<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

|X|    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

                  For the fiscal year ended: December 31, 1996

                                       OR

|_|    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934

                         Commission File No.: 000-21137

                            R&G FINANCIAL CORPORATION
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

          Puerto Rico                                          66-0532217
--------------------------------                         -----------------------
  (State or other jurisdiction                               (I.R.S. Employer
of incorporation or organization)                         Identification Number)

  280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico                                   00918
--------------------------------                         -----------------------
     (Address of Principal                                      (Zip Code)
      Executive Offices)

       Registrant's telephone number, including area code: (787) 766-2424

           Securities registered pursuant to Section 12(b) of the Act:
                                 Not Applicable

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

                 Class B Common Stock (par value $.01 per share)
--------------------------------------------------------------------------------
                                (Title of Class)

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. |X|

As of March 18, 1997, the aggregate value of the 2,659,339 shares of Class B
Common Stock of the Registrant issued and outstanding on such date, which
excludes 76,500 shares held by all directors and officers of the Registrant as a
group, was approximately $67.8 million. This figure is based on the last known
trade price of $25.50 per share of the Registrant's Class B Common Stock on
March 18, 1997.

Number of shares of Class B Common Stock outstanding as of March 18, 1997: 
2,735,839

                       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, 1996 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.
<PAGE>

PART I

Item 1. Business

                                     General

       R&G Financial Corporation (the "Company" or "R&G Financial") is the
holding company for R&G Mortgage Corp., a Puerto Rico mortgage banking company
("R&G Mortgage") and R-G Premier Bank of Puerto Rico, a Puerto Rico-chartered
commercial bank (the "Bank"). The Company was organized under Puerto Rico law in
March 1996. On July 19, 1996, the Company acquired the 88.1% ownership interest
in the common stock of the Bank and the 100% ownership interest in the common
stock of R&G Mortgage held by the Company's Chairman of the Board and Chief
Executive Officer, Mr. Victor J. Galan, in exchange for shares of Class A common
stock of the Company. On August 27, 1996, the Company sold 2,348,333 shares of
Class B common stock to the general public in an underwritten offering. Mr.
Galan also converted 66,667 of his shares of Class A common stock into shares of
Class B common stock and sold such shares in the public offering. As a result of
such transaction, an aggregate of 2,415,000 shares of Class B common stock were
publicly issued and the Company received gross proceeds of $35.0 million in the
offering, which resulted in net proceeds of $31.1 million after payment of
offering expenses. On December 4, 1996, the Company acquired the remaining 11.9%
ownership interest in the common stock of the Bank and issued 300,839 shares of
Class B common stock to the Bank's stockholders in exchange for such ownership
interest. At December 31 1996, the Company had total consolidated assets of $1.0
billion, total consolidated borrowings of $289.7 million, total consolidated
deposits of $615.6 million, and total consolidated stockholders' equity of
$115.6 million.

       Mr. Victor J. Galan, the Chairman of the Board, Chief Executive Officer
and controlling shareholder of R&G Financial, originally organized R&G Mortgage
in 1972. In February 1990, R&G Mortgage acquired a 74.7% interest in a two
branch federal savings and loan association with total assets of $52.9 million,
which was re-named R&G Federal Savings Bank. Recognizing the complementary
operational aspects and cross selling opportunities that are inherent in
operating both a mortgage bank and banking institution, during 1990 Mr. Galan
successfully integrated both the Bank's and R&G Mortgage's operations, which
structure has since been emulated in Puerto Rico. Embarking on a retail branch
expansion strategy, the Bank in 1993 acquired a two branch savings and loan
association with total assets of $78.6 million and, in June 1995, acquired from
a commercial bank $77.2 million in deposits and, after consolidation, six branch
offices. In November 1994, the Bank converted to a Puerto Rico-chartered
commercial bank and took its present name.

       R&G Financial competes for business in Puerto Rico by providing a wide
range of financial services to residents of all of Puerto Rico's major cities
through branch offices and mortgage banking facilities at 17 locations. The
operations of both R&G Mortgage and the Bank have expanded substantially during
the 1990's, due in large part to R&G Mortgage's emergence as the second largest
originator of loans secured by single-family residential
<PAGE>

properties in Puerto Rico. During the year ended December 31, 1996, R&G Mortgage
originated approximately 20.5% of all single-family residential loans originated
in Puerto Rico, which has resulted in significant growth in its servicing
portfolio as well as facilitated rapid expansion of the Bank's franchise and
operations. R&G Mortgage's servicing portfolio has increased by 62.6% since
December 31, 1991 and, at December 31, 1996, R&G Mortgage serviced approximately
51,000 accounts with an aggregate loan balance of $2.6 billion. The Bank's asset
size, which amounted to $793.2 million at December 31, 1996, has increased by
$736.8 million since R&G Mortgage became affiliated with the Bank in February
1990, while the branch office network had increased from two to 14 offices.

       R&G Financial 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. R&G Financial has sought to implement
this strategy by (i) establishing and emphasizing the growth of its mortgage
banking activities, including growing its loan servicing operation; (ii)
expanding its retail banking franchise in order to achieve increased market
presence and to increase core deposits; (iii) enhancing R&G Financial's net
interest income by increasing R&G Financial's loans held for investment,
particularly single-family residential loans; (iv) developing new business
relationships through an increased emphasis on commercial real estate and
commercial business lending; (v) diversifying R&G Financial's retail products
and services, including an increase in consumer loan originations (such as
credit cards); (vi) meeting the banking needs of its customers through, among
other things, the offering of trust and investment services; and (vii)
controlled growth and the pursuit of a variety of acquisition opportunities when
appropriate.

       The Company is subject to regulation and supervision by the Board of
Governors of the Federal Reserve System ("Federal Reserve Board") and is subject
to various reporting and other requirements of the Securities and Exchange
Commission ("SEC").

       R&G Mortgage. R&G Mortgage was originally organized in 1972. R&G Mortgage
is engaged primarily in the business of originating first and second mortgage
loans on single family residential properties secured by real estate which are
either insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration ("VA"). Pursuant to agreements entered into between
R&G Mortgage and the Bank, non-conforming conventional single-family residential
loans and consumer loans, most of which are secured by real estate, are also
originated by R&G Mortgage for portfolio retention by the Bank. The Bank retains
the non-conforming 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 or other underwriting technicalities
at the time of origination. Jumbo loans may be packaged into collateralized
mortgage obligations ("CMOs") and sold while loans with underwriting
technicalities may be cured through payment experience and subsequently sold.
During the years ended December 31, 1996, 1995 and 1994, R&G Mortgage originated
a total of $448.1 million, $322.7 million and $488.1 million of loans,
respectively. These aggregate originations include loans originated by R&G
Mortgage directly for the Bank of $211.3 million, $156.3 million and $142.6
million


                                       2
<PAGE>

during such respective periods, or 47.2%, 48.4% and 29.2%, respectively, of
total originations.

       R&G Mortgage pools FHA/VA loans into mortgage-backed securities which are
guaranteed by the Government National Mortgage Association ("GNMA"), which
securities are sold to securities broker dealers and other investors.
Conventional loans may either be sold directly to agencies such as the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC") or to private investors, or which may be pooled into FNMA-
or FHLMC-backed mortgage-backed securities which are generally sold to
investors. During the years ended December 31, 1996, 1995 and 1994, R&G Mortgage
sold $244.8 million, $195.6 million and $357.4 million of loans, respectively,
which includes loans securitized and sold but does not include loans originated
for the Bank. R&G Mortgage generally retains the servicing function with respect
to the loans which have been securitized and sold. R&G Mortgage is subject to
regulation and examination by the FHA, FNMA, FHLMC, GNMA, VA, the Department of
Housing and Urban Development ("HUD") and the Office of the Commissioner of
Financial Institutions ("OCFI") of Puerto Rico.

       R-G Premier Bank. The Bank's principal business consists of attracting
deposits from the general public and tax-advantaged funds from eligible Puerto
Rico corporations and using such deposits, together with funds obtained from
other sources, to originate (through R&G Mortgage) and purchase loans secured
primarily by residential real estate in Puerto Rico, and to purchase
mortgage-backed and other securities. To a lesser extent but with increasing
emphasis over the past few years, the Bank also originates consumer loans,
commercial business loans and loans secured by commercial real estate. Such
loans offer higher yields, are generally for shorter terms and facilitate the
Bank's provision of a full range of financial services to its customers. The
Bank also offers trust services through its Trust Department. Total loan
originations by the Bank during the years ended December 31, 1996, 1995 and 1994
amounted to $122.8 million, $124.6 million and $57.9 million, respectively. The
Bank's deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") and it is regulated and examined by the FDIC as its primary federal
regulatory agency as well as by the OFCI.

       Affiliated Transactions. As an integral part of R&G Mortgage's
acquisition of a controlling interest in the Bank in February 1990, R&G Mortgage
and the Bank entered into various agreements which address how the parties would
conduct themselves in specifically delineated affiliated transactions (the
"Affiliated Transaction Agreements"). Under federal law and regulations, certain
transactions between a federally insured financial institution and an affiliate,
such as the Bank and R&G Mortgage, are regulated. Generally, these provisions
regulate extensions of credit to directors, officers and principal shareholders
of the Bank, and establish standards for the terms of, limit the amount of, and
establish collateral requirements with respect to, various transactions between
federally insured financial institutions and its affiliates. See generally
"Regulation - R&G Financial Limitations on Transactions with Affiliates."


                                       3
<PAGE>

       The Affiliated Transaction Agreements include a Master Purchase,
Servicing and Collections Agreement (the "Master Purchase Agreement"), a Master
Custodian Agreement, a Master Production Agreement, a Securitization Agreement
and a Data Processing Computer Service Agreement. In accordance with applicable
regulations, the terms of these agreements were negotiated at arm's length on
the basis that they are substantially the same, or at least as favorable to the
Bank, as those prevailing for comparable transactions with, or involving, other
nonaffiliated companies.

       Pursuant to the Master Production Agreement, the Bank, on a monthly
basis, determines its loan production targets and goals (the "Loan Production
Goals") and R&G Mortgage assists the Bank to reach its Loan Production Goals by,
among other things: (i) advertising, promoting and marketing to the general
public; (ii) interviewing prospective borrowers and initial processing of loan
applications, consistent with the Bank's underwriting guidelines and Loan
Production Goals previously established; and (iii) providing personnel and
facilities with respect to the execution of any loan agreement approved by the
Bank. In exchange for these services, the Bank remits to R&G Mortgage a
percentage of the processing or originating fees charged to the borrowers under
loan agreements, as set forth in the agreements. See "-Lending Activities of the
Bank - Originations, Purchases and Sales of Loans."

       The Master Purchase Agreement provides for the sale by the Bank to R&G
Mortgage of the servicing rights to all first and second mortgage loans secured
by residential properties which become part of the Bank's loan portfolio. The
Master Purchase Agreement further provides that R&G Mortgage will service all
other loans held in the Bank's loan portfolio (including single-family
residential loans retained by the Bank and certain commercial real estate
loans), although R&G Mortgage does not actually acquire such servicing rights.
The Master Purchase Agreement further provides that R&G Mortgage exclusively
will service such loans and that the Bank will process payments of such loans,
all according to a fee schedule. See " - Mortgage Banking Activities - Loan
Originations, Purchases and Sales of Loans."

       Under the Securitization Agreement, R&G Mortgage renders securitization
services with respect to the pooling of some of the Bank's mortgage loans into
mortgage-backed securities. With respect to securitization services rendered,
the Bank pays a securitization fee of 25 basis points. The Master Custodian
Agreement provides that the Bank shall be the custodial agent for R&G Mortgage
of certain documentation related to the issuance by R&G Mortgage of GNMA, FNMA
or FHLMC mortgage-backed certificates. In consideration of these services, the
Bank receives a fee for each mortgage note included in a mortgage-backed
certificate per year for which it acts as custodian, as set forth in the
agreement. See "- Mortgage Banking Activities - Loan Originations, Purchases and
Sales of Loans."


                                       4
<PAGE>

                           Mortgage Banking Activities

       Loan Originations, Purchases and Sales. During the years ended December
31, 1996, 1995 and 1994, R&G Mortgage originated a total of $448.1 million,
$322.7 million and $488.1 million of loans, respectively. These aggregate
originations include loans originated by R&G Mortgage directly for the Bank of
$211.3 million, $156.3 million and $142.6 million during the years ended
December 31, 1996, 1995 and 1994, respectively, or 47%, 48% and 29%,
respectively, of total originations. The loans originated by R&G Mortgage for
the Bank are comprised primarily of conventional residential loans and, to a
lesser extent, consumer loans, most of which are secured by real estate.

       R&G Mortgage is engaged to a significant extent in the origination of
FHA-insured and VA-guaranteed single-family residential loans which are
primarily securitized into GNMA mortgage-backed securities and sold to
institutional and/or private investors in the secondary market. During the years
ended December 31, 1996, 1995 and 1994, R&G Mortgage originated $222.0 million,
$154.9 million and $332.4 million, respectively, of FHA/VA loans, which
represented 49.5%, 48.0% and 68.1%, respectively, of total loans originated
during such respective periods.

       R&G Mortgage also originates conventional single-family residential loans
which are either insured by private mortgage insurers or do not exceed 80% of
the appraised value of the mortgaged property. During the years ended December
31, 1996, 1995 and 1994, R&G Mortgage originated $204.9 million, $151.9 million
and $155.7 million, respectively, of conventional single-family residential
mortgage loans. Substantially all conforming conventional single-family
residential loans are securitized and sold in the secondary market while
substantially all non-conforming conventional single-family residential loans
are originated by R&G Mortgage on behalf of the Bank and either held by the Bank
in its portfolio or subsequently securitized by R&G Mortgage and sold in the
secondary market.

       Non-conforming loans generally consist of loans which, primarily because
of size or other underwriting technicalities which may be cured through
seasoning, do not satisfy the guidelines for resale of FNMA, FHLMC, GNMA and
other private secondary market investors at the time of origination. Management
believes that these loans are essentially of the same credit quality as
conforming loans. During the years ended December 31, 1996, 1995 and 1994,
non-conforming conventional loans represented approximately 42%, 43% and 29%,
respectively, of R&G Mortgage's total volume of mortgage loans originated,
substantially all of which were originated by R&G Mortgage on behalf of the
Bank. During the years ended December 31, 1996, 1995 and 1994, 88.9%, 81.0% and
92.4% of loans originated by R&G Mortgage on behalf of the Bank consisted of
single-family residential loans during such respective periods. R&G Mortgage
originates single-family residential, construction and commercial real estate
loans on behalf of the Bank pursuant to the terms of a Master Production
Agreement between R&G Mortgage and the Bank. See "- Lending Activities of the
Bank - Origination, Purchase and Sale of Loans."


                                       5
<PAGE>

       While R&G Mortgage makes available a wide variety of mortgage products
designed to respond to consumer needs and competitive conditions, it currently
emphasizes 15-year and 30-year conventional first mortgages and 15-year and
30-year FHA loans and VA loans. Substantially all of such loans consist of
fixed-rate mortgages. The average loan size for FHA/VA mortgage loans and
conventional mortgage loans is approximately $71,200 and $69,300, respectively.

       R&G Mortgage also offers second mortgage loans up to $125,000 with a
maximum term of 15 years. The maximum loan-to-appraised value ratio on second
mortgage loans permitted by R&G Mortgage is 75% (including the amount of any
first mortgage). In addition, R&G Mortgage also offers real estate secured
consumer loans up to $40,000 with a maximum term of 10 years. The maximum
loan-to-appraised value ratio on real estate secured consumer loans permitted by
R&G Mortgage is 80%. R&G Mortgage will secure such loans with either a first or
second mortgage on the property.

       R&G Mortgage's loan origination activities are conducted out of its
offices and mortgage banking centers. Residential mortgage loan applications are
attributable to walk-in customers, existing customers and advertising and
promotion, referrals from real estate brokers and builders, loan solicitors and
mortgage brokers. At December 31, 1996, R&G Mortgage employed 62 loan
originators who are compensated in part on a commission basis.

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

       R&G Mortgage also purchases FHA loans and VA loans from other mortgage
bankers for resale to institutional investors and other investors in the form of
GNMA mortgage-backed securities. R&G Mortgage's strategy is to increase its
servicing portfolio primarily though internal originations through its branch
network and, to a lesser extent, purchases from third parties. Purchases of
loans from other mortgage bankers in the wholesale loan market is generally
limited to FHA loans and VA loans and such purchases provide R&G Mortgage with a
source of low cost production that allows R&G Mortgage to continue to increase
the size of its servicing portfolio. R&G Mortgage purchased $43.8 million, $55.6
million and $11.0 million of loans from third parties during the years ended
December 31, 1996, 1995 and 1994, respectively.


