UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended: December 31, 2004

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:

Series A-D Noncumulative Perpetual Monthly Income Preferred Stock
(liquidation value $25 per share and par value $.01 per share)

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 þ No o

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. o

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

The aggregate value of the 27,780,426 shares of Class B Common Stock of the Registrant issued and outstanding on June 30, 2004, which excludes 1,762,410 shares held by all directors and officers of the Registrant as a group, was approximately $918.4 million. This figure is based on the last known trade price of $33.06 per share of the Registrant’s Class B Common Stock on June 30, 2004.

Number of shares of Class B Common Stock outstanding as of February 28, 2005: 29,572,120. (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, 2004 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.

Table of Contents

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 as defined in the Private Securities Litigation Reform Act of 1995.

      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, or the Company, is a Puerto Rico chartered, financial holding company that operates R-G Premier Bank of Puerto Rico, or Premier Bank, a Puerto Rico commercial bank, and R-G Crown Bank, or Crown Bank, a Florida domiciled federal savings bank. The Company also operates R&G Mortgage Corp, or R&G Mortgage, the second largest mortgage company in Puerto Rico, The Mortgage Store of Puerto Rico, Inc., or the Mortgage Store, a subsidiary of R&G Mortgage, and Continental Capital Corp., or Continental, a mortgage banking subsidiary of Crown Bank which does business in the continental United States. The Company also conducts an insurance agency business and offers broker dealer services in Puerto Rico through Home & Property Insurance Corp. and R-G Investments Corporation, respectively.

     The Company is currently in its 33^rd year of operations and operates its business through its subsidiaries. The Company provides a full range of banking services through its banking subsidiaries, Premier Bank with 33 branches in Puerto Rico and Crown Bank with 15 branches in Florida. Banking services include commercial banking services, corporate real estate and business lending, residential construction lending, consumer lending and credit cards, offers a diversified range of deposit products and, to a lesser extent, trust and investment services through its private banking department and our broker-dealer. The Company also provides 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, 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, through its mortgage banking subsidiary R-G Mortgage, is the second largest mortgage loan originator and servicer of mortgages on single-family residences in Puerto Rico.

     In June 2002, the Company acquired Crown Bank, which operates in the Tampa — St. Petersburg — Clearwater and Orlando metropolitan areas. At the time of acquisition, the Company operated 15 full-service offices. According to the Metro Orlando Economic Development Commission, the Orlando market is one of the fastest growing markets in Florida, both generally and for Hispanics in particular (mainly Puerto Rican). Management believes that owning and operating Crown Bank is a cost effective way to access the Hispanic markets in the United States, while providing a strong platform for further expansion in Florida. On October 11, 2004, the Company and Crown Bank entered into a purchase and assumption agreement with SouthTrust Bank to acquire 18 SouthTrust branches located in three banking markets in Florida and one banking market in Georgia. The acquisition was completed on February 18, 2005. In the transaction, Crown Bank assumed deposits and other liabilities of approximately $628.0 million and acquired approximately $502.6 million of primarily commercial real estate, commercial business and consumer loans, as well as cash and other assets. Crown Bank will now operate through 33 full service branches. The transaction permits Crown Bank to expand its Central Florida footprint into nearby Lakeland, Florida and obtain a foothold in the Jacksonville, Florida and Augusta, Georgia markets.

     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 (i) expanding its retail banking franchise in order to achieve increased market presence and to increase core deposits; (ii) enhancing its net interest income by increasing its loans held for investment, particularly real estate secured loans, and investment securities; (iii) emphasizing the growth of its mortgage banking activities, including the origination and sale of mortgage loans, and growing its loan servicing operation; (iv) developing new business relationships through an increased emphasis on commercial real estate and commercial business lending; (v) diversifying its retail products and services, including an increase in consumer loan originations; (vi) meeting the financial needs of its customers through, among other things, the offering of trust and investment services and insurance products; (vii) expanding its operations in the continental United States; and, (viii) emphasizing controlled growth, while pursuing a variety of acquisition opportunities when appropriate.

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expects a decrease in demand for its mortgage loans as interest rates increase. Reduced demand for mortgage loans results in reduced loan originations and lower gain on sale of loans. Demand for refinancings is particularly sensitive to increases in interest rates.

