UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended: December 31, 2003

OR

Commission File No.: 0-21137

R&G FINANCIAL CORPORATION

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

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

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

(1)		Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 2003 are incorporated into Parts II and IV.
(2)		Portions of the definitive proxy statement for the Annual Meeting of Stockholders are incorporated into Part III.

PART I

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

	•		the strength of the United States economy in general and the strength of the regional and local economies within Puerto Rico and Florida;
	•		the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
	•		inflation, interest rate, market and monetary fluctuations;
	•		our timely development of new products and services in a changing environment, including the features, pricing and quality of our products and services compared to the products and services of our competitors;
	•		the willingness of users to substitute competitors’ products and services for our products and services;
	•		the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;
	•		technological changes;
	•		changes in consumer spending and savings habits; and
	•		regulatory or judicial proceedings.

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

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

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

ITEM 1: BUSINESS

General

The Company

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

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

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

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

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

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

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

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

Banking Operations

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

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

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

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

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

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

Mortgage Banking

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

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

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

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

Regulation

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

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

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

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Lending Activities from Banking Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mortgage Banking Activities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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