                                       6
<PAGE>

       The following table sets forth loan originations, purchases and sales by
R&G Mortgage for the periods indicated.

                                                  Year Ended December 31,
                                            -----------------------------------
                                               1996        1995         1994
                                            ---------    ---------    ---------
                                                  (Dollars in Thousands)
Loans Originated For the Bank:
  Conventional loans(1):
    Number of loans ......................      2,756         2,226       2,204
    Volume of loans ......................  $ 190,072    $  140,363   $ 142,572
  FHA/VA loans:                                                         
    Number of loans ......................       --            --          --
    Volume of loans ......................  $    --      $     --     $    --
  Consumer loans(2):                                                    
    Number of loans ......................      1,004           974        --
    Volume of loans ......................  $  21,208    $   15,944   $    --
  Total loans:                                                          
    Number of loans ......................      3,760         3,200       2,204
    Volume of loans ......................  $ 211,280    $  156,307   $ 142,572
    Percent of total volume ..............         43%           46%         29%
For Third Parties:                                                      
  Conventional loans(1):                                                
    Number of loans ......................        214           151         166
    Volume of loans ......................  $  14,835    $   11,496   $  13,122
  FHA/VA loans:                                                         
    Number of loans ......................      3,117         2,313       6,030
    Volume of loans ......................  $ 221,967    $  154,916   $ 332,377
  Total loans:                                                          
    Number of loans ......................      3,331         2,464       6,196
    Volume of loans ......................  $ 236,802    $  166,412   $ 345,499
    Percent of total volume ..............         48%           48%         70%
                                            ---------    ---------    ---------
      Total loan originations ............  $ 448,082    $  322,719   $ 488,071
                                            =========    =========    =========
Loans Purchased For R&G Mortgage:                                      
  Number of loans ........................        583          305            4
  Volume of loans (3) ....................  $  45,604    $  19,525    $     279
  Percent of total volume ................          9%           6%           1%
                                            ---------    ---------    ---------
    Total loan originations and                                       
      purchases ..........................  $ 493,686    $ 342,244    $ 488,350
                                            =========    =========    =========
                                                                     

                                       7
<PAGE>

                                                  Year Ended December 31,
                                            -----------------------------------
                                               1996        1995         1994
                                            ---------    ---------    ---------
                                                  (Dollars in Thousands)
Loans Sold To Third Parties(4):
  Conventional loans(1):
    Number of loans ......................        178          151          667
    Volume of loans ......................  $  12,560    $  11,999    $  40,902
  FHA/VA loans:
    Number of loans ......................      3,564        2,252        6,851
    Volume of loans(3) ...................  $ 232,254    $ 183,607    $ 316,483
  Total loans:
    Number of loans ......................      3,742        2,403        7,518
    Volume of loans ......................  $ 244,814    $ 195,606    $ 357,385
    Percent of total volume ..............         50%          57%          73%
                                            ---------    ---------    ---------
Adjustments:
  Loans originated for the Bank ..........  $(211,280)   $(156,307)   $(142,572)
  Loans amortization .....................     (7,224)      (1,960)      (1,577)
                                            ---------    ---------    ---------
Increase (decrease) in loans held for sale  $  30,368    $ (11,629)   $ (13,184)
                                            =========    =========    =========
Average Initial Loan Origination Balance:
  The Bank:
    Conventional loans(1) ................  $      69    $      63    $      65
    FHA/VA loans .........................  $    --      $    --      $    --
  Third Parties:
    Conventional loans(1) ................  $      69    $      76    $      79
    FHA/VA loans .........................  $      71    $      63    $      55
  Total Average Initial Balance:
    Conventional loans(1) ................  $      69    $      64    $      66
    FHA/VA loans .........................  $      71    $      63    $      55
Refinancings(5):
  The Bank ...............................         33%          58%          46%
  Third Parties ..........................         24%          26%          38%

----------
(1)    Includes non-conforming loans.

(2)    All but $1.5 million and $3.3 million of such loans were secured by real
       estate at December 31, 1996 and 1995, respectively.

(3)    Excludes $7.9 million, $36.1 million and $10.7 million loans purchased
       from another financial institution, and securitized and sold to the same
       financial institution during 1996, 1995 and 1994, respectively.

(4)    Includes loans converted into mortgage-backed securities.

(5)    As a percent of the total dollar volume of loans originated by R&G
       Mortgage for the Bank or third parties, as the case may be. In the case
       of the Bank, refinancings do not necessarily represent refinancings of
       loans previously held by the Bank.


                                       8
<PAGE>

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

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

       R&G Mortgage customarily sells most of the loans that it originates,
except for those originated on behalf of the Bank pursuant to the Master
Production Agreement. See "Lending Activities of the Bank - Origination,
Purchases and Sales of Loans." The loans originated by R&G Mortgage (including
FHA loans, VA loans and conventional loans) are secured by real property located
in Puerto Rico and constitute "eligible investments" which results in favorable
tax treatment under U.S. and Puerto Rico tax laws. See "- Puerto Rico Secondary
Mortgage Market and Favorable Tax Treatment." During the years ended December
31, 1996, 1995 and 1994, R&G Mortgage sold $244.8 million, $195.6 million and
$357.4 million and of loans, respectively, which includes loans securitized and
sold but does not include loans originated by R&G Mortgage on behalf of the
Bank. With respect to such loan sales, $232.3 million or 94.9%, $183.6 million
or 93.9% and $316.5 million or 88.6% consisted of GNMA-guaranteed
mortgage-backed securities of FHA loans or VA loans packaged into pools of $1
million or more ($2.5 million to $5 million for serial notes as


                                       9
<PAGE>

described below). These securities were sold primarily to securities
broker-dealers and other investors in Puerto Rico.

       Certain GNMA-guaranteed mortgage-backed securities sold by R&G Mortgage
are in the form of GNMA serial notes which permit the investor to receive
interest monthly and to select among several expected maturity dates of the
notes included in an issue, with each maturity having a specific yield. GNMA
serial notes are sold in pools of $2.5 million to $5 million. GNMA serial notes
are sold to securities broker-dealers in packages consisting of notes of
different yields and maturities, which range from one to 30 years and have an
average maturity of 12 years, taking into account historical experience with
prepayments of the underlying mortgages. The rates on the serial notes or GNMA
pools must be 1/2 of 1% less than the rates on the mortgages comprising the
pool. Upon completion of the necessary processing, the GNMA-guaranteed
mortgage-backed securities are either offered to the public directly through the
Bank's Trust Department or indirectly through securities broker-dealers. During
the years ended December 31, 1996, 1995 and 1994, R&G Mortgage issued GNMA
serial notes totalling approximately $236.4 million, $184.4 million and $228.8
million, respectively.

       Conforming conventional loans originated or purchased by R&G Mortgage are
generally sold directly to FNMA, FHLMC or private investors for cash or are
grouped into pools of $1 million or more in aggregate principal balance and
exchanged for FNMA or FHLMC-issued mortgage-backed securities, which R&G
Mortgage sells to securities broker-dealers. In connection with any such
exchanges, R&G Mortgage pays guarantee fees to FNMA and FHLMC. The issuance of
mortgage-backed securities provides R&G with flexibility in selling the
mortgages which it originates or purchases and also provides income by
increasing the value and marketability of the loans.

       Mortgage loans that do not conform to GNMA, FNMA or FHLMC requirements
(so-called "non-conforming loans") are generally originated on behalf of the
Bank and either retained in the Bank's portfolio, sold to financial institutions
or other private investors or securitized into "private label" CMOs through
grantor trusts or other mortgage conduits and sold through securities
broker-dealers. Non-conforming loans consist of jumbo loans or loans that do not
satisfy all requirements of FNMA, FHLMC and GNMA at the time of origination of
the loan (such as missing tax returns, slightly higher loan-to-value ratios,
etc.).

       Each CMO normally consists of several classes of senior, subordinate and
residual certificates. The residual certificates evidence a right to receive
payments on the mortgage loans after payment of all required amounts on the
senior and subordinate certificates then due. Some form of credit enhancement,
such as an insurance policy, letter of credit or subordination, will generally
be used to increase the credit rating of the senior certificates and thereby
improve their marketability. During the years ended December 31, 1995 and 1994,
R&G Mortgage and the Bank completed sales of approximately $38.2 million and
$201.5 million, respectively, of CMOs in securitization transactions. There were
no sales in 1996. In connection with such transactions, either the Bank or R&G
Mortgage generally


                                       10
<PAGE>

retains the residual certificates issued by the respective trusts as well as the
subordinate certificates issued in such transactions. As of December 31, 1996,
R&G Mortgage held CMOs (which were primarily issued by R&G Mortgage) with a fair
value of $15.1 million and residual certificates issued in CMO transactions
involving R&G Mortgage and the Bank with a fair value of $8.5 million. In
addition, the Bank held CMO subordinated certificates and residual certificates
from one of its issues with a fair value of $8.2 million at December 31, 1996.
See "- Investment Activities." Currently a liquid secondary market for
subordinate or residual certificates does not exist in Puerto Rico. The value of
residual certificates is subject to substantial fluctuations as a result of
changes in prevailing interest rates. However, such residuals often exhibit
elasticity and convexity characteristics which R&G Financial can utilize to
hedge other components of its portfolio. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation" incorporated by
reference in Item 7 hereof.

       While R&G Mortgage's exchanges of mortgage loans into agency securities
and sales of mortgage loans are generally made on a non-recourse basis, R&G
Mortgage also engages in the sale or exchange of mortgage loans on a recourse
basis. In the past, recourse sales often involved the sale of non-conforming
loans to FNMA, FHLMC and local financial institutions. R&G Financial estimates
the fair value of the retained recourse obligation at the time mortgage loans
are sold. Normally, the fair value of any retained recourse is immaterial
because R&G Mortgage is able to resell repurchased loans for at least their
carrying costs. Accordingly, as of December 31, 1996, R&G Financial did not deem
it necessary to establish reserves for possible losses related to its recourse
obligations. At December 31, 1996, R&G Mortgage had loans in its servicing
portfolio with provisions for recourse in the principal amount of approximately
$290.9 million, as compared to $238.2 million and $162.9 million as of December
31, 1995 and 1994, respectively. Of the recourse loans existing at December 31,
1996, approximately $241.2 million in principal amount consisted of loans sold
to FNMA and FHLMC and converted into mortgage-backed securities of such
agencies, and approximately $49.7 million in principal amount consisted of
non-conforming loans sold to other private investors.

       Pursuant to the terms of the Master Purchase Agreement, R&G Mortgage
renders securitization services with respect to the pooling of some of the
Bank's mortgage loans into mortgage-backed securities. With respect to the
securitization services rendered, the Bank pays a securitization fee of 25 basis
points. In addition, pursuant to the terms of a Master Custodian Agreement
entered into by R&G Mortgage and the Bank, the Bank acts as the custodial agent
for R&G Mortgage of certain documentation related to the issuance by R&G
Mortgage of GNMA or FHLMC mortgage-backed certificates. In consideration of
these services, the Bank receives an annual fee of $5.0 for each mortgage note
included in a mortgage-backed certificate for which it acts as custodian. See
also "- General - Affiliated Transactions" and "Regulation - R&G Financial -
Limitations on Transactions with Affiliates."


                                       11
<PAGE>

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

       R&G Mortgage's servicing portfolio has grown significantly over the past
three years. At December 31, 1996, R&G Mortgage's servicing portfolio totalled
$2.6 billion and consisted of a total of 50,979 loans, as compared to $2.1
billion and 43,572 loans at December 31, 1994. At December 31, 1996, R&G
Mortgage was servicing $323.8 million of loans for the Bank or 12.7% of the
total servicing portfolio, as compared to $290.8 million or 12.7% and $213.9
million or 10.1% at December 31, 1995 and 1994, respectively. Substantially all
of the mortgage loans in R&G Mortgage's servicing portfolio are secured by
single (one-to-four) family residences. All of R&G Mortgage's mortgage servicing
portfolio is comprised of mortgages secured by real estate located in Puerto
Rico.

       Pursuant to the terms of a Master Purchase Agreement, the Bank sells to
R&G Mortgage the servicing rights to all first and second mortgage loans secured
by residential properties which become part of the Bank's loan portfolio. The
Master Purchase Agreement further provides that R&G Mortgage will service all
other loans held in the Bank's loan portfolio (including single-family
residential loans retained by the Bank and certain commercial real estate
loans), although R&G Mortgage does not actually acquire such servicing rights.
The Bank pays R&G Mortgage servicing fees with respect to the loans serviced by
R&G Mortgage on behalf of the Bank. In addition, pursuant to the Master Purchase
Agreement, the Bank processes payments of all loans originated by R&G Mortgage
on behalf of the Bank. In connection therewith, R&G Mortgage pays the Bank a fee
equal to between $0.50 and $1.00 per loan. See also "- General - Affiliated
Transactions" and "Regulation - R&G Financial - Limitations on Transactions with
Affiliates."

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


                                       12
<PAGE>

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

                                                Year Ended December 31,
                                         --------------------------------------
                                            1996         1995           1994
                                         ----------   ----------     ----------
                                                (Dollars in Thousands)
Composition of Servicing
   Portfolio at End of Period:
  Conventional and other
    mortgage loans(1) .................  $  971,327   $  811,269     $  634,944
  FHA/VA loans ........................   1,578,842    1,486,931      1,479,799
                                         ----------   ----------     ----------
    Total servicing portfolio(2) ......  $2,550,169   $2,298,200     $2,114,743
                                         ==========   ==========     ==========
Activity in the Servicing
  Portfolio:
  Beginning servicing portfolio .......  $2,298,200   $2,114,743     $2,000,530
  Add: Loan originations ..............     462,954      325,870        473,821
Servicing of portfolio loans
  acquired ............................      36,478      239,414         27,726
  Less: Sale of servicing rights ......      42,080      196,895(3)        --
  Run-offs(4) .........................     205,383      184,932        387,334
                                         ----------   ----------     ----------
  Ending servicing portfolio ..........  $2,550,169   $2,298,200     $2,114,743
                                         ==========   ==========     ==========
  Number of loans serviced(5) .........      50,979       48,240         43,572
  Average loan size(5) ................  $       50   $       48     $       49
  Average servicing fee rate(5) .......       0.532%       0.505%         0.558%

----------
(1)    Includes non-conforming loans.

(2)    At the dates shown, included $323.8 million, $290.8 million and $213.9
       million of loans serviced for the Bank, respectively, which constituted
       12.70%, 12.65% and 10.12% of the total servicing portfolio, respectively.

(3)    R&G Mortgage sold servicing rights during 1994 and recognized a gain of
       $2.9 million. Pursuant to a subservicing agreement with the purchaser of
       the servicing rights, R&G Mortgage continued to service the loans subject
       to such sale and they remained in R&G Mortgage's servicing portfolio
       until 1995.

(4)    Run-off refers to regular amortizations of loans, prepayments and
       foreclosures.

(5)    At December 31, 1996, R&G Mortgage was servicing 4,974 loans for the Bank
       with an average loan size of approximately $65,000 and at an average
       servicing rate of 0.214%. Amounts include late and other miscellaneous
       charges.


                                       13
<PAGE>

       The following table sets forth certain information at December 31, 1996
regarding the number of, and aggregate principal balance of, the mortgage loans
serviced by R&G Mortgage for the Bank and for third parties at various mortgage
interest rates.

<TABLE>
<CAPTION>
                                                            At December 31, 1996
                        ---------------------------------------------------------------------------------------------
                                Loans Serviced                 Loans Serviced                    Total Loans
                                 for the Bank                 for Third Parties                   Serviced
                        ------------------------------   -----------------------------   ----------------------------
                         Number of       Aggregate       Number of       Aggregate        Number        Aggregate
                           Loans     Principal Balance     Loans     Principal Balance   of Loans   Principal Balance
Mortgage Interest Rate  ----------   -----------------   ---------   -----------------   --------   -----------------
                                   (Dollars in Thousands)          (Dollars in Thousands)         (Dollars in Thousands)
<S>                       <C>             <C>             <C>           <C>               <C>          <C>       
Less than 7.00%.......       56           $  2,992         2,723        $  140,061         2,779       $  143,053
7.00% - 7.49%.........      284             27,047         6,795           396,790         7,079          423,837
7.50% - 7.99%.........      831             68,596        12,147           663,495        12,978          732,091
8.00% - 8.49%.........      895             67,714         6,273           351,655         7,168          419,369
8.50% - 8.99%.........    1,645            106,622         7,900           340,007         9,545          446,629
9.00% - 9.49%.........      519             26,362         3,678           142,179         4,197          168,541
9.50% - 9.99%.........      203              9,598         2,964            89,948         3,167           99,546
10.00% - 10.49%.......      160              4,940         1,211            43,143         1,371           48,083
10.50% - 10.99%.......      195              5,380           739            21,309           934           26,689
11.00% or more........      186              4,512         1,575            37,819         1,761           42,331
                          -----           --------        ------        ----------        ------       ----------
                          4,974           $323,763        46,005        $2,226,406        50,979       $2,550,169
                          =====           ========        ======        ==========        ======       ==========
</TABLE>

       The amount of principal prepayments on mortgage loans serviced by R&G
Mortgage was $72.5 million, $68.2 million and $62.2 million for the years ended
December 31, 1996, 1995 and 1994, respectively. This represented approximately
2.8%, 3.0% and 2.9% of the aggregate principal amount of mortgage loans serviced
during such periods. Principal prepayments have declined since 1993 as a result
of decreased refinancing activity caused by the increase in interest rates
experienced following the refinance boom of 1993. The primary means used by R&G
Mortgage to reduce the sensitivity of its servicing fee income to changes in
interest and prepayment rates is the development of a strong internal
origination capability that has allowed R&G Mortgage to continue to increase the
size of its servicing portfolio even in times of high prepayments.