      Increases in interest rates reduce net interest income. Increases in short-term interest rates reduce net interest income, which is an important part of the Company’s earnings. Net interest income is the difference between the interest the Company receives on its earning assets and the interest the Company pays on its borrowings. Most of the Company’s assets, like its mortgage loans and mortgage-backed securities, are long-term assets. In contrast, a large portion of the Company’s borrowings are short-term. When interest rates rise, the Company must pay more in interest on its borrowings while interest earned on its assets does not rise as quickly, which causes profits to decrease.

      Increases in interest rates may reduce or eliminate gain on sale of mortgage loans. If long-term interest rates increase between the time the Company commits to or establishes an interest rate on a mortgage loan and the time it sells the loan, the Company may realize a reduced gain or a loss on such sale.

      Increases in interest rates may reduce the value of mortgage loans and securities holdings. Increases in interest rates may reduce the value of the Company’s financial assets and have an adverse impact on the Company’s earnings and financial condition. The Company owns a substantial portfolio of mortgage loans, mortgage-backed securities and other debt securities, including interest only strips (IO’s), and trading derivatives, including residual interests in financial asset transfers accounted for as sales considered implied interest rate swaps, which have both fixed and adjustable interest rates. The market value may have an adverse effect on the Company’s earnings and financial condition. In addition, the market value of an obligation with an adjustable interest rate can be adversely affected when interest rates increase due to a lag in the implementation of repricing terms as well as due to caps, which may limit the amount of increase in the obligation’s interest rate.

      Decreases in interest rates may adversely affect the value of the Company’s servicing asset. Decreases in interest rates lead to increases in the prepayment of mortgages by borrowers, which may reduce the value of the Company’s servicing asset. The servicing asset is the estimated present value of the fees the Company expects to receive on the mortgages it services over their expected term. If prepayments increase above expected levels, the value of the servicing asset decreases because the amount of future fees expected to be received by the Company decreases. The Company may be required to recognize this decrease in value by taking a charge against its earnings, which would cause its profits to decrease.

      The Company experienced an increase in prepayments of mortgages as interest rates decreased dramatically during the past two years, which impacted the value of the Company’s servicing asset. As a consequence, the Company recognized impairment charges on its servicing portfolio of $14.1 million for the year ended December 31, 2004. During the last half of 2004, the Board of Governors of the Federal Reserve began tightening monetary policy and the increasing interest rates it charges to banks, which has resulted in an increase in interest rates generally. The Company believes, based on historical experience, that the amount of prepayments and related impairment charges should decrease as interest rates increase.

      The Company is subject to default and recourse risk in connection with its loan originations. From the time that the Company funds the mortgage loans it originates for third parties to the time it sells them, the Company is generally at risk or any mortgage loan defaults. Once the Company sells the mortgage loan, the risk of loss from mortgage loan defaults and foreclosures passes to the purchaser or insurer of the mortgage loans. However, in the ordinary course of business, the Company makes representations and warranties to the purchasers and insurers of mortgage loans. If a borrower defaults on a mortgage loan and there has been a breach of any of these representations or warranties, the Company

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may become liable for the unpaid principal and interest on the defaulted mortgage loan and may be required to repurchase the mortgage loan and bear any subsequent loss on the mortgage loan. In addition, with respect to the non-conventional mortgage loans originated by the Company, which are subsequently securitized and/or sold from time to time, the Company provides recourse in the event of mortgage loan defaults and/or foreclosures or certain documentation deficiencies. At December 31, 2004, there were $2.1 billion of loans subject to such recourse provisions.

      The Company is subject to default risk in connection with loan originations of its banking subsidiaries. Both Premier Bank and Crown Bank are subject to the risk of loss from mortgage loan defaults and foreclosures with respect to the loans originated for their respective portfolios. Notwithstanding the care with which loans are originated, industry experience indicates that a portion of a bank’s loans will become delinquent and a portion of the loans will require partial or entire charge-off. Regardless of the underwriting criteria utilized by Premier Bank and Crown Bank, losses may be experienced as a result of various factors beyond each bank’s control, including, among others, changes in market conditions affecting the value of collateral and problems affecting the credit of the borrower. Due to the concentration of Premier Bank and Crown Bank’s loans in Puerto Rico or Florida, respectively, adverse economic conditions in Puerto Rico and Florida could result in a decrease in the value of either bank’s loan portfolio and underlying collateral. Although loan delinquencies have historically been higher in Puerto Rico than in the continental United States, loan charge-offs have historically been lower than in the continental United States.

