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.