       Servicing agreements relating to the mortgage-backed securities programs
of FNMA, FHLMC and GNMA, and certain other investors, require R&G Mortgage to
advance funds to make scheduled payments of principal, interest, taxes and
insurance, if such payments have not been received from the borrowers. During
the years ended December 31, 1996, 1995 and 1994, the monthly average amount of
funds advanced by R&G Mortgage under such servicing agreements was $1.3 million,
$4.4 million and $6.3 million, respectively. Funds advanced by R&G Mortgage
pursuant to these arrangements are generally recovered by R&G Mortgage within 30
days.

       In connection with its loan servicing activities, R&G Mortgage holds
escrow funds for the payment of real estate taxes and insurance premiums with
respect to the mortgage loans it services. At December 31, 1996, R&G Mortgage
held $39.0 million of such escrow funds, $10.6 million of which were deposited
in the Bank and $28.4 million of which were


                                       14
<PAGE>

deposited with other financial institutions. The escrow funds deposited with the
Bank lower its overall cost of funds and is a means of compensating it for
processing mortgages checks received by R&G Mortgage, while the escrow funds
deposited with other financial institutions serve as part of R&G Mortgage's
compensating balances which permit R&G Mortgage to borrow funds from such
institutions (pursuant to certain warehouse lines of credit) at rates that are
lower than would otherwise apply. See "- Sources of Funds -Borrowings."

       The degree of risk associated with a mortgage loan servicing portfolio is
largely dependent on the extent to which the servicing portfolio is non-recourse
or recourse. In non-recourse servicing, the principal credit risk to the
servicer is the cost of temporary advances of funds. In recourse servicing, the
servicer agrees to share credit risk with the owner of the mortgage loans such
as FNMA or FHLMC or with an insurer or guarantor. Losses on recourse servicing
occur primarily when foreclosure sale proceeds of the property underlying a
defaulted mortgage are less than the then outstanding principal balance and
accrued interest of such mortgage loan and the cost of holding and disposing of
such underlying property. At December 31, 1996, R&G Mortgage was servicing
mortgage loans with an aggregate principal amount of $290.9 million on a
recourse basis. During the last three years, losses incurred due to recourse
servicing have not been significant.

       R&G Mortgage's general strategy is to retain the servicing rights related
to the mortgage loans it originates and purchases. Nevertheless, there is a
market in Puerto Rico for servicing rights, which are generally valued in
relation to the present value of the expected income stream generated by the
servicing rights. Among the factors which influence the value of a servicing
portfolio are servicing fee rates, loan balances, loan types, loan interest
rates, the expected average life of the underlying loans (which may be reduced
through foreclosure or prepayment), the value of escrow balances, delinquency
and foreclosure experience, servicing costs, servicing termination rights of
permanent investors and any recourse provisions. During the year ended December
31, 1995, R&G Mortgage sold servicing rights on $196.9 million of mortgage
loans. Although R&G Mortgage may on occasion consider future sales of a portion
of its servicing portfolio, management does not anticipate sales of servicing
rights to become a significant part of its operations.

       The market value of, and earnings from, R&G Mortgage's mortgage loan
servicing portfolio may be adversely affected if mortgage interest rates decline
and mortgage loan prepayments increase. In a period of declining interest rates
and accelerated prepayments, income generated from R&G Mortgage's mortgage loan
servicing portfolio may also decline. Conversely, as mortgage interest rates
increase, the market value of R&G Mortgage's mortgage loan servicing portfolio
may be positively affected. See Note 1 to R&G Financial's Notes to Consolidated
Financial Statements for a discussion of SFAS No. 122 and the treatment of
servicing rights, incorporated by reference into Item 8 hereof.


                                       15
<PAGE>

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

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                             ----------------------------------------------------------------------------
                                        1996                     1995                      1994
                             ------------------------    ----------------------  ------------------------
                                           Percent of                Percent of                Percent of
                              Number of     Servicing    Number of   Servicing   Number of      Servicing
                                Loans       Portfolio      Loans     Portfolio     Loans        Portfolio
                             ----------    ----------    ---------   ----------  ---------     ----------
<S>                              <C>           <C>          <C>        <C>           <C>           <C>  
Loans delinquent for:
  30-59 days................     2,775         5.44%        3,366      6.98%         2,609         5.99%
  60-89 days................       533         1.05           906      1.88            543         1.25
  90 days or more...........       646         1.27           988      2.05            716         1.64
                                 -----         ----         -----     -----          -----         ----
    Total delinquencies(1)..     3,954         7.76%        5,260     10.90%         3,868         8.88%
                                 =====         ====         =====     =====          =====         ==== 
Foreclosures pending(2).....       693         1.36%          459      0.95%           401         0.92%
                                 =====         ====         =====     =====          =====         ==== 
</TABLE>

----------

(1)    Includes at December 31, 1996, an aggregate of $29.8 million of
       delinquent loans serviced for the Bank, or 1.17% of the total servicing
       portfolio and $1.0 million of delinquent loans held in R&G Mortgage's own
       portfolio.

(2)    At December 31, 1996, the Bank had foreclosures pending on $8.5 million
       of loans being serviced by R&G Mortgage, which constituted 0.33% of the
       servicing portfolio. R&G Mortgage had foreclosures pending on $346,000 of
       loans it is servicing for its own portfolio at December 31, 1996.

       While delinquency rates in Puerto Rico are generally higher than in the
mainland United States, these rates are not necessarily indicative of future
foreclosure rates or losses on foreclosures. Real estate owned as a result of
foreclosures ("REO") related to R&G Mortgage's mortgage banking business arise
primarily through foreclosure on mortgage loans repurchased from investors
either because of breach of representations or warranties or pursuant to
recourse arrangements. As of December 31, 1996, 1995 and 1994, R&G Mortgage held
REO with a book value of approximately $0, $0 and $43,000, respectively. Sales
of REO resulted in net losses to R&G Mortgage of $57,000 for the year ended
December 31, 1996, and gains of $30,000 and $12,000 for the years ended December
31, 1995 and 1994 respectively. There is no liquid secondary market for the sale
of R&G Mortgage's REO.

       With respect to mortgage loans securitized through GNMA programs, R&G
Mortgage is fully insured as to principal by the FHA and VA against foreclosure
loans. As a result of these programs, foreclosure on these loans had generated
no loss of principal as of December 31, 1996. R&G Mortgage, however, incurs
about $3,000 per loan foreclosed in interest and legal charges during the time
between payment by R&G Mortgage and FHA or VA reimbursement. For the years ended
December 31, 1996, 1995 and 1994, total expenses related to FHA or VA loans
foreclosed amounted to $281,000, $230,000 and $290,000, respectively. Although
FNMA and FHLMC are obligated to reimburse R&G Mortgage for principal and
interest payments advanced by R&G Mortgage as a servicer


                                       16
<PAGE>

(except for recourse servicing), the funding of delinquent payments or the
exercise of foreclosure rights involves costs to R&G Mortgage which may not be
recouped. Such nonrecouped expenses have to date been immaterial.

       Any significant adverse economic developments in Puerto Rico could result
in an increase in defaults or delinquencies on mortgage loans that are serviced
by R&G Mortgage or held by R&G Mortgage pending sale in the secondary mortgage
market, thereby reducing the resale value of such mortgage loans.

       Puerto Rico Secondary Mortgage Market and Favorable Tax Treatment. In
general, the Puerto Rico market for mortgage-backed securities is an extension
of the United States market with respect to pricing, rating of the investment
instruments, and other matters. However, United States and Puerto Rico tax laws
provide an economic incentive for Puerto Rico residents and Section 936
Corporations (defined below) to invest in certain mortgage loans and
mortgage-backed securities originated in Puerto Rico, including FHA and VA loans
and GNMA certificates, thereby tending to increase the secondary market demand
for, and the resale value of, such mortgage loans and mortgage-backed
securities. These tax advantages also favorably affect R&G Financial's net
interest income by helping create a pool of lower-cost funds that R&G Financial
can access through financial intermediaries such as banks and broker-dealers and
use to fund mortgage loans and mortgage-backed securities pending sale.

       Under various Puerto Rico industrial incentives acts (the "Industrial
Incentives Acts"), certain investment income earned by qualified manufacturing
entities or service enterprises ("Exempt Companies") is exempt from Puerto Rico
income tax. Investment income that qualifies for this exemption includes
interest on certain mortgage loans and interest on funds of Exempt Companies
("936 Funds") placed with eligible institutions in Puerto Rico (primarily
savings and loan associations, commercial banks and registered broker-dealers),
provided such funds are invested in certain "eligible activities" in accordance
with regulations promulgated by the OCFI, including certain mortgage loans and
mortgage-backed securities. The Industrial Incentives Acts also encourage
investment in Puerto Rico by allowing Exempt Companies to reduce the otherwise
applicable 10% tax (the "Tollgate Tax") on distributions to shareholders by
investing their exempt industrial development income ("IDI") in Puerto Rico for
fixed periods of time, generally from five years to ten years.

       Most Exempt Companies are United States corporations which operate in
Puerto Rico under Section 936 of the Code. Corporations that meet certain
requirements and elect the benefits of Section 936 ("Section 936 Corporations")
are entitled to credit against their United States corporate income tax a
portion of such tax attributable to (i) income derived from sources outside the
United States from the active conduct of a trade or business within Puerto Rico
or from the sale or exchange of substantially all assets used in the active
conduct of such trade or business ("Active Business Income") and (ii) qualified
possession source investment income ("QPSII"). QPSII generally includes interest
derived from mortgage loans secured by real property located in Puerto Rico and
mortgage-backed


                                       17
<PAGE>

securities consisting of such mortgage loans as well as interest on deposits
with financial institutions in Puerto Rico which in turn use such funds to
finance the origination of mortgage loans and other qualifying assets. The
credit provided for QPSII tends to increase the demand for Puerto Rico mortgage
loans and mortgage-backed securities as well as to reduce funding costs for
mortgage banking institutions.

       The Omnibus Budget Reconciliation Act of 1993 (the "OBRA Amendments") and
the Small Business Job Protection Act of 1996 (the "SBJPA") amended various
provisions of Section 936. The OBRA Amendments, which are generally effective
for taxable years beginning after December 31, 1993, permit a taxpayer to
compute the tax credit available under Section 936 (the "936 Credit") as under
prior law but limit the amount of credit allowed with respect to Active Business
Income under one of two alternatives to be selected at the option of the
taxpayer. Under the first alternative, the limit is equal to a fixed percentage
of the amount of tax credit allowable under prior law (the "Fixed Percentage
Method"). This fixed percentage commenced at 60% for taxable years beginning in
1994 and is reduced by 5% per year until 1998. For taxable years beginning in
1998, such percentage would be 40%. Under the second alternative (the "Economic
Activity Method"), which is based on the amount of economic activity conducted
by the taxpayer in Puerto Rico, the credit may not exceed the sum of the
following three components: (i) 60% of the qualified possession wages and the
allocable fringe benefits paid by the taxpayer, (ii) applicable percentages of
certain depreciation deductions claimed for regular tax purposes by the taxpayer
with respect to qualified tangible property and (iii) a portion of the
possession income taxes paid by the taxpayer except where the taxpayer uses the
profit-split method for determining its income. The OBRA Amendments did not
limit the 100% credit available under Section 936 for QPSII, including income
received from investment in certain Puerto Rico mortgage loans and
mortgage-backed securities.

       The SBJPA repealed (i) the 936 Credit attributable to QPSII generally for
income received or accrued after June 30, 1996, and (ii) the 936 Credit
attributable to Active Business Income for taxable years beginning after
December 31, 1995. The SBJPA, however, provided grandfather rules under which a
Section 936 Corporation that had elected the benefits of the Section 936 Credit
and which was engaged in active trade or business within Puerto Rico on October
13, 1995 (an "Existing Claimant") would be eligible to claim the 936 Credit
attributable to Active Business Income during a transition period. A corporation
may also qualify as an Existing Claimant if it acquires all the assets of a
trade or business of a corporation that meets the active trade or business
requirement and the election requirement is satisfied.

       The amount and computation method of the 936 Credit during the transition
period depends upon whether a Section 936 Corporation is using the Economic
Activity Method or the Fixed Percentage Method. A Section 936 Corporation that
is an Existing Claimant and uses the Economic Activity Method may continue to
determine its 936 Credit attributable to Active Business Income as under present
law for taxable years beginning after December 31, 1995 and before January 1,
2002. For taxable years beginning after


                                       18
<PAGE>

December 31, 2001 and before January 1, 2006, a Section 936 Corporation's Active
Business Income eligible for the 936 Credit is subject to a cap, described
below. A Section 936 Corporation that is an Existing Claimant and is using the
Fixed Percentage Method may continue to determine its 936 Credit attributable to
Active Business Income under the existing rules for taxable years beginning
after December 31, 1995 and before January 1, 1998. For taxable years beginning
after December 31, 1997 and before January 1, 2006, the Section 936
Corporation's Active Business Income that is eligible for the 936 Credit is also
subject to a cap. For taxable years beginning after December 31, 2005, the 936
Credit attributable to Active Business Income is terminated. Under the cap rules
for both the Economic Activity Method and the Fixed Percentage Method, the
income eligible for the 936 Credit is limited to the "adjusted base period
income" of the Section 936 Corporation. Computation of the "adjusted base period
income" involves three steps: (i) the Section 936 Corporation base period years
are determined (which are, generally, three of the Section 936 Corporation's
five most recent years ending before October 14, 1995, determined by
disregarding the taxable years in which the Section 936 Corporation's Active
Business Income was the highest and the lowest); (ii) Active Business Income of
the Section 936 Corporation in each of the base period years is adjusted for
inflation; and (iii) the income in the base period years, as adjusted for
inflation, is averaged.

       In response to certain proposals put forth by the Government of Puerto
Rico (the "Puerto Rico Government Proposals"), the SBJPA added Section 30A to
the Code ("Section 30A"). The Puerto Rico Government Proposals included a
ten-year grandfather period for the existing 936 Credit and the creation of a
new tax credit for qualifying corporations that invest in "economically
developing jurisdictions." Section 30A incorporates in part the Puerto Rico
Government Proposals and provides for an income tax credit to domestic
corporations operating in Puerto Rico. This new credit is determined under
guidelines similar to the Economic Activity Method.

       The modification of Section 936 as enacted into law could have an adverse
effect on the general economic condition of Puerto Rico, R&G Financial's service
area, by reducing incentives for investment in Puerto Rico. Any such adverse
effect on the general economy of Puerto Rico could lead to an increase in
mortgage delinquencies and a reduction in the level of residential construction
and demand for mortgage loans. The elimination of the credit for QPSII could
also lead to a decrease in the amount of 936 Funds invested in Puerto Rico
financial assets by 936 Corporations, thereby increasing funding costs and
decreasing liquidity in the Puerto Rico financial market. The magnitude of the
impact of any such changes on R&G Financial's profitability or financial
condition cannot be determined at this time. R&G Financial has taken steps to
attempt to reduce the impact of any such adverse changes by diversifying its
sources of funding and identifying additional investors for its mortgage
products. During recent periods, the disparity between the cost of 936 Funds and
other sources of funding such as the Eurodollar market has decreased, thereby
reducing the adverse effect that the loss of such funding could have on the
profitability of R&G Financial.