      Each of Premier Bank and Crown Bank has established provisions for loan losses, which are charged to operations, in order to maintain the allowance or loan losses at a level which is deemed to be appropriate by management based upon an assessment of prior loss experience, the volume and type of lending being conducted, industry standards, past due loans, general economic conditions in their market area and other factors related to the collectibility of the loan portfolios. Although each bank’s management utilizes its best judgment in providing for loan losses, there can be no assurance that management has accurately estimated the level of future loan losses or that either bank will not have to increase its provisions for loan losses in the future as a result of future increases in non-performing loans or for other reasons beyond the control of either bank. Any such increases in either bank’s provisions for loan losses with respect thereto could have a negative impact on the Company’s future financial condition and/or results of operations.

      The Company’s exposure to larger credit risk will increase as a consequence of the increase in construction and commercial lending activities. Each of the banking subsidiaries of R&G Financial has increased its emphasis on residential construction, commercial real estate and commercial business lending, which is likely to increase overall credit risk. Banks generally charge higher interest rates on commercial and residential construction loans than on residential mortgage loans, because larger loan losses are expected in this business line. Generally, commercial and construction loans are considered to be riskier than residential mortgage loans because they have larger balances to a single borrower or group of related borrowers. In addition, the borrower’s ability to repay a commercial and a construction loan depends, in the case of a commercial loan, on the successful operation of the business or the property securing the loan and, in the case of a construction loan, on the successful completion and sale or operation of the project. The properties securing these loans are also more difficult to dispose of in foreclosure. If Premier Bank or Crown Bank experienced loan losses that are higher than its allowance for loan losses, the Company’s profits and financial condition would be adversely affected.

      The Company is subject to risks in servicing loans for others. The Company is also affected by mortgage loan delinquencies and defaults on mortgage loans that the Company services for third parties. Under certain types of servicing contracts, the servicer must forward all or part of the scheduled payments to the owner of the mortgage loan, even when mortgage loan payments are delinquent. Also, to protect

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their liens on mortgaged properties, owners of mortgage loans usually require the servicer to advance mortgage and hazard insurance and tax payments on schedule even though sufficient escrow funds may not be available. The servicer will generally recover its advances from the mortgage owner or from liquidation proceeds when the mortgage loan is foreclosed. However, in the interim, the servicer must absorb the cost of funds advanced during the time the advance is outstanding. Further, the servicer must bear the increased costs of attempting to collect on delinquent and defaulted mortgage loans. In addition, if a default is not cured, the mortgage loan will be cancelled as a result of foreclosure proceedings. As a consequence, the Company is required to forego servicing income from the time such loan becomes delinquent forward.

      The economic hedging transactions which the Company enters into may not be effective in managing its exposure to interest rate risk. The Company uses derivatives to manage its exposure to interest rate risk caused by changes in interest rates. Derivatives include interest rate swaps, interest rate collars, futures, forwards and options. Derivatives are generally either privately-negotiated over-the-counter, or OTC, or standard contracts transacted through regulated exchanges. OTC contracts generally consist of swaps, collars, forwards and options. Exchange-traded derivatives include futures and options. The derivative instruments that the Company may utilize also have their own risks, which include (1) basis risk, which consists of the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost; (2) credit or default risk, which consists of the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder; and (3) legal risk, which consists of the risk that the Company is unable to enforce certain terms of such instruments. All or any of such risks could expose the Company to losses. Consequently, the Company’s profitability may be adversely affected during any period as a result of the use of derivatives in a hedging transaction.

      For financial reporting purposes, the Company’s general policy is to account for derivative instruments on a marked-to-market basis with gains or losses charged to current operations as they occur. Contracts with positive fair value are reported as assets and contracts with negative fair values are reported as liabilities, after the application of netting arrangements, with unrealized gains and losses recorded either in other comprehensive income in the Company’s consolidated statements of financial condition or in the Company’s consolidated statements of income, depending on the purpose for which the derivative is held. Under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as subsequently amended, the Company may designate a derivative as a hedge of the fair value of a recognized fixed rate asset or liability (“fair value” hedge) only if certain conditions are met. Certain hedging activities related to the fair value of certain beneficial interests retained on financial asset transfers accounted for as sales are reported as trading derivatives. Both the changes in fair value of the hedged item (in this case beneficial interests retained on financial asset transfers accounted for as sales) and changes in fair value of the derivative are included in trading activities in the Company’s consolidated statements of income. The Company recognized pre-tax losses of $2.6 million on such trading derivatives that serve as economic fair value hedges for its beneficial interests retained during the year ended December 31, 2004.

