SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission file number: 000-21137

R&G FINANCIAL CORPORATION

(787) 758-2424

(Registrant’s telephone number, including area code)

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

YES x  NO o

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  
x Yes       o NO

Number of shares of Class B Common Stock outstanding as of March 31, 2004: 29,539,464 (Does not include 21,559,584 Class A Shares of Common Stock which are exchangeable into Class B Shares of Common Stock at the option of the holder.)

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R&G FINANCIAL CORPORATION

INDEX

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PART 1-FINANCIAL INFORMATION

ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS

The accompanying notes are an integral part of these statements.

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R&G FINANCIAL CORPORATION

The accompanying notes are an integral part of these statements.

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R&G FINANCIAL CORPORATION

The accompanying notes are an integral part of these statements.

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R&G FINANCIAL CORPORATION

The accompanying notes are an integral part of these statements.

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R&G FINANCIAL CORPORATION

NOTE 1 - REPORTING ENTITY AND BASIS OF PRESENTATION

Reporting entity

     The accompanying unaudited consolidated financial statements include the accounts of R&G Financial Corporation (the “Company”), a diversified financial services company, and its wholly-owned subsidiaries, R-G Premier Bank of Puerto Rico (“Premier Bank”), a Puerto Rico commercial bank, R-G Crown Bank (“Crown Bank”), a Florida-based federal savings bank, R&G Mortgage Corp. (“R&G Mortgage”), Puerto Rico’s second largest mortgage banker, R-G Investments Corporation, a Puerto Rico licensed securities broker-dealer, and Home & Property Insurance Corp., a Puerto Rico insurance agency. The Company, currently in its 32nd year of operations, operates as a financial holding company, pursuant to the provisions of the Gramm-Leach-Bliley Act of 1999, and is engaged in banking, mortgage banking, and securities and insurance brokerage through its subsidiaries.

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

     Crown Bank is also engaged in the origination of FHA-insured, VA-guaranteed and privately insured first and second mortgage loans on residential real estate (1 to 4 families) in the States of New York, New Jersey, Connecticut, North Carolina and Florida, through its wholly-owned subsidiary, Continental Capital Corporation (“Continental Capital”).

     R&G Mortgage is engaged primarily in the business of originating FHA-insured, VA- guaranteed, and privately insured first and second mortgage loans on residential real estate (1 to 4 families), directly and through its wholly-owned subsidiary, Mortgage Store of Puerto Rico, Inc. R&G Mortgage pools FHA and VA loans into GNMA mortgage-backed securities and collateralized mortgage obligation certificates for sale to investors. After selling the loans, it retains the servicing on the loans. R&G Mortgage is also a FNMA and FHLMC seller-servicer of conventional loans.

Basis of presentation

     The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles. However, in the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments (principally consisting of normal recurring accruals) necessary for a fair presentation of the Company’s financial condition as of March 31, 2004 and the results of operations and changes in its cash flows for the three months ended March 31, 2004 and 2003.

     The results of operations for the three month periods ended March 31, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. The unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2003.

Basis of consolidation

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

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Recent accounting pronouncements

Accounting for Derivative Instruments and Hedging Activities

     On July 1, 2003, the Company adopted SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivatives instruments embedded in other contracts, and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The adoption of this Statement on July 1, 2003 had no significant effect on the consolidated financial condition or results of operations of the Company.

Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity

     On July 1, 2003 the Company adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 covers a limited number of instruments that are to be classified as liabilities and specifies that such instruments embody obligations of the issuer and that, therefore, the issuer must classify them as liabilities.

     Among the instruments specified by SFAS No. 150, mandatorily redeemable financial instruments had to be classified as liabilities. The Company had $35 million of guaranteed preferred beneficial interest in company junior subordinated deferrable interest debentures (“trust preferred securities”) that had already been classified as other borrowings in its consolidated statements of financial condition as of June 30, 2003 and accordingly, the adoption of this Statement on July 1, 2003 did not have any effect on the Company’s consolidated financial statements.

Accounting for Consolidation of Variable Interest Entities

     In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities, and Interpretation of ARB No. 51” (“FIN 46”). Under FIN 46, entities that would be assessed for consolidation are typically referred to as Special-Purposed Entities (“SPEs”), although non-SPE-type entities may also be subject to the guidance. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s

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activities or entitled to receive a majority of the entities residual returns, or both. FIN 46 was effective immediately for variable interest entities created after January 31, 2003. For variable interest entities created prior to February 1, 2003, the provisions of FIN 46 became effective October 1, 2003.