                                       19
<PAGE>

       In the absence of the 936 Credit and as a means of continuing to defer
U.S. income taxation, subsidiaries of multi-national companies operating under
Section 936 of the Code may transfer their operations to a corporation organized
under Puerto Rico law. Generally, a Puerto Rico corporation is not subject to
United States income taxes to the extent it does not derive U.S. source income
and may be entitled to defer U.S. income taxation until dividends are
repatriated to the United States. Under Section 954 of the Code, foreign
subsidiaries of multi-national companies whose parent corporation is
incorporated in the U.S. are not subject to federal income tax on profits on
products which they manufacture. Though a Puerto Rico corporation is subject to
local Puerto Rico taxes, the benefits under the Industrial Incentives Act, which
provide a 90 percent tax exemption on profits for companies that manufacture or
provide services in Puerto Rico, would continue to be available. In addition,
under Section 901 and 902 of the Code and subject to certain limitations and
exceptions, U.S. shareholders of a Puerto Rico corporation would be allowed to
claim a foreign tax credit with respect to income tax paid in Puerto Rico. U.S.
shareholders are also not required to recognize income attributable to
manufacturing operations of a Puerto Rico corporation as a general rule under
Subpart F of the Code. However, under Section 367 of the Code, multi-national
corporations may be required to recognize income upon the transfer of operations
to a Puerto Rico corporation, depending upon the nature and value of the
property transferred. Several multi-national 936 Corporations have taken such
steps since the legislation with respect to Section 936 was first introduced in
the U.S. Congress.

       In addition to the foregoing incentives, interest derived from FHA loans
or VA loans secured by real property in Puerto Rico originated after June 30,
1983 and, under certain circumstances, on or before February 15, 1973, and from
GNMA certificates consisting of such mortgages, is exempt from Puerto Rico
income tax. FHA and VA mortgage loans are also exempt from Puerto Rico gift and
estate taxes. Individuals who are bona fide residents of Puerto Rico are also
not subject to United States federal income tax on income from Puerto Rico
sources, including interest income derived from mortgage loans originated in
Puerto Rico whose mortgagors are residents of Puerto Rico. The exemption for
interest earned on FHA loans, VA loans and GNMA certificates tends to increase
the demand for these products and the price R&G Financial may obtain upon their
sale. There can be no assurance that the tax exempt treatment of interest on FHA
and VA loans will not be reviewed or modified in the future.

       Any change in Puerto Rico's political status could result in the
elimination or modification of these tax benefits described above.

                         Lending Activities of the Bank

       General. At December 31, 1996, R&G Financial's loans receivable, net
totalled $603.8 million, which represented 58.2% of R&G Financial's $1.0 billion
of total assets. At December 31, 1996, $554.0 million or 91.8% of R&G
Financial's loans receivable, net were held by the Bank. The principal category
of loans in R&G Financial's portfolio are


                                       20
<PAGE>

conventional loans which are secured by first liens on single-family residences.
Conventional residential real estate loans are loans which are neither insured
by the FHA nor partially guaranteed by the VA. At December 31, 1996, $369.5
million or 99.6% 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.


                                       21
<PAGE>

       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 in the Bank's loan portfolio.

<TABLE>
<CAPTION>
                                                                     December 31,
                                              ------------------------------------------------------------
                                                    1996                 1995                 1994        
                                              -----------------    -----------------    ------------------
                                              Amount    Percent    Amount    Percent    Amount     Percent
                                              ------    -------    ------    -------    ------     -------
                                                                 (Dollars in Thousands)
<S>                                          <C>         <C>      <C>         <C>      <C>          <C>   
Residential real  estate - first                                            
  mortgage(1)..............................  $370,876    60.75%   $282,498    58.23%   $194,707     62.14%
Residential real estate - second                                            
  mortgage.................................    15,757     2.58      14,372     2.96      13,298      4.24 
Residential construction...................     5,351      .88      15,046     3.10      12,039      3.84 
Commercial construction and land                                            
  acquisition..............................     5,075      .83       5,523     1.14       1,062      0.34 
Commercial real estate.....................    70,139    11.49      61,862    12.74      43,029     13.72 
Commercial business........................    31,063     5.09      27,816     5.74      14,102      4.51 
Consumer loans:                                                             
  Loans secured by deposits................     9,409     1.54       7,497     1.55       5,829      1.86 
  Real estate secured consumer loans.......    42,893     7.03      33,381     6.88      29,279*     9.34*
  Unsecured consumer loans.................    59,864     9.81      37,180     7.66            *         *
                                             --------   ------    --------   ------    --------    ------ 
    Total loans receivable.................   610,427   100.00%    485,175   100.00%    313,345    100.00%
                                             --------   ------    --------   ------    --------    ------ 
Less:                                                                       
  Allowance for loan losses................    (3,332)              (3,510)              (2,887)          
  Loans in process.........................    (2,430)              (5,727)              (5,945)          
  Deferred loan fees.......................        41                 (266)                (424)          
  Unearned interest........................      (955)              (1,831)              (2,475)          
                                             --------             --------             --------           
                                               (6,676)             (11,334)             (11,731)          
                                             --------             --------             --------           
  Loans receivable, net....................  $603,751             $473,841             $301,614           
                                             ========             ========             ========           
                                                                           
<CAPTION>
                                                            December 31,
                                              ---------------------------------------
                                                    1993                  1992
                                              -----------------     -----------------
                                              Amount    Percent     Amount    Percent
                                              ------    -------     ------    -------
                                                       (Dollars in Thousands) 
<S>                                          <C>         <C>       <C>         <C>   
Residential real  estate - first             
  mortgage(1)..............................  $137,396    60.95%    $ 64,777    50.27%
Residential real estate - second             
  mortgage.................................    11,135      4.94       7,945     6.17
Residential construction...................     3,940      1.75      13,801    10.71
Commercial construction and land             
  acquisition..............................     1,084      0.48         707     0.55
Commercial real estate.....................    30,290     13.44      21,246    16.49
Commercial business........................    15,417      6.84       4,574     3.55
Consumer loans:                              
  Loans secured by deposits................     3,815      1.69       1,900     1.47
  Real estate secured consumer loans.......    22,355*     9.92*     13,896*   10.78*
  Unsecured consumer loans.................        *           *           *        *
                                             --------     ------   --------   ------
    Total loans receivable.................   225,432     100.00%   128,846   100.00%
                                             --------     ------   --------   ------
Less:                                        
  Allowance for loan losses................    (3,029)               (1,230)
  Loans in process.........................    (1,531)               (5,776)
  Deferred loan fees.......................      (456)                 (452)
  Unearned interest........................    (3,796)               (3,960)
                                             --------              --------
                                               (8,812)              (11,418)
                                             --------              --------
  Loans receivable, net....................  $216,620              $117,428
                                             ========              ========
</TABLE>

----------
(1)    Includes $49.7 million and $55.2 million of residential real estate -
       first mortgage loans which are held by R&G Mortgage at December 31, 1996
       and 1995, respectively.

(2)    Does not include mortgage loans held for sale of $54.5 million, $21.3
       million, $22.0 million, $174.2 million and $106.4 million at December 31,
       1996, 1995, 1994, 1993 and 1992, respectively.

*      R&G Financial is unable to distinguish these two sub-categories of
       consumer loans during the years ended December 31, 1994, 1993 and 1992.


                                       22
<PAGE>

       Contractual Principal Repayments and Interest Rates. The following table
sets forth certain information at December 31, 1996 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.

<TABLE>
<CAPTION>
                                                  Due 1-5 years  Due 5 or more
                                                      after       years after
                                      Due 1 year   December 31,   December 31,
                                       or less        1996            1996      Total(1)
                                      ----------  -------------  -------------  --------
                                                         (In Thousands)
<S>                                    <C>           <C>            <C>         <C>     
Residential real estate .............  $ 57,506      $159,372       $169,755    $386,633
Residential construction ............     5,351          --             --         5,351
Commercial real estate(2) ...........    17,994        16,495         40,725      75,214
Commercial business .................     7,355(3)     18,188          5,520      31,063
Consumer:                                                                       
  Loans on savings ..................     4,235         4,745            429       9,409
  Real estate secured consumer loans        850        11,515         30,528      42,893
  Unsecured consumer loans ..........     5,991        53,179            694      59,864
                                       --------      --------       --------    --------
Total(4) ............................  $ 99,282      $263,494       $247,651    $610,427
                                       ========      ========       ========    ========
</TABLE>
                                                                                
----------
(1)    Amounts have not been reduced for the allowance for loan losses, loans in
       process, deferred loan fees or unearned interest.

(2)    Includes $5.1 million of commercial construction and land acquisition
       loans.

(3)    Includes $726,000 of past due loans from the Bank's insurance premium
       financing portfolio. See "Asset Quality."

(4)    Does not include mortgage loans held for sale.

       The following table sets forth the dollar amount of total loans due after
one year from December 31, 1996, as shown in the preceding table, which have
fixed interest rates or which have floating or adjustable interest rates.

                                                        Floating or
                                          Fixed rate  adjustable-rate    Total
                                          ----------  ---------------    -----
                                                       (In Thousands)
Residential real estate .................  $329,127       $   --        $329,127
Residential construction ................     --              --            --
Commercial real estate(1) ...............     5,541         51,679        57,220
Commercial business .....................    16,771          6,937        23,708
Consumer:                                                              
  Loans on savings ......................     5,174           --           5,174
  Real estate secured consumer loans ....    42,043           --          42,043
  Unsecured consumer loans ..............    53,873           --          53,873
                                           --------       --------      --------
   Total ................................  $452,529       $ 58,616      $511,145
                                           ========       ========      ========
                                                                          
----------
(1)    Includes $5.1 million of commercial construction and land acquisition
       loans.


                                       23
<PAGE>

       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, with
respect to conventional loans originated for the Bank after February 1994,
due-on-sales clauses, which 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, Purchase and Sales of Loans. The following table sets forth
loan originations, purchases and sales by the Bank for the periods indicated.

                                                    Year Ended December 31,
                                              ---------------------------------
                                                 1996        1995        1994
                                              ---------   ---------   ---------
                                                    (Dollars in Thousands)
Loan originations:
Loans originated by R&G Mortgage:
  Residential mortgages ....................  $ 187,845   $ 126,599   $ 131,749
  Commercial mortgages .....................       --          --           123
  Construction loans .......................      2,227      13,764      10,700
  Consumer loans ...........................     21,208      15,944        --
    Total loans originated by R&G
      Mortgage .............................    211,280     156,307     142,572
Other loans originated:
  Commercial real estate ...................     36,140      48,497      21,921
  Commercial business ......................     33,318      21,556      13,391
Consumer loans:
  Loans on deposit .........................     13,988      12,546       9,290
  Real estate secured consumer loans .......         80       3,436       9,323
  Unsecured consumer loans .................     39,312      38,589       4,005
    Total other loans originated ...........    122,838     124,624      57,930
  Loans purchased(1) .......................      8,047         807      12,837
    Total loans originated and
       purchased ...........................    342,165     281,738     213,339
  Loans sold(2) ............................    (50,687)    (75,093)    (27,000)
  Loan principal reductions ................   (113,831)    (78,519)    (62,170)
  Net increase before other items, net .....    177,647     128,126     124,169
  Loans securitized and transferred to
    mortgage-backed securities .............    (43,673)    (17,631)    (51,492)
  Other increases (decreases) ..............       --           179      (2,363)
  Net increase in loan portfolio ...........  $ 133,974   $ 110,674   $  70,314

                                                   (Footnotes on following page)


                                       24
<PAGE>

----------
(1)    Comprised of conventional loans purchased from other financial
       institutions aggregating $8.1 million, $807,000 and $8.5 million in the
       years ended December 31, 1996, 1995 and 1994, and FHA and conventional
       loans purchased from R&G Mortgage aggregating $4.3 million during the
       year ended December 31, 1994.

(2)    Loans sold by the Bank in 1995 include approximately $55.2 million of
       loans sold to two commercial banks which have been recognized in R&G
       Financial's Consolidated Financial Statements as a transfer of loans with
       recourse. Accordingly, the aggregate principal amount of the loans have
       been reported as an asset in R&G Financial's Consolidated Financial
       Statements. See "Sources of Funds - Borrowings."

       R&G Financial, through the Bank, 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.

       Pursuant to the Master Production Agreement, R&G Mortgage will assist the
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 the Bank's underwriting guidelines;
and (iii) providing personnel and facilities with respect to the execution of
loan agreements approved by the Bank. R&G Mortgage performs the foregoing loan
origination services on behalf of the Bank with respect to residential mortgage
loans, some commercial real estate loans and construction loans. R&G Mortgage
receives from the Bank 75% of the applicable loan origination fee with respect
to loans originated by R&G Mortgage on behalf of the Bank pursuant to the terms
of the Master Production Agreement. During the years ended December 31, 1996,
1995 and 1994, R&G Mortgage received $4.5 million, $3.6 million and $3.2
million, respectively, of loan origination fees with respect to loans originated
by R&G Mortgage on behalf of the Bank pursuant to the terms of the Master
Production Agreement. These fees are eliminated in consolidation in R&G
Financial's Consolidated Financial Statements. See also "- General - Affiliated
Transactions" and "Regulation - R&G Financial - Limitations on Transactions with
Affiliates."

       The Bank originates commercial real estate, commercial business and
consumer loans. Applications for commercial real estate, commercial business and
unsecured consumer loans are taken at all of the Bank's branch offices and may
be approved by various lending officers of the Bank within designated limits,
which 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, the
Management Credit Committee is authorized to approve all loans not exceeding
$400,000, the Credit Committee of the Board of Directors is authorized to
approve real estate secured loans not exceeding $500,000, and the Executive
Committee of


                                       25
<PAGE>

the Board of Directors is authorized to approve all loans exceeding $500,000.
All loans originated or purchased by the Bank must be approved by one of the
three committees set forth above. Management of the Bank believes that its
relatively centralized approach to approving loan applications ensures strict
adherence to the Bank's underwriting guidelines while still allowing the Bank to
approve loan applications on a timely basis.

       The Bank also occasionally purchases loans secured by first liens on
single-family residential real estate. The Bank will occasionally purchase FHA
loans from R&G Mortgage and conventional loans from unrelated financial
institutions. Such loan purchases are underwritten by the Bank pursuant to the
same guidelines as direct loan originations. Loans purchased by the Bank are
generally securitized by R&G Mortgage and sold by the Bank. During the years
ended December 31, 1996, 1995 and 1994, the Bank purchased $8.1 million,
$807,000 and $12.8 million of loans, respectively.

       During the years ended December 31, 1996, 1995 and 1994, the Bank sold
$50.7 million, $75.1 million and $26.8 million of loans. 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.

       Pursuant to the Master Purchase Agreement, the Bank sells to R&G Mortgage
the servicing rights to all first and second mortgage loans secured by
residential properties which are or will become part of the Bank's loan
portfolio once the Bank has a commitment to sell the loans. The Master Purchase
Agreement further provides that R&G Mortgage will service all other loans held
in the Bank's portfolio (including single-family residential loans retained by
the Bank, commercial real estate, commercial business and consumer loans
(although R&G Mortgage does not actually acquire such servicing rights)). In
addition, pursuant to the Master Purchase Agreement, the Bank processes payments
on all loans serviced by R&G Mortgage on behalf of the Bank. Finally, under the
Master Purchase Agreement, R&G Mortgage renders securitization services with
respect to the pooling of some of the Bank's mortgage loans into mortgage-backed
securities. See "- Mortgage Banking Activities."

       At December 31, 1996, R&G Financial's five largest loans-to-one borrower
and their related entities amounted to $1.9 million, $1.9 million, $649,000,
$625,000 and $621,000. The largest loan concentration is primary comprised of
two interim construction loans with an aggregate balance of $1.2 million to a
developer of 110 single family detached residential units in Humaco, with the
balance of the loan concentration comprised of other commercial loans. The
second largest loan concentration is a loan to a developer of a new shopping
center in Carolina. Plans and permits are being developed for various fast food
chains. The third largest loan concentration is primarily comprised of a
commercial loan guaranteed by the Small Business Administration. The fourth 
largest loan concentration consist of an interim financing to complete the 
purchase of a land lot for the development of low to moderate single family 
residences. The fifth largest loan consist of a term loan for the purchase of 
a commercial two- story building in an industrial complex in the San Juan 
metropolitan area. All of R&G

                                       26
<PAGE>

Financial's five largest loan concentrations were performing in accordance with
their terms as of December 31, 1996.

       Single-Family Residential Real Estate Loans. The Bank has historically
concentrated its lending activities on the origination of loans secured by first
mortgage liens on existing single-family residences. At December 31, 1996,
$370.9 million or 60.7% of R&G Financial's total loans held for investment
consisted of such loans, $369.5 million or 99.6% of which consisted of
conventional loans. The Bank's first mortgage single-family residential loans
consist exclusively of fixed-rate loans with 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.

       The Bank'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 the Board of Directors, the Bank can lend up
to 95% of the appraised value of the property securing a first mortgage
single-family residential loan provided the Bank obtains private mortgage
insurance with respect to the top 25% of the loan.

