     
 
Total liabilities and stockholders’ equity
  $ 5,781,267                     $ 4,212,968                  
 
   
     
     
     
     
     
 
Net interest income; interest rate spread (5)
          $ 41,310       2.67 %           $ 27,896       2.57 %
 
   
     
     
     
     
     
 
Net interest margin
                    2.96 %                     2.86 %
 
   
     
     
     
     
     
 
Average interest-earning assets to average interest-bearing liabilities
                    108.61 %                     106.33 %
 
   
     
     
     
     
     
 

(footnote on page 26)

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    For the nine month period ended September 30,
     
    2002   2001
   
 
    Average           Yield/   Average           Yield/
(Dollars in thousands)   Balance   Interest   Rate   Balance   Interest   Rate
   
 
 
 
 
 
Interest-Earning Assets:
                                               
Cash and cash equivalents (1)
  $ 91,933     $ 902       1.31 %   $ 37,109     $ 1,345       4.83 %
Investment securities available for sale
    563,497       23,950       5.67       394,164       19,770       6.69  
Investment securities held to maturity
    25,093       1,020       5.42       7,506       325       5.77  
Mortgage-backed securities held for trading
    84,241       3,480       5.51       108,557       5,117       6.28  
Mortgage-backed securities available for sale
    1,677,697       77,901       6.19       1,114,739       54,343       6.50  
Mortgage-backed securities held to maturity
    49,982       2,183       5.82       29,049       1,301       5.97  
Loans receivable, net (2)
    2,354,631       127,569       7.22       1,866,557       114,292       8.16  
FHLB of New York Stock
    79,151       2,241       3.77       49,933       2,243       5.99  
 
   
     
     
     
     
     
 
Total interest-earning assets
    4,926,225     $ 239,246       6.48 %     3,607,614     $ 198,736       7.35 %
 
   
     
     
     
     
     
 
Non-interest-earning assets
    338,364                       301,599                  
 
   
     
     
     
     
     
 
Total assets
  $ 5,264,589                     $ 3,909,213                  
 
   
     
     
     
     
     
 
Interest-Bearing Liabilities:
                                               
Deposits
  $ 2,340,924     $ 65,416       3.73 %   $ 1,773,775     $ 67,937       5.11 %
Securities sold under agreements to repurchase (3)
    1,399,763       37,764       3.60       973,255       36,717       5.03  
Notes payable
    252,815       5,152       2.72       231,468       8,545       4.92  
Other borrowings(4)
    643,326       21,550       4.47       446,538       18,053       5.39  
 
   
     
     
     
     
     
 
Total interest-bearing liabilities
    4,636,828     $ 129,882       3.73 %     3,425,036     $ 131,252       5.11 %
 
   
     
     
     
     
     
 
Non-interest-bearing liabilities
    112,911                       96,956                  
 
   
     
     
     
     
     
 
Total liabilities
    4,749,739                       3,521,992                  
 
   
     
     
     
     
     
 
Stockholders’ equity
    514,850                       387,221                  
 
   
     
     
     
     
     
 
Total liabilities and stockholders’ equity
  $ 5,264,589                     $ 3,909,213                  
 
   
     
     
     
     
     
 
Net interest income; interest rate spread(5)
          $ 109,364       2.75 %           $ 67,484       2.24 %
 
   
     
     
     
     
     
 
Net interest margin
                    2.96 %                     2.49 %
 
   
     
     
     
     
     
 
Average interest-earning assets to average interest-bearing liabilities
                    106.24 %                     105.33 %
 
   
     
     
     
     
     
 

(footnotes on following page)

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

Mortgage Loan Servicing

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

                       
          At or for the nine months ended
          September 30,
         
          2002   2001
         
 
          (Dollars in thousands)
Composition of Servicing Portfolio at period end:
               
   
GNMA
  $ 2,721,221     $ 2,958,985  
   
FNMA/FHLMC
    5,926,375       2,337,570  
   
Other mortgage loans (3)
    2,602,507       1,808,222  
   
 
   
     
 
Total servicing portfolio (3)
  $ 11,250,103     $ 7,104,777  
   
 
   
     
 
Activity in the Servicing Portfolio:
               
 
Beginning servicing portfolio
  $ 7,224,571     $ 6,634,059  
 
Add: Loan originations and purchases
    1,529,819       1,415,853  
     
Servicing of portfolio loans acquired (4)
    4,168,844       3,837  
 
Less: Sale of servicing rights(1)
    (176,644 )     (164,875 )
     
Run-offs(2)
    (1,496,487 )     (784,097 )
   
 
   
     
 
 
Ending servicing portfolio(3)
  $ 11,250,103     $ 7,104,777  
   
 
   
     
 
 
Number of loans serviced
    162,823       113,181  
 
Average loan size
  $ 69     $ 63  
 
Average servicing fee rate
    0.51 %     0.50 %


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

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(2)   Run-offs refer to regular amortization of loans, prepayments and foreclosures.
(3)   At the dates shown, included $981.1 million and $1.0 billion of loans serviced for the Bank, respectively, which constituted 8.7% and 14.1% of the total servicing portfolio, respectively, and $120.8 million of loans in Crown Bank’s portfolio as of September 30, 2002, or 1.1% of the total servicing portfolio at such date.
(4)   Includes $2.6 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 September 30, 2002, 62.6% 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 nine month periods ended September 30, 2002 and 2001, the Company recognized $7.2 million and $2.5 million, respectively, of unscheduled amortization on mortgage servicing rights, and made provisions for impairment of approximately $6.5 million and $1.2 million during such respective periods.