     Under the provisions of FIN 46, effective July 1, 2003, the Company deconsolidated R&G Capital Trust I and II which had issued trust preferred securities prior to February 1, 2003. As discussed above, the Company had classified its $35 million trust preferred securities as borrowings in its consolidated statements of financial condition prior to such deconsolidation. The primary effect of deconsolidating these trusts was to change the balance sheet classification of the liabilities from guaranteed preferred beneficial interest in company junior subordinated deferrable interest debentures to long-term debt.

     The Company did not consolidate R&G Capital Trust IV created by the Company in August 2003, which issued $15 million in trust preferred securities in a private placement, and R&G Capital Trust III which in October 2003 issued $100 million of trust preferred securities in a public offering.

     On March 31, 2004 the Company created R&G Capital Trust V which also issued $100 million of trust preferred securities in a public offering. The requirements of FIN 46 were also applied to R&G Capital Trust V.

      Based on interim guidance issued by the Federal Reserve Board, the deconsolidation of these vehicles pursuant to FIN 46 would not impact the Tier I capital treatment of the liabilities to the extent permitted under current regulations until notice is given to the contrary.

Accounting for Certain Loans and/or Debt Securities Acquired in a Transfer

     In November 2003, the Accounting Standards Executive Committee issued Statement of Position (SOP) No. 03-3, “Accounting for Certain Loans and/or Debt Securities Acquired in a Transfer.” This statement addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable to credit quality. This SOP does not apply to loans originated by the entity and it prohibits both the creating and carry over of valuation allowances in the initial accounting of all loans acquired in a transfer within the scope of this SOP. The prohibition of the carry over applies to purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. Based on presently available information, management believes that adoption of this SOP will not have a significant effect on its consolidated financial statements.

Application of Accounting Principles to Loan Commitments

     On March 9, 2004, the SEC issued Staff Accounting Bulletin 105, “Application of Accounting Principles to Loan Commitments,” (“SAB 105”) to inform registrants of the Staff’s view that the fair value of the recorded loan commitments should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The Staff will not object to the application of existing accounting practices to loan commitments accounted for as derivatives that are entered into on or before March 31, 2004, with appropriate disclosures. On April 1, 2004, R&G Financial adopted the provisions of SAB 105. R&G Financial records the value of its mortgage loan commitments at fair market value for mortgages it intends to sell. R&G Financial does not currently include, and was not including, the value of mortgage servicing or any other internally-developed intangible assets in the valuation of its mortgage loan commitments. Therefore, the adoption of SAB 105 did not have an impact on the Company’s financial condition or results of operations.

NOTE 2 - EARNINGS PER SHARE

     Basic earnings per common share are computed by dividing net income (less preferred stock dividends) by the weighted average number of shares of common stock outstanding. The weighted average number of outstanding stock options granted in connection with the Company’s Stock Option Plan (236,861 and 237,060 during the three months ended March 31, 2004 and 2003, respectively, after giving effect to stock split), is included in the weighted average number of shares for purposes of the diluted earnings per share computation. No other adjustments are made to the computation of basic earnings per share to arrive at diluted earnings per share.

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

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NOTE 3 - INVESTMENT AND MORTGAGE-BACKED SECURITIES

     The carrying value and estimated fair value of investment and mortgage-backed securities by category are shown below. The fair value of investment securities is based on quoted market prices and dealer quotes.

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In addition to the investment and mortgage-backed securities pledged on repurchase agreements and reported as pledged assets in the statement of financial condition, at March 31, 2004 the Company had investment and mortgage-backed securities pledged as collateral on repurchase agreements where the counterparties do not have the right to sell or repledge the assets as follows:

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NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES

     Loans consist of the following:

     The changes in the allowance for loan losses follow:

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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.

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NOTE 5 - SERVICING ASSET

The changes in the servicing asset of the Company follows:

NOTE 6 - DEPOSITS

Deposits are summarized as follows:

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NOTE 7 - COMMITMENTS AND CONTINGENCIES

Commitments to buy and sell GNMA certificates and mortgage loans

As of March 31, 2004, the Company had open commitments to issue GNMA certificates of approximately $109.4 million. In addition, the Company had commitments to sell mortgage loans to third party investors amounting to approximately $251.8 million.