       The Bank also originates loans secured by second mortgages on
single-family residential properties. At December 31, 1996, $15.8 million or
2.6% of R&G Financial's total loans held for investment consisted of second
mortgage loans on single-family residential properties. The Bank 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. In recent years, the Bank has been active in
originating loans to construct single-family residences. These construction
lending activities generally are conducted throughout Puerto Rico, although
loans are concentrated in areas contiguous to Bank branches. At December 31,
1996, residential construction loans amounted to $5.4 million or 0.9% of R&G
Financial's total loans held for investment, while commercial construction and
land acquisition loans amounted to $5.1 million or 0.83% of total loans held for
investment.

       The Bank primarily offers construction loans to individual borrowers for
the purpose of constructing single-family residences. Substantially all of the
Bank'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 Bank 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, which 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. R&G Mortgage's construction loan department approves the
proposed contractors and administers


                                       27
<PAGE>

the loan during the construction phase. The Bank's construction/permanent loan
program has been successful due to its ability to offer borrowers a single
closing and, consequently, reduced costs. At December 31, 1996, the Bank's
construction loan portfolio included 45 construction/permanent loans with an
aggregate principal balance of $5.4 million.

       The Bank has also originated construction loans to developers on a very
limited basis to develop single family residential properties. The Bank does not
intend to actively engage in this business and will primarily undertake such
investments to accommodate a valued developer client if the Bank determines that
the project is worthy and the risk is acceptable. At December 31, 1996, the Bank
had 3 residential construction loans outstanding to developers aggregating $2.0
million to develop single-family subdivisions, consisting of 58 units in Fajardo
and 110 units in Humaco. The Fajardo project, which involved a $2.3 million
loan, had an outstanding balance of $437,000 as of December 31, 1996. The Humaco
project, which involved a $1.4 million loan for the third phase of the project,
had an outstanding balance of $463,000, and the $1.2 million loan granted for
the fourth phase of the project had an outstanding balance of $770,000 at
December 31, 1996. Each loan is performing in accordance with its terms. The
Humaco project loans are referenced in the discussion of the Bank's largest loan
concentrations above.

       In addition to the foregoing, at December 31, 1996, the Bank had three
land acquisition loans amounting to $519,000, $239,000 and $180,000 which were
made in connection with projects to construct single-family residences. The Bank
and the financial institution which made the interim construction loan have
entered into an agreement pursuant to which the Bank is to be paid a percentage
of the proceeds from each home as it is released upon construction and sale. The
Bank expects to make the permanent construction loan on one of these projects.
The Bank does not expect to be active in this business.

       The Bank intends to continue to increase its involvement in single-family
residential construction lending. Such loans afford the Bank the opportunity to
increase the interest rate 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 Bank has taken steps to minimize the foregoing risks by, among other things,
limiting its construction lending primarily to residential properties. In
addition, the Bank has adopted underwriting guidelines which impose stringent
loan-to-value (80% with respect to single-family residential real estate), debt
service and other requirements for loans which are believed to involve higher
elements of credit risk and by working with builders with whom it has
established relationships or knowledge


                                       28
<PAGE>

thereof. At December 31, 1996, $363,000 of the Bank's construction loans were
classified as non-performing.

       Commercial Real Estate Loans. The Bank has also originated mortgage loans
secured by commercial real estate. At December 31, 1996, $70.1 million or 11.49%
of R&G Financial's total loans held for investment consisted of such loans. As
of such date, the Bank's commercial real estate loan portfolio consisted of
approximately 704 loans with an average principal balance of $107,000. At
December 31, 1996, $3.1 million of R&G Financial's commercial real estate loans
were classified as nonperforming.

       Commercial real estate loans originated by the Bank 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 7-15 years and have maturity dates of five to seven years. The
Bank will originate these loans with interest rates which 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 Bank's commercial real estate loans are
currently limited to 80% or lower. As part of the criteria for underwriting
commercial real estate loans, the Bank generally requires a debt coverage ratio
(the ratio of net cash from operations before payment of debt service to debt
service) of 1.30 or more. It is also the Bank's general 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. The Bank attempts to minimize its
risk exposure by limiting the extent of its commercial lending generally. In
addition, the Bank imposes stringent loan-to-value ratios, requires conservative
debt coverage ratios, and continually monitors the operation and physical
condition of the collateral. Although the Bank has begun to increase its
emphasis on commercial real estate lending, management does not currently
anticipate that its portfolio of commercial real estate loans will grow
significantly as a percentage of the total loan portfolio.

       Commercial Business Loans. Beginning in 1991, the Bank began emphasizing
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


                                       29
<PAGE>

one to 15 years. The interest rates on such loans are generally variable and are
indexed to a designated prime rate, plus a margin. The Bank also generally
obtains personal guarantees from the principals of the borrowers. At December
31, 1996, commercial business loans amounted to $31.1 million or 5.1% of total
loans held for investment. Although the Bank 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. At December 31, 1996 $1.6 million of R&G
Financial's commercial business loans were classified as non-performing, an
increase of $1.5 million as compared to December 31, 1995. The increase is
primarily related to certain loans related to the Bank's insurance premiums
financing business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Results of Operation -- Provision for Loan
Losses" incorporated by reference in Item 7 hereof.

       Consumer Loans. The Bank has recently begun to emphasize the origination
of consumer loans in order to provide a full range of financial services to its
customers and because such loans generally have shorter terms and higher
interest rates than mortgage loans. At December 31, 1996, $112.2 million or
18.4% of R&G Financial's total loans held for investment consisted of consumer
loans. The consumer loans offered by the Bank include real estate secured
consumer loans (which are originated by R&G Mortgage), loans secured by deposit
accounts, credit card loans and other secured and unsecured consumer loans. Most
of the Bank's consumer loans are secured and have been primarily obtained
through newspaper advertising, although loans are also obtained from existing
and walk-in customers. Although the Bank has begun to increase its 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.

       The Bank currently offers loans secured by deposit accounts, which
amounted to $9.4 million at December 31, 1996. 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. The Bank 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. Real estate secured
consumer loans have a maximum term of 10 years, which may be extended within the
sole discretion of the Bank, and an interest rate which is set at a fixed rate
based on market conditions. The Bank secures the loan with a first or second
mortgage on the property and will originate the loan even if another institution
holds the first mortgage. At December 31, 1996, real estate secured consumer
loans totalled $42.9 million. In November 1995, the Bank began issuing credit
cards in its own name. At December 31, 1996, credit card receivables totalled
$1.8 million.

       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


                                       30
<PAGE>

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, 1996,
$820,000 of consumer loans were classified as non-performing.

Asset Quality

       General. 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 Bank refers the file for collection action after 60 days.

       Loans secured by real estate are placed on non-accrual status when, in
the judgment of management, the probability of collection of interest is deemed
to be insufficient to warrant further accrual. When such a loan is placed on
non-accrual status, previously accrued but unpaid interest is deducted from
interest income. As a matter of policy, the Bank does not accrue interest on
loans past due 90 days or more which are secured by real estate. The Bank
generally takes the same position in the case of consumer loans.

       Real estate acquired by the Bank as a result of foreclosure or by
deed-in-lieu of foreclosure are classified as real estate owned until sold.
Pursuant to a statement of position ("SOP 92-3") issued by the American
Institute of Certified Public Accountants in April 1992, which provides guidance
on determining the balance sheet treatment of foreclosed assets in annual
financial statements for periods ending on or after December 15, 1992, there is
a rebuttable presumption that foreclosed assets are held for sale and such
assets are recommended to be carried at the lower of fair value minus estimated
costs to sell the property, or cost (generally the balance of the loan on the
property at the date of acquisition). After the date of acquisition, all costs
incurred in maintaining the property are expensed and costs incurred for the
improvement or development of such property are capitalized up to the extent of
their net realizable value. The Bank's accounting for its real estate owned
complies with the guidance set forth in SOP 92-3.


                                       31
<PAGE>

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

<TABLE>
<CAPTION>
                                                                   December 31,
                                                -------------------------------------------------
                                                  1996        1995      1994      1993      1992
                                                -------     -------   -------   -------   -------
                                                              (Dollars in Thousands)
<S>                                             <C>         <C>       <C>       <C>       <C>    
Non-accruing loans:
  Residential real estate(1) .................  $12,991     $ 7,921   $ 4,045   $ 2,942   $ 1,939
  Residential Construction ...................      363        --        --        --        --
  Commercial real estate .....................    3,141       1,903       789     1,311       141
  Commercial business ........................      823        --        --        --        --
  Consumer ...................................      686          40       918       736       221
  Other(2) ...................................      726        --        --        --        --
                                                -------     -------   -------   -------   -------
    Total ....................................   18,730(3)    9,864     5,752     4,989     2,301
                                                -------     -------   -------   -------   -------
Accruing loans greater than 90 day
  delinquent: ................................                                                  s
  Residential real estate ....................     --          --        --        --        --
  Residential construction ...................     --           611      --        --          28
  Commercial real estate .....................     --          --        --        --        --
  Commercial business ........................       22           8        10        70      --
  Consumer ...................................      134          94      --        --           4
                                                -------     -------   -------   -------   -------
    Total accruing loans greater than
      90 days delinquent .....................      156         713        10        70        32
                                                -------     -------   -------   -------   -------
    Total non-performing loans ...............   18,886      10,577     5,762     5,059     2,333
                                                -------     -------   -------   -------   -------
Real estate owned, net of reserves(4) ........      865         654       722       699        21
                                                -------     -------   -------   -------   -------
    Total non-performing assets ..............  $19,751     $11,231   $ 6,484   $ 5,758   $ 2,354
                                                =======     =======   =======   =======   =======
    Total non-performing loans as a
      percentage of total loans ..............     3.55%       2.18%     1.84%     2.24%     1.81%
                                                =======     =======   =======   =======   =======
    Total non-performing assets as a
      percentage of total assets .............     2.15%       1.32%     1.04%     1.07%     0.80%
                                                =======     =======   =======   =======   =======
</TABLE>

----------
(1)    Includes residential real estate secured by both first and second
       mortgage loans.

(2)    Comprised of insurance premium financing contracts, primarily 
       commercial and, to a lesser extent, personal. See "Management's 
       Discussion and Analysis of Financial Condition and Results of 
       Operations -- Results of Operation -- Provision for Loan Losses" 
       incorporated by reference in Item 7 hereof.

(3)    As of December 31, 1996, comprised of 249 loans secured by residential
       real estate, 30 loans secured by commercial real estate, 4 construction
       loans, 20 commercial business loans and 85 consumer loans.

(4)    Includes properties held by R&G Mortgage of $43,000 as of December 31,
       1994. As of December 31, 1996, the Bank had 10 residential properties
       aggregating $865,000.

       While the level of total non-performing assets of R&G Financial has
increased on an absolute basis during the periods presented, from $2.4 million
at December 31, 1992 to $19.8 million at December 31, 1996, R&G Financial's net
loans receivable portfolio has


                                       32
<PAGE>

increased by 414.3% during this period, from $117.4 million at December 31, 1992
to $603.8 million at December 31, 1996. Thus, total non-performing assets as a
percent of total assets increased from 0.80% at December 31, 1992 to 2.15% at
December 31, 1996.

       [Need to explain to me increases in single family and commercial real
estate and commercial business loans.]

       It is the policy of the Bank to maintain an allowance for estimated
losses on loans and to increase such allowance when, based on management's
evaluation, a loss becomes both probable and estimable (i.e., the loss is likely
to occur and can be reasonably estimated). Major loans and major lending areas
are reviewed periodically to determine potential problems at an early date.
Also, management's periodic evaluation considers factors such as loss
experience, current delinquency data, known and inherent risks in the portfolio,
identification of adverse situations which may affect the ability of debtors to
repay the loan, the estimated value of any underlying collateral and assessment
of current economic conditions. Additions to the allowance are charged to
income. Such provisions are based on management's estimated value of any
underlying collateral, as applicable, considering the current and anticipated
operating conditions of the borrower. Any recoveries are credited to the
allowance.

       The following table sets forth an analysis of R&G Financial's allowance
for loan losses during the periods indicated, which is maintained on the Bank's
loan portfolio.

<TABLE>
<CAPTION>
                                             At and For the Year Ended December 31,
                                         ---------------------------------------------
                                          1996     1995       1994     1993      1992
                                         ------   ------     ------   ------    ------
                                                     (Dollars in Thousands)
<S>                                      <C>      <C>        <C>      <C>       <C>   
Balance at beginning of period ........  $3,510   $2,887     $3,029   $1,230    $  892
                                         ------   ------     ------   ------    ------
Charge-offs:
  Residential real estate .............      45       53       --       --           5
  Construction ........................      50     --         --       --        --
  Commercial real estate ..............    --       --         --       --        --
  Commercial business .................     110       91          3       56       105
  Consumer ............................   1,922      365        139       90        11
  Other(1) ............................   2,535     --         --       --        --
                                         ------   ------     ------   ------    ------
    Total charge-offs .................   4,662      509        142      146       121
                                         ------   ------     ------   ------    ------
Recoveries:
  Residential real estate .............    --          1       --       --        --
  Construction ........................    --       --         --       --        --
  Commercial real estate ..............    --       --         --       --        --
  Commercial business .................      31       85       --         20         2
  Consumer ............................     195       96       --        242        22
                                         ------   ------     ------   ------    ------
    Total recoveries ..................     226      182       --        262        24
                                         ------   ------     ------   ------    ------
Net charge-offs .......................   4,436      327        142     (116)       97
                                         ------   ------     ------   ------    ------
Allowance for loan losses acquired from
  Caribbean Federal ...................    --       --         --      1,683      --
Provision for losses on loans .........   4,258      950(2)    --       --         435
                                         ------   ------     ------   ------    ------
Balance at end of period ..............  $3,332   $3,510     $2,887   $3,029    $1,230
                                         ======   ======     ======   ======    ======
Allowance for loan losses as a percent
  of total loans outstanding ..........     .55%    0.72%      0.92%    1.34%     0.95%
                                         ======   ======     ======   ======    ======
Allowance for loan losses as a percent
  of non-performing loans .............   15.55%   33.19%     50.10%   59.87%    52.72%
                                         ======   ======     ======   ======    ======
Ratio of net charge-offs to average
  loans outstanding ...................     .86%    0.08%      0.05%   (0.06)%    0.07%
                                         ======   ======     ======   ======    ======
</TABLE>


                                       33
<PAGE>

----------
(1)    Comprised of $2.5 million of loans from the Bank insurance premiums
       financing portfolio. See "Management's Discussion and Analysis of
       Financial Condition and Results of Operation -- Results of Operation --
       Provision for Loan Losses" incorporated by reference in Item 7 hereof.

(2)    Includes $500,000 transferred to the provision for loan losses which R&G
       Financial determined was excess valuation reserves on mortgage loans held
       for sale.


                                       34
<PAGE>

       The following table sets forth information concerning the allocation of
R&G Financial's allowance for loan losses (which is maintained on the Bank's
loan portfolio) by loan category at the dates indicated.

<TABLE>
<CAPTION>
                                                                         December 31,
                          ----------------------------------------------------------------------------------------------------------
                                  1996                   1995                 1994                 1993                 1992
                          --------------------   --------------------  -------------------  -------------------  -------------------
                                   Percent of             Percent of           Percent of           Percent of           Percent of
                                    Loans in               Loans in             Loans in             Loans in             Loans in
                                      Each                   Each                 Each                 Each                 Each
                                   Category to            Category to          Category to          Category to          Category to
                          Amount   Total Loans   Amount   Total Loans  Amount  Total Loans  Amount  Total Loans  Amount  Total Loans
                          ------   -----------   ------   -----------  ------  -----------  ------  -----------  ------  -----------
                                                                    (Dollars in Thousands)
<S>                       <C>         <C>        <C>         <C>       <C>        <C>       <C>        <C>       <C>        <C>   
Residential real estate   $  810      24.31%     $2,094      59.66%    $1,962     67.95%    $2,029     66.99%    $  913     74.23%
Construction...........       51       1.53          32       0.90         --        --         --        --         --        --
Commercial real estate.      489      14.68          --         --         --        --         --        --         --        --
Commercial business....      109       3.27         782      22.28        403     13.96        576     19.02        154     12.60
Consumer...............    1,873      56.21         602      17.16        522     18.09        424     13.99        163     13.17
                          ------     ------      ------     ------     ------    ------     ------    ------     ------    ------ 
Total..................   $3,332     100.00%     $3,510     100.00%    $2,887    100.00%    $3,029    100.00%    $1,230    100.00%
                          ======     ======      ======     ======     ======    ======     ======    ======     ======    ====== 
</TABLE>


                                       35
<PAGE>

                              Investment Activities

       General. R&G Financial's securities portfolio is managed by investment
officers in accordance with a comprehensive written investment policy which
addresses strategies, types and levels of allowable investments and which is
reviewed and approved annually by the respective Boards of Directors of the Bank
and R&G Mortgage. The management of the securities portfolio is set in
accordance with strategies developed by the Bank's Interest Rate Risk, Budget
and Investments Committee ("IRRBICO").