      The Company’s business has historically been concentrated in Puerto Rico, and adverse conditions in Puerto Rico could negatively impact the Company’s operations. The Company’s business activities and credit exposure have historically been concentrated with customers in Puerto Rico. Accordingly, the Company’s financial condition and results of operations have been dependent to a significant extent upon the economic conditions prevailing in Puerto Rico, including the effect of such economic conditions on real estate values. Any significant adverse political or economic developments or

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nature-related occurrences, such as hurricanes, in Puerto Rico, and, in particular, any decline in real estate values, could result in a downturn in loan originations, an increase in the level of nonperforming assets and a reduction in the value of the Company’s loans, real estate owned and mortgage servicing portfolio, all of which would negatively affect the Company’s profitability. While the acquisition and subsequent growth of Crown Bank has facilitated a diversification of overall lending concentration, Crown Bank is subject to similar concentration risks in the Florida markets in which it operates.

      The Company’s origination business could be adversely affected if the Company cannot maintain access to stable funding sources. The Company’s business requires continuous access to various funding sources. While Premier Bank and Crown Bank are able to fund their operations through deposits as well as through longer-term borrowings from the Federal Home Loan Bank, or FHLB, and other alternative sources, the business of R&G Mortgage has been significantly dependent upon short-term borrowings under warehousing lines. Some of these warehousing lines of credit require the maintenance of minimum levels of net worth and debt service and limit the amount of indebtedness and dividends that may be declared.

      While the Company expects to have continued access to credit from the foregoing sources of funds, there can be no assurance that such financing sources will continue to be available or will be available on favorable terms. In the event that the warehousing lines of credit of the Company’s subsidiaries were reduced or eliminated and the Company was not able to replace such lines on a cost-effective basis, the Company would be forced to curtail or cease its mortgage origination business, which would have a material adverse effect on its operations and financial condition. Although the Company’s subsidiaries could also potentially access borrowings from the Company’s banking subsidiaries, any such borrowings would be subject to and limited by certain regulatory restrictions which apply to transactions between banks and their affiliates, including certain of the Company’s subsidiaries.

      For the quarters ended September 30, and December 31, 2004, R&G Mortgage breached a covenant not to pay in excess of 50% of its net income for the fiscal year. The breach was occasioned primarily due to the previously disclosed trading losses during the last two quarters of 2004. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 hereof. R&G Mortgage’s lender has agreed to waive the breach of covenant for each of the quarters in question. Except as disclosed herein, management of R&G Financial believes that as of December 31, 2004, it was in compliance with all such covenants and restrictions and does not anticipate that such covenants and restrictions will limit its operations.

      The Company’s loan portfolio has significantly increased in recent years and many of the Company’s commercial real estate and commercial construction loans are relatively unseasoned, and defaults on such loans could adversely affect the Company’s financial condition and results of operations. The Company’s total loan portfolio has grown significantly in recent years, from $1.6 billion at December 31, 2000 to $5.1 billion at December 31, 2004. While 52.4% of the Company’s loan portfolio continues to be secured by residential properties, an increasing amount of the Company’s loan portfolio is comprised of commercial real estate loans and commercial construction and land acquisition loans.

      At December 31, 2004, the Company’s commercial real estate, land acquisition and construction portfolios amounted to an aggregate of $2.2 billion or 38.5% of the Company’s loan portfolio. Because such loans are relatively unseasoned, many of the loans may be too new to demonstrate problems. While the Company attempts to mitigate these risks in commercial real estate lending through stringent underwriting criteria and in the case of construction loans, by limiting originations to primarily residential properties, no assurance can be made that an increase in delinquencies and defaults will not occur. Defaults on these loans could negatively effect the Company’s financial condition and results of operations.