Unrealized gains and losses are recorded in trading activities in the accompanying consolidated statements of income related to these forward sales commitments, for the difference between committed prices and market prices at the balance sheet date. Unrealized trading gains or losses were not significant during the three months ended March 31, 2004.

Lease commitments

The Company is obligated under several noncancelable leases for office space and equipment rentals, all of which are accounted for as operating leases. The leases expire at various dates with options for renewals.

Other

At March 31, 2004, the Company is liable under limited recourse provisions resulting from the sale of loans to several investors, principally FHLMC. The principal balance of these loans, which are serviced by the Company, amounts to approximately $1.2 billion at March 31, 2004. At March 31, 2004, the Company has an allowance for recourse provisions of $4.1 million. Historical losses on recourse obligations have not been significant.

In April 2002, R&G Acquisition Holdings Corporation (a wholly-owned subsidiary of R&G Financial) (“RAC”), a Florida corporation and the holding company of Crown Bank, formed R&G Capital Trust I. R&G Capital Trust I issued $25 million of trust preferred securities in a private placement. In addition, in August 2003, RAC also formed R&G Capital Trust IV which issued $15 million of trust preferred securities in a private placement, and in October 2003 and March 2004, the Company formed R&G Capital Trust III and R&G Capital Trust V, respectively, each of which issued $100 million of trust preferred securities in public offerings (see Note 1). The Company has guaranteed certain obligations of RAC to R&G Capital Trust I and IV, and has guaranteed certain obligations of R&G Capital Trust III and V.

During the second quarter of 2003, the US Internal Revenue Service (“IRS”) began an income tax examination of the income tax returns for the year 2001 for the predecessor thrift holding company of Crown Bank prior to its acquisition by the Company in June 2002. Management believes that this examination should not result in any significant adverse effect on the Company’s financial condition or results of operations.

During the first quarter of 2004, the Puerto Rico Treasury Department (“PRTD”) began an income tax examination of the income tax returns for the year 2001 of R&G Financial (parent only) and R-G Mortgage. Management believes that this examination should not result in any significant adverse effect on the Company’s financial condition or results of operations.

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NOTE 8 - SUPPLEMENTAL INCOME STATEMENT INFORMATION

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

NOTE 9 - INDUSTRY SEGMENTS

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

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

Total assets of the Company among its industry segments and a reconciliation of reportable segment assets to the Company’s consolidated total assets as of March 31, 2004 and December 31, 2003 follows:

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Item 2: Management’s Discussion and Analysis

Cautionary Statement Regarding Forward-Looking Statements

     A number of the presentations and disclosures in this Form 10-Q, including, without limitation, statements regarding the level of allowance for loan losses, the rate of delinquencies and amounts of charge-offs, and the rates of loan growth, and 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:

     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-Q. 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.

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General

     R&G Financial Corporation (the “Company”) is a Puerto Rico chartered diversified financial holding company that, through its wholly-owned subsidiaries, is engaged in banking, mortgage banking, securities and insurance brokerage activities. The Company, currently in its 32^nd year of operations, operates 31 bank branches mainly located in the northeastern section of Puerto Rico, 15 bank branches in the Orlando and Tampa/St. Petersburg Florida markets, 5 mortgage and 7 commercial lending offices in the continental United States, and 52 mortgage offices in Puerto Rico, including 25 facilities located within Premier Bank’s branches.

     The Company is engaged in providing a full range of banking services through R-G Premier Bank of Puerto Rico (“Premier Bank”), its Puerto Rico commercial bank, and R-G Crown Bank (“Crown Bank”), its Florida-based federal savings bank acquired in June 2002. Banking activities include commercial banking services, corporate and construction lending, consumer lending and credit cards, offering a variety of deposit products and, to a lesser extent, trust and investment services through private banking.

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

     The Company is also engaged in insurance brokerage through Home & Property Insurance Corp., a Puerto Rico insurance agency, and securities brokerage through R-G Investments Corporation, a Puerto Rico licensed broker-dealer.