       As discussed under "- Mortgage Banking Activities," R&G Mortgage is
primarily engaged in the origination of mortgage loans and the securitization of
such loans into mortgage-backed and related securities and the subsequent sale
of such securities to securities broker-dealers and other investors in the
secondary market. As a result of R&G Mortgage's securitization activities, R&G
Mortgage maintains a substantial portfolio of GNMA mortgage-backed securities.
At December 31, 1996, R&G Mortgage held GNMA mortgage-backed securities with a
fair value of $106.4 million which are classified as held for trading. Such
securities generally remain in R&G Mortgage's portfolio for between 90 and 180
days. In addition, during 1994 and 1995, R&G Mortgage sold through grantor
trusts $201.4 million and $38.1 million, respectively, of CMOs and retained a
portion of the residual interests related thereto. In addition, in 1995, R&G
Mortgage purchased from the Bank $4.6 million of mortgage-backed residuals
relating to the Bank's 1993 issuance of CMOs. At December 31, 1996, R&G
Mortgage's CMOs and CMO residuals, which are classified as held for trading, had
an amortized cost of $24.7 million and a fair value of $23.7 million.

       The Bank's Investment Policy authorizes the Bank to invest in U.S.
Treasury obligations (with a maturity up to five years), U.S. Agency
obligations, FNMA, GNMA and FHLMC mortgage-backed certificates, investment grade
municipal obligations (with a maturity of up to five years), bankers'
acceptances and Federal Home Loan Bank ("FHLB") notes (with a maturity of up to
five years), investment grade commercial paper (with a maturity of up to 9
months), federal funds (with a maturity of six months or less), certificates of
deposit in other financial institutions (including Eurodollar deposits),
repurchase agreements (with a maturity of six months or less), investment grade
corporate bonds (with a maturity of five years or less) and certain
mortgage-backed derivative securities (with a weighted average life of less than
ten years).

       At December 31, 1996, the Bank's securities portfolio consisted of $43.2
million of securities held for investments, consisting of $21.7 million of
tax-free mortgage-backed securities, $16.2 million of other mortgage backed
securities, and $5.3 million of Puerto Rico Government obligations and other
Puerto Rico securities. In addition, at December 31, 1996, the Bank had a
securities portfolio classified as available for sale with a fair value of $81.8
million, consisting of $42.6 million of mortgage-backed securities, $4.3 million
of FHLB stock, $8.2 million of CMOs and CMO residuals and $26.7 million of U.S.
Government agency securities. Finally, at December 31, 1996, $2.5 million of the
Bank's securities were classified as held for trading, consisting of $1.7
million of GNMA certificates and $770,000 of U.S. Treasury Bills.

       In February 1996, the Company entered into various agreements with an
independent investment management firm whereby such firm has been appointed as
investment advisor


                                       36
<PAGE>

with respect to a portion of the Company's securities portfolio. Pursuant to
such agreements, this investment advisory firm advises and recommends the
purchase and/or sale of otherwise eligible investments on behalf of the Company
as well as the execution of various hedging strategies. Such firm, which has
been engaged by the Company to, among other things, assist it in achieving the
objectives established by the Company's IRRBICO, receives an annual management
fee of .15% of the average aggregate principal amount under management (payable
quarterly) together with a quarterly performance fee of 25% of the net trading
profits earned during each calendar quarter. At December 31, 1996, this
investment advisory firm was managing assets of the Company with an approximate
fair value of $33.0 million ($19.2 million of which is being utilized for
hedging purposes and $13.8 million of which is being utilized for trading
purposes), which were invested in U.S. Government agency securities, U.S.
Treasury Bills, money market instruments and option contracts. Such firm also
executes hedging strategies on behalf of the Company for a portion of U.S.
Government and agency securities available for sale and mortgage-backed
securities which are available for sale (excluding CMOs) or held for trading. At
December 31, 1996, the Company's securities held for trading and available for
sale for which hedging contracts are made had a fair value of $149.1 million.
Effective January 1, 1997, the Company discontinued hedging activities for its
mortgage backed securities held for trading after management determined that the
relatively low volatility of such securities did not warrant hedging against
such assets.


                                       37
<PAGE>

       The following table presents certain information regarding the
composition and period to maturity of R&G Financial's securities portfolio held
to maturity as of the dates indicated below. All of such securities are assets
of the Bank.

<TABLE>
<CAPTION>
                                                                           December 31,
                               ---------------------------------------------------------------------------------------------------
                                              1996                              1995                             1994
                               ---------------------------------   ------------------------------   ------------------------------
                                                        Weighted                         Weighted                         Weighted
                               Carrying      Market     Average    Carrying   Market     Average    Carrying   Market     Average
                                Value        Value       Yield      Value     Value       Yield       Value    Value      Yield
                               --------      ------     --------   --------   ------     --------   --------   ------     --------
                                                                     (Dollars in Thousands)
<S>                            <C>           <C>                   <C>        <C>                   <C>        <C>               
Mortgage-backed securities:
  GMNA
    Due within one year.....   $    --       $    --          %    $    --    $    --         --%   $    --    $    --        --%
    Due from one-five years.        --            --        --          --         --         --         --         --        --
    Due from five-ten years.        97           100     10.00%        118        108      10.00        174        164     10.00
    Due over ten years......    21,591        20,571      6.03      24,617     23,681       6.03     26,619     24,224      5.98
FNMA
  Due within one year.......        --            --        --          --         --         --         --         --        --
  Due from one-five years...        --            --        --          --         --         --         --         --        --
  Due from five-ten years...        --            --        --          --         --         --         --         --        --
  Due over ten years........    15,895        16,124      7.18      16,623     16,623       7.18     16,175     15,267      7.16
FHLMC
  Due within one year.......        --            --        --          --         --         --         --         --        --
  Due from one-five years...        --            --        --          --         --         --         --         --        --
  Due from five-ten years...        --            --        --          --         --         --        659        678      9.16
  Due over ten years........       317           309      5.38         373        373       5.50     40,495     38,512      7.05
Investment Securities:
  Puerto Rico Government
    obligations
  Due within one year.......        --            --        --         377        377       2.69        460        460      3.49
  Due from one-five years...     4,960         4,930      5.38       1,042      1,000       6.25      1,046        982      6.25
  Due from five-ten years...        --            --        --          --         --         --         --         --        --
  Due over ten years........        --            --        --         627        619       4.25        676        667      4.55
  U.S. Government Agency
  Due within one year.......        --            --        --          --         --         --         --         --        --
  Due within one-five years.       310           311      6.13          --         --         --         --         --        --
  Due within five-ten years.        --            --        --          --         --         --         --         --        --
  Due over ten years........        --            --        --          --         --         --         --         --        --
Commercial paper:
  Due within one year.......     2,982         2,982      5.55          --         --         --         --         --        --
  Due within one-five years.        --            --        --          --         --         --         --         --        --
  Due within five-ten years.        --            --        --          --         --         --         --         --        --
  Due over ten years........        --            --        --          --         --         --         --         --        --
    Total Securities held for
      investment............   $46,152       $45,327      6.34%    $43,777    $42,781       6.42%   $86,304    $80,954      6.76%
</TABLE>


                                       38
<PAGE>

       The following table presents certain information regarding the
composition and period to maturity of R&G Financial's held for trading and
available for sale mortgage-backed and investment securities portfolio as of the
dates indicated below.

<TABLE>
<CAPTION>
                                                                                  December 31,
                                            ----------------------------------------------------------------------------------------
                                                        1996                          1995                          1994
                                            ----------------------------  ----------------------------  ----------------------------
                                                                Weighted                      Weighted                      Weighted
                                            Amortized   Fair    Average   Amortized   Fair    Average   Amortized    Fair   Average
                                              Cost      Value     Yield      Cost     Value    Yield       Cost      Value   Yield
                                            ---------  -------  --------  ---------  ------   --------  ---------   ------  --------
                                                                             (Dollars in Thousands)
<S>                                         <C>        <C>         <C>    <C>       <C>          <C>    <C>        <C>       <C>  
Mortgage-Backed Securities Available 
  for Sale(1):
  FNMA mortgage-backed securities
    Due within one year...................  $     --   $     --      --%   $    --  $    --        --%  $     --   $     --    --%
    Due from one-five years...............        --         --      --         --        --       --         --         --    --
    Due from five-ten years...............        --         --      --         --        --       --         --         --    --
    Due over ten years....................    10,563     10,293    6.99     14,846    14,946     7.12         --         --    --
  FHLMC mortgage-backed securities
    Due within one year...................        --         --      --         --        --       --         --         --    --
    Due from one-five years...............        56         60    9.01         --        --       --         --         --    --
    Due from five-ten years...............       474        487    9.25      1,122     1,180     8.90         --         --    --
    Due over ten years....................    32,454     31,806    6.77     36,353    36,759     6.94         --         --    --
  CMO residuals and other mortgage-backed
    securities (2)
    Due within one year...................        --         --      --         --        --       NA         --         --    NA
    Due from one-five years...............        --         --      --         --        --       NA         --         --    NA
    Due from five-ten years...............        --         --      --         --        --       NA         --         --    NA
    Due over ten years....................     7,067      8,195   8.125      7,126     8,123       NA     11,684     13,300    NA
Investment Securities Available for Sale(1)
  U.S. Government Agency
    Due within one year...................     1,500      1,500    6.00         --        --       --         --         --    --
    Due from one-five years...............    20,502     20,361    6.18         --        --       --         --         --    --
    Due from five-ten years...............     5,026      4,865    6.73         --        --       --         --         --    --
    Due over ten years....................        --         --      --         --        --       --         --         --    --
  FHLB stock..............................     4,247      4,247    6.30      3,280     3,280     7.68      1,878      1,878  7.60
                                            --------   --------    ----   --------  --------     ----   --------   --------  ---- 
                                            $ 81,889   $ 81,814    6.75%  $ 62,727  $ 64,288     6.42%  $ 13,562   $ 15,178  5.01%
                                            ========   ========    ====   ========  ========     ====   ========   ========  ==== 
Securities held for trading(3):
  GNMA certificates.......................    83,848     84,460    6.53   $ 87,656  $ 88,448     6.71%  $ 65,813   $ 64,184  6.59%
  CMO certificates........................    16,200     15,147    5.95     16,200    15,570     5.95     54,350     50,241  5.76
  CMO residuals(4)........................     8,489      8,539    8.07     10,248     9,791     8.07      9,500     10,097  8.00
  U.S. Treasury Bills.....................     1,370      1,316    5.72         --        --       --         --         --    --
                                            --------   --------    ----   --------  --------     ----   --------   --------  ---- 
                                            $109,907   $109,462    6.55%  $114,104  $113,809     6.72%  $129,663   $124,522  6.35%
                                            ========   ========    ====   ========  ========     ====   ========   ========  ==== 
</TABLE>

                                                   (Footnotes on following page)


                                       39
<PAGE>

----------
(1)    All securities are held in the Bank's investment securities portfolio.

(2)    Comprised of subordinated tranches and residuals from the Bank's 1992
       Grantor Trust.

(3)    Except for GNMA Certificates with a fair value of $1.7 million, $1.8
       million and $1.9 million during the years ended December 31, 1996, 1995
       and 1994 and U.S. Treasury Bills with a fair value of $770,000 at
       December 31, 1996, all of such securities are held in R&G Mortgage's
       securities portfolio.

(4)    Represents residuals purchased from the Bank from its 1993 CMO Grantor
       Trust and from R&G Mortgage's CMO Grantor Trust.

       A substantial portion of R&G Financial's securities are held in
mortgage-backed securities. Mortgage-backed securities (which also are known as
mortgage participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages, the
principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as R&G Financial. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include the FHLMC,
the FNMA and the GNMA.

       The FHLMC is a public corporation chartered by the U.S. Government and
owned by the 12 Federal Home Loan Banks and federally-insured savings
institutions. The FHLMC issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely payment of interest
and the ultimate return of principal within one year. The FNMA is a private
corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for conventional mortgage loans. The FNMA guarantees the timely
payment of principal and interest on FNMA securities. FHLMC and FNMA securities
are not backed by the full faith and credit of the United States, but because
the FHLMC and the FNMA are U.S. Government-sponsored enterprises, these
securities are considered to be among the highest quality investments with
minimal credit risks. The GNMA is a government agency within HUD which is
intended to help finance government-assisted housing programs. GNMA securities
are backed by FHA-insured and VA-guaranteed loans, and the timely payment of
principal and interest on GNMA securities are guaranteed by the GNMA and backed
by the full faith and credit of the U.S. Government. Because the FHLMC, the FNMA
and the GNMA were established to provide support for low- and middle-income
housing, there are limits to the maximum size of loans that qualify for these
programs. For example, the FNMA and the FHLMC currently limit


                                       40
<PAGE>

their loans secured by a single-family, owner-occupied residence to $214,600. To
accommodate larger-sized loans, and loans that, for other reasons, do not
conform to the agency programs, a number of private institutions have
established their own home-loan origination and securitization programs.

       Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgage, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security thus approximates
the life of the underlying mortgages.

       R&G Financial's securities portfolio includes CMOs. CMOs have been
developed in response to investor concerns regarding the uncertainty of cash
flows associated with the prepayment option of the underlying mortgagor and are
typically issued by government agencies, government sponsored enterprises and
special purpose entities, such as trusts, corporations or partnerships,
established by financial institutions or other similar institutions. A CMO can
be collateralized by loans or securities which are insured or guaranteed by the
FNMA, the FHLMC or the GNMA. In contrast to pass-through mortgage-backed
securities, in which cash flow is received pro rata by all security holders, the
cash flow from the mortgages underlying a CMO is segmented and paid in
accordance with a predetermined priority to investors holding various CMO
classes. By allocating the principal and interest cash flows from the underlying
collateral among the separate CMO classes, different classes of bonds are
created, each with its own stated maturity, estimated average life, coupon rate
and prepayment characteristics.

       Mortgage-backed securities generally increase the quality of R&G
Financial's assets by virtue of the insurance or guarantees that back them, are
more liquid than individual mortgage loans and may be used to collateralize
borrowings or other obligations of R&G Financial. At December 31, 1996, $44.5
million or 22.6% of R&G Financial's mortgage-backed securities was pledged to
secure various obligations of R&G Financial (excluding repurchase agreements).

       The FDIC has issued a statement of policy which states, among other
things, that mortgage derivative products (including CMOs and CMO residuals)
which possess average life or price volatility in excess of a benchmark fixed
rate 30-year mortgage-backed pass-through security are "high-risk mortgage
securities," are not suitable investments for depository institutions, and if
considered "high risk" at purchase must be carried in the institution's trading
account or as assets held for sale, and must be marked to market on a regular
basis. In addition, if a security was not considered "high risk" at purchase but
was later found to be "high risk" based on the tests, it may remain in the
held-to-maturity portfolio as long as the institution has positive intent to
hold the security to maturity and has a documented plan in place to manage the
high risk. At December 31, 1996, the Bank's


                                       41
<PAGE>

CMOs and CMO residuals, which had a fair value of $8.2 million, were designated
as "high-risk mortgage securities" and classified as available for sale.

                                Sources of Funds

       General. R&G Financial will consider various sources of funds to fund its
investment and lending activities and evaluates the available sources of funds
in order to reduce R&G Financial's overall funding costs. Deposits, reverse
repurchase agreements, warehouse lines of credit, notes payable, FHLB advances,
subordinated capital notes and sales, maturities and principal repayments on
loans and securities have been the major sources of funds for use in R&G
Financial's lending and investing activities and for other general business
purposes.

       Deposits. Deposits are the major sources of the Bank's funds for lending
and other investment purposes. Consumer and commercial deposits are attracted
principally from within the Bank's primary market area through the offering of a
broad selection of deposit instruments, including passbook, NOW and Super NOW,
checking and commercial checking and certificates of deposit ranging in terms
from 7 days to 10 years. Included among these deposit products are $168.6
million of certificates of deposit with balances of $100,000 or more, which
amounted to 27.4% of the Bank's total deposits at December 31, 1996. Deposit
account terms vary according to the minimum balance required, the time periods
the funds must remain on deposit and the interest rate, among other factors.

       The Bank attempts to price its deposits in order to promote deposit
growth. The Bank regularly evaluates the internal costs of funds, surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending and liquidity and executes rate changes when deemed appropriate. The
Bank does not currently obtain funds through brokers, although at December 31,
1996 it held $10.1 million of deposits acquired from money desks in the United
States.