      Taxation of the Company’s international banking entity may impact the Company’s future earnings. In January 2004, the Puerto Rico Legislature passed legislation to modify the taxation of international banking entities, or IBEs, organized under the Puerto Rico International Banking Center Law. Under the new legislation, which affects only those entities organized as divisions of banks (as opposed to those organized as separate subsidiaries of banks), the income generated by international bank divisions will be subject to the regular Puerto Rico statutory tax rate to the extent it exceeds 40% of the combined taxable income of the bank and its IBE divisions for the period January 1, 2004 to December

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31, 2004, 30% for the period January 1, 2005 to December 31, 2005, and 20% thereafter. The new law does not impose taxes on IBEs that operate as a subsidiary of a bank.

      The Company presently operates an IBE as a division of Premier Bank. The Company intends to transfer some of the assets of Premier Bank’s IBE to a new IBE that will operate as a subsidiary of Premier Bank, which will allow the Company to continue to enjoy such tax benefits. The Company cannot give any assurance that the legislation may not be further modified in the future in a manner which would reduce the tax benefits available to the Company’s IBE. A reduction of such tax benefits may reduce the Company’s earnings.

      The Company is subject to numerous laws and significant regulation and the failure to comply with these laws and regulations could adversely affect the Company. The Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the related rules and regulations promulgated by the Securities Exchange Commission, or SEC, and the New York Stock Exchange, have increased the scope, complexity and cost of the Company’s corporate governance reporting and disclosure practices. The Sarbanes-Oxley Act imposes a variety of civil and criminal penalties with respect to any violations of such act and the related rules and regulations.

       The USA Patriot Act of 2001, or Patriot Act, and the Bank Secrecy Act, or BSA, contain anti-money laundering and financial transparency laws. The regulations under such acts include standards for verifying client identification at account opening and rules designed to prevent money laundering and to identify parties that may be involved in terrorism. In connection with BSA, as a result of an examination of Premier Bank as of June 2004, in December 2004 the Federal Deposit Insurance Corporation, or FDIC, the Office of Puerto Rico Commissioner of Financial Institutions, or OCFI, and Premier Bank entered into a Memorandum of Understanding, or MOU, to correct and strengthen perceived deficiencies in Premier Bank’s BSA and anti-money laundering programs. Premier Bank is required, among other things, to enhance monitoring, reporting, and documentation, strengthen controls, revise policies, increase its audits and enhance the training of its personnel. Premier Bank has taken certain measures in accordance with a corrective action plan submitted to the FDIC and OCFI, and believes that it is in substantial compliance with the MOU.

      Changes in statutes, regulations and the regulatory environment in which the Company operates could adversely affect the Company. R&G Financial, as a Puerto Rico chartered financial holding company, and its various subsidiaries, are each subject to federal and local governmental supervision and regulation. There are laws and regulations which restrict transactions between the Company and its various subsidiaries. Any change in such regulations, whether by applicable regulators or as a result of legislation subsequently enacted by the Congress of the United States or the applicable local legislatures, could have a substantial impact on the Company’s operations and profitability.

      Competition with other financial institutions could adversely affect the Company’s profitability. The Company faces substantial competition in originating loans and in attracting deposits. The competition in originating loans comes principally from other United States, Puerto Rico and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other institutional lenders and purchasers of loans. The Company will encounter greater competition as it continues to expand its operations in the continental United States. A number of institutions with which the Company competes have significantly greater assets, capital, name recognition and other resources. In addition, many of the Company’s competitors are not subject to the same federal regulation that governs the Company’s business. As a result, many of the Company’s competitors have advantages in conducting certain businesses and providing certain services. Increased competition could require the Company to increase the rates it offers on deposits or lower the rates it charges on loans, which could adversely affect the Company’s profitability.

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      If the Company was to lose the services of its key individuals, its business would suffer. The Company’s success has been largely dependent on Víctor J. Galán, Chairman of the Board and Chief Executive Officer, and Ramón Prats, Vice Chairman of the Board and President. The Company’s future success will also depend, to a great extent, upon the services of Mr. Galán and Mr. Prats. The Company believes that the prolonged unavailability or the unexpected loss of the services of Mr. Galán and/or Mr. Prats could have a material adverse effect upon the Company, as attracting suitable replacements may involve significant time and/or expense.