     The Company is the second largest mortgage loan originator and servicer of mortgage loans on single family residences in Puerto Rico. R&G Financial’s mortgage servicing portfolio amounted to approximately $10.9 billion as of March 31, 2004, or essentially the same amount as of the same date a year ago. While R&G Financial’s servicing portfolio continues to be affected by a high level of prepayments due to lower interest rates, R&G Financial continues to emphasize increasing the size of its mortgage servicing portfolio by relying principally on internal loan originations.

     As part of its strategy to maximize net interest income, R&G Financial maintains a substantial portfolio of mortgage-backed and investment securities. At March 31, 2004, the Company held securities available for sale with a fair market value of $3.2 billion, which included $2.6 billion of mortgage-backed securities, of which $337.1 million consisted of Puerto Rico GNMA securities, the interest on which is tax-exempt to the Company. These securities are generally held by the Company for longer periods prior to sale in order to maximize the tax-exempt interest received thereon. R&G Financial’s lower effective tax rate compared to the maximum statutory rate reflects the exemption under Puerto Rico law of the net interest income derived from such securities. In addition, the Company invests in certain U.S. agency securities that are exempt from Puerto Rico taxation and are not subject to federal income taxation. Finally, through its international banking subsidiaries, the Company may invest in various U.S. securities, the income on which is exempt from Puerto Rico income taxation and is also not subject to federal income taxation.

     A substantial portion of R&G Financial’s total mortgage loan originations has been comprised of refinance loans. R&G Financial’s future results could be adversely affected by a significant increase in mortgage interest rates that reduces refinancing activity. However, the Company believes that

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refinancing activity is less sensitive to interest rate changes in Puerto Rico than in the mainland United States because a significant amount of refinance loans are made for debt consolidation purposes.

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

Financial Condition

     At March 31, 2004, total assets amounted to $8.6 billion, as compared to $8.2 billion at December 31, 2003. The $385.3 million or 4.7% increase in total assets since the beginning of the year was primarily the result of a $192.9 million or 6.4% increase in mortgage-backed and investment securities available for sale, and a $148.2 million or 3.7% increase in loans receivable, net, due to continued strong loan production during the three months period ended March 31, 2004 of $929.8 million, although a 9% decrease when compared to the corresponding period in 2003. The Company’s loan production during the quarter ended March 31, 2004 was principally affected by decreased refinancings in the U.S. at Crown Bank. The Company’s loan production continues to be driven principally by the Company’s ongoing expansion in commercial and residential lending in Central Florida and Puerto Rico, as well as refinancings in Puerto Rico, which continue to be consistent with R&G Financial’s historical experience.

     At March 31, 2004, R&G Financial had $3.9 billion of borrowings (consisting of securities sold under agreements to repurchase, notes payable, FHLB advances and other borrowings), compared to $3.7 billion at December 31, 2003. R&G Financial utilized repurchase agreements and deposits to fund its growth during the period; total deposits grew 4.3% from $3.6 billion at December 31, 2003 to $3.7 billion at March 31, 2004, whereas repurchase agreements increased by $119.1 million or 5.4%.

     At March 31, 2004, R&G Financial’s allowance for loan losses totaled $43.6 million, which represented a $4.0 million or 10.2% increase from the level maintained at December 31, 2003. At March 31, 2004, R&G Financial’s allowance represented approximately 0.98% of the total loan portfolio and 44.30% of total non-performing loans. However, excluding R&G Financial’s residential loan portfolio, which has minimal charge-off experience, the allowance for loan losses to total loans and to total non-performing loans would have been 2.18% and 142.33%, respectively, at March 31, 2004, compared to 2.09% and 139.57% at December 31, 2003.

     Non-performing loans amounted to $98.5 million at March 31, 2004, an increase of $13.1 million when compared to $85.4 million at December 31, 2003. The increase is primarily related to a $10.8 million increase in delinquent residential real estate loans over 90 days past due, as the Company re-acquired loans pursuant to recourse provisions in existing sale contracts made prior to 2001. On certain of these contracts, the Company is required to re-acquire any loans sold that become delinquent over 120 days.

At March 31, 2004, $67.9 million or 68.9% of non-performing loans consisted of residential mortgage loans in which R&G Financial has historically experienced a low level of loan charge-offs. R&G Financial’s aggregate net charge-offs as a percentage of total average loans outstanding amounted to 0.22% during the three months ended March 31, 2004 and 0.32% during the year ended December 31, 2003. Although loan delinquencies have historically been higher in Puerto Rico than in the United States, actual foreclosures and the resulting loan charge-offs have historically been lower than in the United States.