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 September 30, 2002, the Company had $119.7 million in borrowing capacity under unused warehousing and other lines of credit, $768.7 million in borrowings capacity under unused lines of credit with the FHLB of New York and $25.0 million under unused fed funds lines of credit. The Company has generally not relied upon brokered deposits as a source of liquidity.

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         At September 30, 2002, the Company had outstanding commitments to originate and/or purchase mortgage and non-mortgage loans (including unused lines of credit) of $365.9 million. Certificates of deposit which are scheduled to mature within one year totaled $916.7 million at September 30, 2002, and borrowings that are scheduled to mature within the same period amounted to $1.2 billion. The Company anticipates that it will have sufficient funds available to meet its current loan commitments.

         Capital Resources - The Company issued $25 million in Trust Preferred Securities in April 2002 through R&G Capital Trust I, a subsidiary of RAC. 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 September 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 6.80%, 12.77% and 13.74%, respectively. At September 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 8.44%, 11.86% and 12.91%, 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 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

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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.

         As of September 30, 2002, the Company had a servicing asset of $147.6 million, and retained interests (CMO residuals and interest only strips) resulting from financial asset transfers accounted for as sales totaling $22.7 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 September 30, 2002 is presented on page 22 of this Report. Management believes there have been no material changes in the Company’s market risk since December 31, 2001.

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Item 4. Controls and Procedures

         Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-14. Based upon that evaluation, the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission (“SEC”) filings. There have been no significant changes in the Company’s internal controls or in other factors which could significantly affect these controls subsequent to the date the Company carried out its evaluation.

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

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PART II — OTHER INFORMATION

Item 1: Legal Proceedings

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

Item 2: Changes in Securities

      Not applicable.

Item 3: Defaults Upon Senior Securities

      Not applicable.

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

      Not applicable.

Item 5: Other Information

      Not applicable.

Item 6: Exhibits and Reports on Form 8-K

(a)   Item 601 exhibits:

     
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   Agreement and Plan of Reorganization by and 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, as amended (2)
3.1.0   Certificate of Incorporation of R&G Financial Corporation (3)
3.1.1   Certificate of Amendment to the Certificate of Incorporation of R&G Financial Corporation (3)

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No.   Description

 
3.1.2   Amended and Restated Certificate of Incorporation of R&G Financial Corporation (4)
3.1.3   Amendment to the Amended and Restated Certificate of Incorporation of R&G Financial Corporation (5)
3.1.4   Second Amendment to Amended and Restated Certificate of Incorporation of R&G Financial Corporation (15)
3.1.5   Certificate of Resolutions designating the terms of the Series A Preferred Stock (6)
3.1.6   Certificate of Resolutions designating the terms of the Series B Preferred Stock (7)
3.1.7   Certificate of Resolutions designating the terms of the Series C Preferred Stock (12)
3.1.8   Certificate of Resolutions designating the terms of the Series D Preferred Stock (13)
3.2   Bylaws of R&G Financial Corporation (3)
4.0   Specimen of Stock Certificate of R&G Financial Corporation (3)
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)
10.1   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 (3)
10.2   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 (3)
10.3   Data Processing Computer Service Agreement between R&G Mortgage and R-G Premier Bank of Puerto Rico dated December 1, 1994 (3)
10.4   Securitization Agreement by and between R&G Mortgage and R-G Premier Bank of Puerto Rico, dated as of July 1, 1995 (3)
10.5   R&G Financial Corporation Stock Option Plan (3)(*)
10.6   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.

(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 Registrant’s 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 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 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 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.
(*)   Management contract or compensatory plan or arrangement.

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(b)   Reports on Form 8-K

(1)  The Registrant filed a current report on Form 8-K on July 3, 2002, announcing the filing of a listing application with The New York Stock Exchange to list its Class B Common Stock.

(2)  The Registrant filed a current report on Form 8-K on July 11, 2002, announcing receipt of approval to list its Class B Common Stock on The New York Stock Exchange (the “NYSE”), and that the Class B Common would begin trading on the NYSE on July 12, 2002 and be delisted from the Nasdaq National Market effective July 11, 2002.

(3)  The Registrant filed a current report on Form 8-K on July 17, 2002, with an attached press release announcing its earning for the second quarter and six months ended June 30, 2002.

(4)  The Registrant filed a current report on Form 8-K on July 30, 2002, announcing the pricing of an offering of 3.5 million shares of is Class B Common Stock at a price of $19.00 per share.

(5)  The Registrant filed a current report on Form 8-K on August 2, 2002, announcing the closing of the offering of 3.5 million shares of its Class B Common Stock.

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: November 14, 2002   By:   /S/ VICTOR J. GALAN
       
    Víctor J. Galán, 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)

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CERTIFICATIONS

I, Víctor J. Galán, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of R&G Financial Corporation;
 
2.   Based on my knowledge, this quarterly 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 quarterly report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
 
4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

  (a)   Designed such disclosure controls and procedures 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 the periodic report is being prepared;
 
  (b)   Evaluated the effectiveness of the registrant ‘s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
  (c)   Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

  (a)   All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls;
 
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.   The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

     
Date: November 14, 2002    
 
    /s/ Víctor J. Galán
Chairman of the Board and
Chief Executive Officer

 


Table of Contents

I, Joseph R. Sandoval, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of R&G Financial Corporation;
 
2.   Based on my knowledge, this quarterly 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 quarterly report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
 
4.   The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

  (a)   Designed such disclosure controls and procedures 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 the periodic report is being prepared;
 
  (b)   Evaluated the effectiveness of the registrant ‘s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
  (c)   Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.   The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

  (a)   All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls;
 
  (b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.   The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

     
Date: November 14, 2002    
 
    /s/ Joseph R. Sandoval
Senior Vice President and Chief
Financial Officer