      The concentration of ownership in the Company’s stock and disparate voting rights may leave minority stockholders with little control over R&G Financial. Shares of the Company’s Class A common stock are entitled to two votes per share and shares of the Company’s Class B common stock are entitled to one vote per share. At December 31, 2004, Víctor J. Galán, Chairman of the Board and Chief Executive Officer, owned 42.2% of the Company’s outstanding common stock and was entitled to exercise 59.3% of the outstanding voting rights. As a result, Mr. Galán has the power to elect and remove all of R&G Financial’s board of directors and management and to determine the outcome of substantially all other matters to be decided by a vote of stockholders. Mr. Galán’s interest may not necessarily always be consistent with the interests of all other stockholders. Any future offerings of Class A common stock will dilute the voting power of the Class B common stock.

      Certain provisions in the Company’s certificate of incorporation and bylaws could discourage an acquisition of R&G Financial. In addition to the amount of common stock controlled by the Company’s Chairman of the Board and Chief Executive Officer described above under “— The concentration of ownership in the Company’s stock and disparate voting right may leave minority stockholders with little control over R&G Financial,” certain provisions of the Company’s certificate or incorporation and bylaws could have the effect of discouraging non-negotiated takeover attempts, which certain stockholders might deem to be in their interest, and make it more difficult for the Company’s stockholders to remove members of the Company’s board of directors and management. In addition, various federal laws and regulations could affect the ability of a person, firm or entity to acquire the Company or shares of the Company’s common stock.

Banking Operations

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

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

      Residential Loans. At December 31, 2004, R&G Financial’s loans receivable, net, totaled $5.1 billion, that represented 50.3% of R&G Financial’s $10.2 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

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historically has had a substantial amount of loans secured by first mortgage liens on existing single-family residences. At December 31, 2004, $2.9 billion, or 51.7% of R&G Financial’s total loans held for investment, consisted of such loans, of which all but $1.2 million consisted of conventional loans.

      Construction Loans. At December 31, 2004, retail construction loans amounted to $428.2 million, or 7.6% of R&G Financial’s total loans held for investment, while commercial construction and land acquisition loans amounted to $836.0 million in the aggregate, or 14.9% 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, 2004, $896.0 million, or 16.0% 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 and auto leases), term loans, insurance premium loans and loans guaranteed by the Small Business Administration and various consumer loans. At December 31, 2004, consumer loans, some of which are secured by real estate and deposits, amounted to $206.5 million, or 3.7% of total loans held for investment, and commercial business loans (including leases) amounted to $307.5 million, or 5.5% 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, 2004, 2003 and 2002, R&G Financial originated a total of $2.3 billion, $2.8 billion and $2.0 billion of residential mortgage loans, respectively. These aggregate originations include loans originated by R&G Mortgage directly for Premier Bank of $1.3 billion, $1.3 billion and $811.8 million during the years ended December 31, 2004, 2003 and 2002, respectively, or 55%, 45% and 41%, respectively, of total originations. The loans originated by R&G Mortgage for Premier Bank are comprised primarily of conventional residential loans and, to a lesser extent, residential construction loans and consumer loans secured by real estate.

      Servicing. R&G Financial’s servicing portfolio has grown significantly over the past several years. At December 31, 2004, R&G Financial’s servicing portfolio totaled $11.4 billion and consisted of a total of 145,324 loans. These amounts include R&G Mortgage’s servicing portfolio, totaling $8.5 billion, and Crown Bank’s servicing portfolio, totaling $2.9 billion, at December 31, 2004. At December

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31, 2004, R&G Financial’s servicing portfolio included $2.1 billion of loans serviced for Premier Bank and $647.7 million of loans serviced for Crown Bank, or 18.3% and 5.7%, 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, or FHA, and Veterans Administration, or 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, or FNMA, and the Federal Home Loan Mortgage Corporation, or 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, 2004, 2003 and 2002, R&G Financial sold $1.2 billion, $1.6 billion and $1.2 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 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 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, 2004, Premier Bank and Crown Bank met the capital measures for being “well-capitalized” under the regulations.

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

Lending Activities from Banking Operations

      General. At December 31, 2004, R&G Financial’s loans receivable, net totaled $5.1 billion, which represented 50.3% of R&G Financial’s $10.2 billion of total assets. At December 31, 2004, 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

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partially guaranteed by the VA. At December 31, 2004, all but $1.2 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, 2004 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, 2004 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

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because of prepayments and due-on-sale clauses that give R&G Financial the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan rates are higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are lower than current mortgage loan rates (due to refinancing of adjustable-rate and fixed-rate loans at lower rates). Under the latter circumstance, the weighted average yield on loans decreases as higher-yielding loans are repaid or refinanced at lower rates.

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