     Stockholders’ equity increased from $750.4 million at December 31, 2003 to $782.5 million at March 31, 2004. The $32.2 million or 4.3% increase was due primarily to the net income recognized during the period, net of dividends paid.

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Results of Operations

     During the three months ended March 31, 2004, R&G Financial reported net income of $38.5 million or $0.67 of earnings per diluted share compared to net income of $29.1 million or $0.49 of earnings per diluted share for the comparative period in 2003. These results reflect an increase in earnings per diluted share of 36.7% for the three months period ending March 31, 2004 over the comparable periods in 2003.

     Net interest income increased by $13.5 million or 32.0% during the three months period ended March 31, 2004 to $55.7 million, due to a $1.7 billion increase in the average balance of interest-earning assets, together with a 7 basis point increase in the Company’s net interest margin from 2.81% to 2.88%.

     The provision for loan losses amounted to $6.5 million during the three months ended March 31, 2004, a 53.3% increase over the prior comparable period, reflecting the continuing increase in the Company’s commercial real estate and construction loan portfolios, which have higher credit risk compared to residential loans.

     R&G Financial also experienced an increase in non-interest income during the three months ended March 31, 2004 over the comparable period. Net gain on sale of loans increased by $6.9 million or 20.8% over the prior comparable period, as a result of strong loan production within the Company’s Puerto Rico mortgage operations, and an increase in the volume of loans sold during the period. Total loan production during the three months ended March 31, 2004 amounted to $929.8 million compared to $1.0 billion during the prior comparable period. Loan administration and servicing fees decreased by $3.9 million or 29.4% over the comparable period, due to a decrease in the Company’s weighted average servicing fee during the period. Other fee income increased by $3.2 million or 55.8%. Such increase reflects the added contributions made by the Company’s insurance agency and broker-dealer subsidiaries, as well as the fee income generated through the operations of Crown Bank.

     Total expenses increased by $2.9 million or 5.7% during the three months ended March 31, 2004 over the comparable 2003 period, partially due to a $1.6 million or 10.3% increase in employee compensation and benefits associated with general growth in Company operations in Puerto Rico and Florida. The increase in total expenses was also due to a $678,000 or 11.9% increase in office occupancy and equipment expenses and a $700,000 or 2.3% increase in other administrative and general expenses, which is net of a $1.5 million reduction in expenses associated with impairment charges of the Company’s servicing asset.

     During the first quarter of 2004, the Company reported $5.8 million of impairment charges on its servicing asset related to unscheduled amortization amounts, compared to $6.7 million during the first quarter of 2003. The decrease in unscheduled amortization amounts during the first quarter of 2004 compared to the first quarter of 2003 is due to lower prepayment speeds in the Company’s servicing portfolio. The decrease in prepayments reflect the increase in interest rates for mortgage loans during the period. Notwithstanding the reduction of prepayment speeds of the portfolio, the Company recorded during the first quarter of 2004 a $3.5 impairment charge on its servicing asset related to valuation reserves for a temporary decline in the fair value of its servicing portfolio. The decline was caused by a decrease during March 2004 in the interest rate for refinancings of mortgage loans. Given that the decrease in the rate for mortgage loans was only for a short period of time during the quarter, such decrease did not have a significant effect on actual prepayment of the portfolio nor unscheduled amortization amounts during the quarter. Based on the level of interest rates since, management estimates a complete reversal during the second quarter of 2004 of the $3.5 million valuation impairment charge recorded during the first quarter. The value of the Company’s servicing portfolio is expected to increase given the more recent levels of higher interest rates, which are expected to result in lower prepayment speeds. Unscheduled amortization amounts are expected to decline also in future periods due to the lower prepayment speeds.

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Interest Rate Risk Management

     The following table summarizes the anticipated maturities or repricing or R&G Financial’s interest-earning assets and interest-bearing liabilities as of March 31, 2004, based on the information and assumptions set forth in the notes below. For purposes of this presentation, the interest earning components of loans held for sale and mortgage-backed securities held in connection with the Company’s mortgage banking business as well as all securities held for trading, are assumed to mature within one year. In addition, investments held by the Company which have call features are presented according to their contractual maturity date.