       The principal methods currently used by the Bank to attract deposit
accounts include offering a wide variety of services and accounts and
competitive interest rates. The Bank utilizes traditional marketing methods to
attract new customers and savings deposits, including advertising.


                                       42
<PAGE>

       The following table presents the average balance of each deposit type and
the average rate paid one each deposit type of the Bank for the periods
indicated.

<TABLE>
<CAPTION>
                                                       December 31,
                            -------------------------------------------------------------------
                                    1996                    1995                   1994
                            --------------------   ---------------------  ---------------------
                            Average     Average    Average      Average   Average      Average
                            Balance    Rate Paid   Balance     Rate Paid  Balance     Rate Paid
                            --------   ---------   -------     ---------  -------     ---------
                                                  (Dollars in Thousands)
<S>                         <C>          <C>       <C>           <C>      <C>           <C>  
Passbook.................   $ 73,216     3.77%     $ 59,860      3.66%    $ 45,220      3.60%
NOW and Super NOW accounts    78,183     3.85        65,135      3.82         3.87
Checking.................     20,451       --         6,050        --        2,725        --
Commercial checking(1)...     30,173       --        24,601        --       22,819        --
Certificates of deposit..    359,525     6.05       276,187      6.25      197,035      5.20
                            --------     ----      --------      ----     --------      ---- 
  Total deposits.........   $561,548     4.90%     $431,833      5.05%    $340,461      4.25%
                            ========     ====      ========      ====     ========      ==== 
</TABLE>

----------
(1)    Includes $10.6 million, $9.7 million and $10.0 million of escrow funds of
       R&G Mortgage maintained with the Bank at December 31, 1996, 1995 and
       1994, respectively.

       The following table sets forth the maturities of the Bank's certificates
of deposit having principal amounts of $100,000 or more at December 31, 1996.

                                                                     Amount
                                                                 --------------
                                                                 (In Thousands)
Certificates of deposit maturing:
Three months or less......................................          $ 57,711
Over three through six months.............................            21,788
Over six through twelve months............................            47,706
Over twelve months........................................            41,410
                                                                    --------
  Total...................................................          $168,615
                                                                    ========

       Borrowings. R&G Financial's business requires continuous access to
various funding sources, both short and long-term. R&G Mortgage's primary source
of short-term funds is through sales of securities to investment dealers under
agreements to repurchase ("reverse repurchase agreements"). The Bank also from
time to time utilizes reverse repurchase agreements when they represent a
competitive short-term funding source. In a reverse repurchase agreement
transaction, R&G Financial will generally sell a mortgage-backed security
agreeing to repurchase either the same or a substantially identical security on
a specified later date (generally not more than 90 days) at a price less than
the original sales price. The difference in the sale price and purchase price is
the cost of the use of the proceeds. The mortgage-backed securities underlying
the agreements are delivered to the dealers who arrange the transactions. For
agreements in which R&G Financial has agreed to repurchase substantially
identical securities, the dealers may sell, loan or otherwise


                                       43
<PAGE>

dispose of R&G Financial's securities in the normal course of their operations;
however, such dealers or third party custodians safe-keep the securities which
are to be specifically repurchased by R&G Financial. Reverse repurchase
agreements represent a competitive cost funding source for R&G Financial.
Nevertheless, R&G Financial is subject to the risk that the lender may default
at maturity and not return the collateral. The amount at risk is the value of
the collateral which exceeds the balance of the borrowing. In order to minimize
this potential risk, R&G Financial only deals with large, established investment
brokerage firms when entering into these transactions. Reverse repurchase
transactions are accounted for as financing arrangements rather than as sales of
such securities, and the obligations to repurchase such securities is reflected
as a liability in R&G Financial's Consolidated Financial Statements. As of
December 31, 1996, R&G Financial had $97.4 million of reverse repurchase
agreements outstanding, all of which represented borrowings of R&G Mortgage. At
December 31, 1996, the weighted average interest rate on R&G Financial's reverse
repurchase agreements amounted to 5.67%.

       R&G Mortgage's loan originations are also funded by borrowings under
various warehouse lines of credit provided by two unrelated commercial banks
("Warehouse Lines"). At December 31, 1996, R&G Mortgage was permitted to borrow
under such Warehouse Lines up to $108.4 million, $40.3 million of which was
drawn upon and outstanding as of such date. The Warehouse Lines are used by R&G
Mortgage to fund loan commitments and must generally be repaid within 180 days
after the loan is closed or when R&G Mortgage receives payment from the sale of
the funded loan, whichever occurs first. Until such sale closes, the Warehouse
Lines provide that the funded loan is pledged to secure the outstanding
borrowings. The Warehouse Lines are also collateralized by certificates of
deposit, a general assignment of mortgage payments receivable, an assignment of
certain mortgage servicing rights and an assignment of key man life insurance
policies on Mr. Victor J. Galan, R&G Financial's Chairman of the Board and Chief
Executive Officer. In addition, some of the Warehouse Lines are personally
guaranteed by Mr. Galan. Certain of these warehousing lines of credit impose
restrictions on R&G Mortgage with respect to the maintenance of minimum levels
of net worth and working capital and limitations on the amount of indebtedness
and dividends which may be declared.

       The interest rate on funds borrowed pursuant to the Warehouse Lines is
based upon a specified prime rate less a negotiated amount or a designated
Puerto Rico Section 936 funds rate (which is lower than the prime rate) plus a
negotiated amount. By maintaining compensating balances, R&G Mortgage is able to
borrow funds under the Warehouse Lines at a lower interest rate than would
otherwise apply. These compensating balances are comprised of a portion of the
escrow accounts maintained by R&G Mortgage for principal and interest payments
and related tax and insurance payments on loans its services. At December 31,
1996, the weighted average interest rate being paid by R&G Mortgage under its
Warehouse Lines amounted to 6.48%.

       The Warehouse Lines include various covenants and restrictions on R&G
Mortgage's operations, including maintenance of minimum levels of net worth and
working capital,


                                       44
<PAGE>

minimum levels and ratios with respect to outstanding indebtedness and
restrictions on the amount of dividends which can be declared and paid by R&G
Mortgage on its common stock (which is limited to 50% of R&G Mortgage's net
income for the preceding fiscal year). Management of R&G Financial believes that
as of December 31, 1996, it was in compliance with all of such covenants and
restrictions and does not anticipate that such covenants and restrictions will
limit its operations.

       Although the Bank's primary source of funds is deposits, the Bank also
borrows funds on both a short and long-term basis. The Bank actively utilizes
936 Notes as a primary borrowing source. The 936 Notes have original terms to
maturity of between five and eight years and are payable semiannually at either
a variable interest rate (84% of the three-month LIBOR rate less .125%, and 96%
of the three month LIBID rate or a fixed interest rate (ranging from 5.50% to
7.15%). The Bank is able to obtain such low cost funds by investing the proceeds
in eligible activities as proscribed under Puerto Rico law, which provide tax
advantages under Puerto Rico tax laws and under U.S. federal tax laws for U.S.
corporations which are operating in Puerto Rico pursuant to Section 936 of the
Code. See " - Mortgage Banking Activities - Puerto Rico Secondary Mortgage
Market and Favorable Tax Treatment." At December 31, 1996, $41.0 million of the
936 Notes were secured by marketable securities, while $45.5 million were
secured by standby letters of credit issued by the FHLB of New York (which are,
in turn, secured by first mortgage loans, securities and cash deposits). The 936
Notes contain certain provisions which indemnify the holders thereof from the
federal tax liability which would be incurred, plus any penalties and interest,
if the Bank did not invest the proceeds as required in eligible activities, and
also provide for a "gross up" provision which permits the Bank to continue the
obligation at an adjusted interest rate based on LIBOR in the event the interest
on the 936 Notes is subject in whole or in part to federal and/or Puerto Rico
income tax. At December 31, 1996, the Bank had $86.5 million of 936 Notes
outstanding, $23.6 million of which matures in 1999, $25.0 million of which
matures in 2000, $35.5 million of which matures in 2001 and $2.4 million of
which matures in 2003.

       The Bank obtains both fixed-rate and variable-rate short-term and
long-term advances from the FHLB of New York upon the security of certain of its
residential first mortgage loans, securities and cash deposits, provided certain
standards related to the credit-worthiness of the Bank have been met. FHLB of
New York advances are available for general business purposes to expand lending
and investing activities. Advances from the FHLB of New York are made pursuant
to several different credit programs, each of which has its own interest rate
and range of maturities. At December 31, 1996, the Bank had access to $50.0
million in advances from the FHLB of New York, and had three FHLB of New York
advances aggregating $15.0 million outstanding as of such date, which mature in
1997 and have a weighted average interest rate of 5.75%. In addition, at
December 31, 1996, the Bank maintained $54.3 million in standby letters of
credit with the FHLB of New York, which secured $45.5 million of outstanding 936
Notes payable and $7.0 million of 936 certificates of deposit. At December 31,
1996, the Bank had pledged specific collateral aggregating $100.8 million to the
FHLB of New York under its advances program and to


                                       45
<PAGE>

secure the letters of credit. The Bank maintains collateral with the FHLB of New
York in excess of applicable requirements in order to facilitate any necessary
additional borrowings by the Bank in the future.

       In June 1991, the Bank issued $3.3 million of subordinated capital notes
bearing interest at 8% payable on a quarterly basis. The subordinated notes are
guaranteed by R&G Mortgage and by the Chairman of the Board and Chief Executive
Officer of R&G Financial, and are secured by an irrevocable standby letter of
credit issued by an unrelated commercial bank. Pursuant to the terms of the
subordinated notes, the Bank is required to deposit with an established sinking
fund in seven equal annual installments (the first of which began in September
1992 and the last of which is scheduled for June 1998, when the notes mature)
cash or other permitted investments in an amount sufficient to retire
one-seventh ($464,000) of the aggregate principal amount of the subordinated
notes. The standby letter of credit is reduced in equal proportion to the
deposits to such sinking fund.

       In December 1995, the Bank sold single-family residential mortgage loans
with an aggregate outstanding balance of approximately $55 million to two
commercial banks. In connection with the foregoing, R&G Mortgage assumed certain
recourse provisions and guaranteed a specific yield to the purchasers of the
loans. In addition, the purchasers of the loans have the right, at their option,
to require R&G Mortgage to purchase the mortgage loans at any time after
December 2000. Management has estimated its liability, if any, under the
foregoing recourse provisions to be immaterial as of December 31, 1996. In R&G
Financial's Consolidated Financial Statements, R&G Financial has recognized the
foregoing transaction as a transfer of loans with recourse. Accordingly, the
proceeds from such transaction (amounting to $50.5 million at December 31, 1996)
have been reported as a secured borrowing in R&G Financial's Consolidated
Financial Statements. Similarly, the aggregate outstanding principal balance of
the related loans (amounting to $49.7 million as of December 31, 1996) have been
reported as an asset in R&G Financial's Consolidated Financial Statements.


                                       46
<PAGE>

       The following table sets forth certain information regarding the
short-term borrowings of R&G Financial at or for the dates indicated.

                                                    At or For the Year Ended
                                                          December 31,
                                                -------------------------------
                                                   1996       1995       1994
                                                 --------   --------   --------
                                                        (Dollars in Thousands)
R&G Mortgage:
Securities sold under agreements to repurchase:
  Average balance outstanding .................  $ 94,128   $ 99,145   $ 84,405
  Maximum amount outstanding at any month-end
    during the period .........................   108,240    112,507    119,926
  Balance outstanding at end of period ........    97,444     87,958     97,355
  Average interest rate during the period .....      5.58%      5.87%      5.92%
  Average interest rate at end of period ......      5.67%      5.47%      6.06%
Notes Payable:
  Average balance outstanding .................  $ 40,279   $ 24,521   $ 61,352
  Maximum amount outstanding at any month-end
    during the period .........................    85,135     31,626    134,271
  Balance outstanding at end of period ........    40,342     30,130     22,215
  Average interest rate during the period .....      6.61%      6.92%      6.47%
  Average interest rate at end of period ......      6.48%      6.77%      6.61%
The Bank:
FHLB of New York advances:
  Average balance outstanding .................  $  6,366   $ 11,796   $ 12,060
  Maximum amount outstanding at any month-end
    during the period .........................    15,000     13,562     14,592
  Balance outstanding at end of period ........    15,000      6,007     13,568
  Average interest rate during the period .....      5.84%      6.00%      6.06%
  Average interest rate at end of period ......      5.75%      6.74%      5.84%
Securities sold under agreements to repurchase:
  Average balance outstanding .................  $  6,954   $  7,737   $  9,724
  Maximum amount outstanding at any month-end
    during the period .........................    19,000     14,673     22,272
  Balance outstanding at end of period ........      --       10,525     11,566
  Average interest rate during the period .....      4.74%      5.16%      3.98%
  Average interest rate at end of period ......       --%       5.11%      4.91%
Notes Payable:
  Average balance outstanding .................  $ 85,365   $ 30,597   $  4,020
  Maximum amount outstanding at any month-end
    during the period .........................   111,500     51,000     23,600
  Balance outstanding at end of period ........    86,500     51,000     23,600
  Average interest rate during the period .....      5.55%      6.42%      6.47%
  Average interest rate at end of period ......      5.82%      5.93%      6.74%

                          Trust and Investment Services

       R&G Financial also provides trust and investment services through the
Bank's Trust Department. Services offered include custodial services, the
administration of IRA accounts and the sale to investors of mortgage-backed
securities guaranteed by GNMA. As of December 31, 1996, the Bank's Trust
Department administered approximately 5,491 trust accounts, with aggregate
assets of $19.2 million as of such date. In addition, during the year ended
December 31, 1996, the Bank's Trust Department sold $24.0 million of GNMA
mortgage-backed securities. The Bank receives fees dependent upon the level and
type of service provided. The administration of the Bank's Trust Department is
performed by the Trust Committee of the Board of Directors of the Bank.


                                       47
<PAGE>

                                    Personnel

       As of December 31, 1996, R&G Financial (on a consolidated basis) had 681
full-time employees and 55 part-time employees. The employees are not
represented by a collective bargaining agreement and R&G Financial believes that
it has good relations with its employees.

                                   Regulation

       Set forth below is a brief description of certain laws and regulations
which, together with the descriptions of laws and regulations contained
elsewhere herein, are deemed material to an investor's understanding of the
extent to which R&G Financial, R&G Mortgage and the Bank are regulated. The
description of these laws and regulations, as well as descriptions of laws and
regulations contained elsewhere herein, does not purport to be complete and is
qualified in its entirety by reference to applicable laws and regulations.

R&G Financial

       General. R&G Financial is a registered bank holding company pursuant to
the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company
became a bank holding company in July 1996 through its acquisition of Mr. Victor
Galan's 88.1% interest in the Bank (which excludes his required qualifying
shares as a director of the Bank) in exchange for R&G Financial's Class A Common
Stock. R&G Financial acquired the remaining interest in the Bank in December
1996. R&G Financial, as a bank holding company, is subject to regulation and
supervision by the Federal Reserve Board and the OFCI. R&G Financial is required
to file annually a report of its operations with, and is subject to examination
by, the Federal Reserve Board and the OFCI.

       BHCA Activities and Other Limitations. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the Federal Reserve Board. No approval under the
BHCA is required, however, for a bank holding company already owning or
controlling 50% of the voting shares of a bank to acquire additional shares of
such bank.

       The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the possible
adverse effects, such as


                                       48
<PAGE>

undue concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.

       The Federal Reserve Board has by regulation determined that certain
activities are closely related to banking within the meaning of the BHCA. These
activities include operating a mortgage company, such a R&G Mortgage, finance
company, credit card company, factoring company, trust company or savings
association; performing certain data processing operations; providing limited
securities brokerage services; acting as an investment or financial advisor;
acting as an insurance agent for certain types of credit-related insurance;
leasing personal property on a full-payout, non-operating basis; providing tax
planning and preparation services; operating a collection agency; and providing
certain courier services. The Federal Reserve Board also has determined that
certain other activities, including real estate brokerage and syndication, land
development, property management and underwriting of life insurance not related
to credit transactions, are not closely related to banking and a proper incident
thereto.

       Limitations on Transactions with Affiliates. Transactions between
financial institutions and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a financial institution is any company
or entity which controls, is controlled by or is under common control with the
financial institution. In a holding company context, the parent holding company
of a financial institution (such as R&G Financial) and any companies which are
controlled by such parent holding company are affiliates of the financial
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
financial institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no financial
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the financial institution. See "- General - Affiliated
Transactions" for a discussion of the affiliated transactions conducted by R&G
Mortgage and the Bank.

       In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a financial institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the financial
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal


                                       49
<PAGE>

stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a financial
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers.

       Capital Requirements. The Federal Reserve Board has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications
to it under the BHCA. The Federal Reserve Board capital adequacy guidelines
generally require bank holding companies to maintain total capital equal to 8%
of total risk-adjusted assets, with at least one-half of that amount consisting
of Tier I or core capital and up to one-half of that amount consisting of Tier
II or supplementary capital. Tier I capital for bank holding companies generally
consists of the sum of common stockholders' equity and perpetual preferred stock
(subject in the case of the latter to limitations on the kind and amount of such
stocks which may be included as Tier I capital), less goodwill and, with certain
exceptions, intangibles. Tier II capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
Tier I capital; term subordinated debt and intermediate-term preferred stock;
and, subject to limitations, general allowances for loan losses. Assets are
adjusted under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no additional
capital) for assets such as cash to 100% for the bulk of assets which are
typically held by a bank holding company, including multi-family residential and
commercial real estate loans, commercial business loans and consumer loans.
Single-family residential first mortgage loans which are not past-due (90 days
or more) or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighing system, as
are certain privately-issued mortgage-backed securities representing indirect
ownership of such loans. Off-balance sheet items also are adjusted to take into
account certain risk characteristics.

       In addition to the risk-based capital requirements, the Federal Reserve
Board requires bank holding companies to maintain a minimum leverage capital
ratio of Tier I capital to total assets of 3.0%. Total assets for this purpose
does not include goodwill and any other intangible assets and investments that
the Federal Reserve Board determines should be deducted from Tier I capital. The
Federal Reserve Board has announced that the 3.0% Tier I leverage capital ratio
requirement is the minimum for the top-rated bank holding companies without any
supervisory, financial or operational weaknesses or deficiencies or those which
are not experiencing or anticipating significant growth. Other bank holding
companies will be expected to maintain Tier I leverage capital ratios of at
least 4.0% to 5.0% or more, depending on their overall condition.

       R&G Financial is in compliance with the above-described Federal Reserve
Board regulatory capital requirements.


                                       50
<PAGE>

       Financial Support of Affiliated Institutions. Under Federal Reserve Board
policy, R&G Financial will be expected to act as a source of financial strength
to the Bank and to commit resources to support the Bank in circumstances when it
might not do so absent such policy. The legality and precise scope of this
policy is unclear, however, in light of recent judicial precedent. In addition,
any capital loans by a bank holding company to a subsidiary bank is subordinate
in right of payment to deposits and to certain other indebtedness of such
subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment.

The Bank

       General. The Bank is incorporated under the Puerto Rico Banking Act of
1933, as amended (the "Puerto Rico Banking Law") and is subject to extensive
regulation and examination by the OFCI, the FDIC and certain requirements
established by the Federal Reserve Board. The federal and Puerto Rico laws and
regulations which are applicable to banks regulate, among other things, the
scope of their business, their investments, their reserves against deposits, the
timing of the availability of deposited funds and the nature and amount of and
collateral for certain loans. There are periodic examinations by the OFCI and
the FDIC to test the Bank's compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the insurance fund and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the OFCI, the FDIC or the U.S. Congress or Puerto Rico
legislature could have a material adverse impact on R&G Financial, R&G Mortgage,
the Bank and their operations.

       FDIC Insurance Premiums. The Bank currently pays deposit insurance
premiums to the FDIC based on a risk-based assessment system established by the
FDIC for all SAIF-member institutions. Under applicable regulations,
institutions are assigned to one of three capital groups which is based solely
on the level on an institution's capital - "well capitalized," "adequately
capitalized" and "undercapitalized". These three groups are then divided into
three subgroups which reflect varying levels of supervisory concern, from those
which are considered to be healthy to those which are considered to be of
substantial supervisory concern. The matrix so created results in nine
assessment risk classifications, with rates ranging from .23% for well
capitalized, healthy institutions to .31% for undercapitalized institutions with
substantial supervisory concerns. The Bank was classified as a
"well-capitalized" institution as of December 31, 1996.


                                       51
<PAGE>

       The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.

       Recapitalization of SAIF. Both the Savings Association Insurance Fund
("SAIF") and the Bank Insurance Fund ("BIF"), the federal deposit insurance fund
that covers commercial bank deposits, are required by law to attain and
thereafter maintain a reserve ratio of 1.25% of insured deposits. Certain of the
Bank's deposits were required to continue to be insured by the SAIF following
its 1994 conversion from a federally chartered savings bank to a Puerto Rico
chartered commercial bank. The approximately $77.2 million of deposits acquired
by the Bank from a Puerto Rico commercial bank are BIF insured and subject to
deposit insurance assessments at BIF rates. The Bank had previously paid SAIF
assessment rates and, as a result, its deposit insurance assessment from the
FDIC was adjusted beginning with the quarter ended September 30, 1996, and will
continue to be adjusted until the correction has been made in the overpayment of
deposit insurance premiums. In addition to the quarterly adjustments, the Bank
received a set-off from insurance premiums for the September 1996 quarter of
approximately $206,440 (plus interest).

       The BIF previously achieved a fully funded status and, therefore, in late
1995, the FDIC approved a final rule regarding deposit insurance premiums which,
effective with respect to the semiannual premium assessment beginning January 1,
1996, reduced deposit insurance premiums for BIF member institutions to zero
basis points (subject to an annual minimum of $2,000) for institutions in the
lowest risk category. Deposit insurance premiums for SAIF members were
maintained at their existing levels (23 basis points for institutions in the
lowest risk category).

       On September 30, 1996, President Clinton signed into law legislation
which will eliminate the premium differential between SAIF-insured institutions
and BIF-insured institutions by recapitalizing the SAIF's reserves to the
required ratio. The legislation provides that all SAIF member institutions pay a
one-time special assessment to recapitalize the SAIF, which in the aggregate
will be sufficient to bring the reserve ratio in the SAIF to 1.25% of insured
deposits. The legislation also provides for the merger of the BIF and the SAIF,
with such merger being conditioned upon the prior elimination of the thrift
charter.

       Effective October 8, 1996, FDIC regulations imposed a one-time special
assessment of 65.7 basis points on SAIF-assessable deposits as of March 31,
1995, which was collected on November 27, 1996. The Bank's one-time special
assessment amounted to $1.6 million


                                       52
<PAGE>

net of related tax benefits. The payment of such special assessment had the
effect of immediately reducing the Bank's capital by such an amount.

       In the fourth quarter of 1996, the FDIC lowered the assessment rates for
SAIF members to reduce the disparity in the assessment rates paid by BIF and
SAIF members. Beginning October 1, 1996, effective SAIF rates generally range
from zero basis points to 27 basis points, except that during the fourth quarter
of 1996, the rates for SAIF members ranged from 18 basis points to 27 basis
points in order to include assessments paid to the Financing Corporation
("FICO"). From 1997 through 1999, SAIF members will pay 6.4 basis points to
FICO, while BIF member institutions will pay approximately 1.3 basis points. The
Bank's insurance premiums, which had amounted to 23 basis points were thus
reduced to 6.4 basis points, effective January 1, 1997. Based upon the $657.2
million of assessable deposits at December 31, 1996, the Bank expects to pay
$241,000 less in insurance premiums per quarter during 1997.

       Capital Requirements. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System. These
requirements are substantially similar to those adopted by the Federal Reserve
Board regarding bank holding companies, as described above.

       The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, the highest-rated banks are those that the FDIC determines
are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization and are rated composite 1 under the
Uniform Financial Institutions Rating System. Leverage or core capital is
defined as the sum of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, and minority
interests in consolidated subsidiaries, minus all intangible assets other than
certain qualifying supervisory goodwill and certain purchased mortgage servicing
rights.

       The FDIC also requires that banks meet a risk-based capital standard. The
risk-based capital standard for banks requires the maintenance of total capital
(which is defined as Tier I capital and supplementary (Tier 2) capital) to risk
weighted assets of 8%. In determining the amount of risk-weighted assets, all
assets, plus certain off balance sheet assets, are multiplied by a risk-weight
of 0% to 100%, based on the risks the FDIC believes are inherent in the type of
asset or item. The components of Tier I capital are equivalent to those
discussed above under the 3% leverage capital standard. The components of
supplementary capital include certain perpetual preferred stock, certain
mandatory convertible securities, certain subordinated debt and intermediate
preferred stock and


                                       53
<PAGE>

general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At December 31, 1996,
the Bank met each of its capital requirements.

       In August 1995, the FDIC and other federal banking agencies published a
final rule modifying their existing risk-based capital standards to provide for
consideration of interest rate risk when assessing capital adequacy of a bank.
Under the final rule, the FDIC must explicitly include a bank's exposure to
declines in the economic value of its capital due to changes in interest rates
as a factor in evaluating a bank's capital adequacy. In addition, in August
1995, the FDIC and the other federal banking agencies published a joint policy
statement for public comment that describes the process the banking agencies
will use to measure and assess the exposure of a bank's net economic value to
changes in interest rates. In June 1996, the FDIC and other federal banking
agencies adopted a joint policy statement on interest rate risk policy. Because
market conditions, bank structure, and bank activities vary, the agencies
concluded that each bank needs to develop its own interest rate risk management
program tailored to its needs and circumstances. The policy statement describes
prudent principles and practices that are fundamental to sound interest rate
risk management, including appropriate board and senior management oversight and
a comprehensive risk management process that effectively identifies, measures,
monitors and controls risks.

       Activities and Investments. The activities and equity investments of
FDIC-insured, state-chartered banks (which under the Federal Deposit Insurance
Act includes banking institutions incorporated under the laws of Puerto Rico)
are generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an insured
state-chartered bank may not, directly, or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the insurance fund of which it is a member and the bank is in compliance with
applicable regulatory capital requirements. Any insured state-chartered bank
directly or indirectly engaged in any activity that is not permitted for a
national bank must cease the impermissible activity.


                                       54
<PAGE>

       Puerto Rico Banking Law. As a commercial bank organized under the laws of
the Commonwealth, the Bank is subject to supervision, examination and regulation
by the OFCI pursuant to the Puerto Rico Banking Law.

       The Puerto Rico Banking Law requires that at least ten percent (10%) of
the yearly net income of the Bank be credited annually to a reserve fund. This
apportionment shall be done every year until the reserve fund shall be equal to
ten percent (10%) of the total deposits or the total paid-in capital, whichever
is greater. As of December 31, 1996, the Bank had credited $1.5 million to such
reserve fund, which was first established in late 1994 in connection with the
Bank's conversion from a federally chartered savings bank to a Puerto Rico
commercial bank.

       The Puerto Rico Banking Law also provides that when the expenditures of a
bank are greater than the receipts, the excess of the former over the latter
shall be charged against the undistributed profits of the bank, and the balance,
if any, shall be charged against the reserve fund, as a reduction thereof. If
there is no reserve fund sufficient to cover such balance in whole or in part,
the outstanding amount shall be charged against the capital account and no
dividend shall be declared until said capital has been restored to its original
amount and the reserve fund to 20% of the original capital. In addition, every
bank is required by the Puerto Rico Banking Law to maintain a legal reserve
which shall not be less than 20% of its demand liabilities, except government
deposits (federal, state and municipal) which are secured by actual collateral.
The reserve is required to be made up of any of the following instruments or any
combination of them: (i) legal tender of the United States; (ii) checks on banks
or trust companies located in any part of Puerto Rico, to be presented for
collection during the day following that on which they are received, and (iii)
money deposited in other banks provided said deposits are authorized by the
Commissioner, subject to immediate collection.

       Under the Puerto Rico Banking Law, the Bank is permitted to make loans to
any one person, firm, partnership or corporation, up to an aggregate amount of
fifteen percent (15%) of the paid-in capital and reserve fund of the Bank. As of
December 31, 1996, the legal lending limit for the Bank under this provision was
approximately $6.5 million and its maximum extension of credit to any one
borrower, including affiliates thereof, was $1.9 million. If such loans are
secured by collateral worth at least twenty-five percent (25%) more than the
amount of the loan, the aggregate maximum amount may reach one-third of the
paid-in capital of the Bank, plus its reserve fund. There are no restrictions on
the amount of loans that are wholly secured by bonds, securities and other
evidences of indebtedness of the United States or the Commonwealth, or by
current debt bonds, not in default, of municipalities or instrumentalities of
the Commonwealth. The Puerto Rico Banking Law also authorizes the Bank to
conduct certain financial and related activities directly or through
subsidiaries. The Puerto Rico Banking Law also prohibits Puerto Rico banks from
making loans secured by their own stock, and from purchasing their own stock,
unless such purchase is necessary to prevent losses because of a debt previously
contracted


                                       55
<PAGE>

in good faith. The stock so purchased by the bank must be sold in a private or
public sale within one year from the date of purchase.

       The rate of interest that the Bank may charge on mortgage and other types
of loans to individuals in Puerto Rico is subject to Puerto Rico's usury laws.
Such laws are administered by the Financing Board, which consists of the
Commissioner of Financial Institutions, the President of the Government
Development Bank, the Chairman of the Planning Board and the Puerto Rico
Secretaries of Commerce, Treasury and Consumer Affairs and three representatives
from the private sector. The Financing Board promulgates regulations which
specify maximum rates on various types of loans to individuals. The Financing
Board has adopted a regulation, Regulation 26-A, which fixes the maximum rate
(which is adjusted on a weekly basis) which may be charged on residential first
mortgage loans. Effective April 1996, the Financing Board eliminated the
regulations that set forth the maximum interest rates that could be charged on
non-federal government guaranteed loans. Interest rates on consumer loans and
commercial loans are not subject to any limitations by Regulation 26-A.

       Regulatory Enforcement Authority. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.

R&G Mortgage

       The mortgage banking business conducted by R&G Mortgage is subject to the
rules and regulations of FHA, VA, FNMA, FHLMC and GNMA with respect to
originating, processing, selling and servicing mortgage loans and the issuance
and sale of mortgage-backed securities. Those rules and regulations, among other
things, prohibit discrimination and establish underwriting guidelines which
include provisions for inspections and appraisals, require credit reports on
prospective borrowers and fix maximum loan amounts and, with respect to VA
loans, fix maximum interest rates. Moreover, lenders are required annually to
submit to FNMA, FHA, FHLMC, GNMA and VA audited financial statements, and each
regulatory entity has its own financial requirements. R&G Mortgage's affairs are
also subject to supervision and examination by FNMA, FHA, FHLMC, GNMA, HUD and
VA at all times to assure compliance with the applicable regulations, policies
and procedures. Mortgage origination activities are subject to, among others,
the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real
Estate Settlement Procedures Act and the regulations promulgated thereunder.


                                       56
<PAGE>

       R&G Mortgage's mortgage loan production activities are subject to the
Federal Truth-in-Lending Act and Regulation Z promulgated thereunder. The
Truth-in-Lending Act contains disclosure requirements designed to provide
consumers with uniform, understandable information with respect to the terms and
conditions of loans and credit transactions in order to give them the ability to
compare credit terms. The Truth-in-Lending Act provides consumers a three day
right to cancel certain credit transactions, including any refinance mortgage or
junior mortgage loan on a consumer's primary residence.

       R&G Mortgage is required to comply with the Equal Credit Opportunity Act
of 1974, as amended ("ECOA"), and Regulation B promulgated thereunder, which
prohibit creditors from discriminating against applicants on the basis of race,
color, sex, age or marital status, and restrict creditors from obtaining certain
types of information from loan applicants. It also requires certain disclosures
by lenders regarding consumer rights and requires lenders to advise applicants
of the reasons for any credit denial. In instances where the applicant is denied
credit or the rate or charge for loan increases as a result of information
obtained from a consumer credit agency, another statute, The Fair Credit
Reporting Act of 1970, as amended, requires the lenders to supply the applicant
with the name and address of the reporting agency.

       The Federal Real Estate Settlement Procedures Act ("RESPA") imposes,
among other things, limits on the amount of funds a borrower can be required to
deposit with R&G Mortgage in any escrow account for the payment of taxes,
insurance premiums or other charges.

       R&G Mortgage is also subject to regulation by the OFCI, with respect to,
among other things, licensing requirements and the record-keeping, examination
and reporting requirements of the Puerto Rico Mortgage Banking Institutions Law
(the "Mortgage Banking Law"). R&G Mortgage is licensed by the OFCI as a mortgage
banking institution in Puerto Rico. Such authorization to act as a mortgage
banking institution must be renewed as of January 1 of each year. In the past,
R&G Mortgage has not had any difficulty in renewing its authorization to act as
a mortgage banking institution, and management is unaware of any existing
practices, conditions or violations which would result in R&G Mortgage being
unable to receive such authorization in the future.

       The Mortgage Banking Law requires the prior approval of the OFCI for the
acquisition of control of any mortgage banking institution licensed under the
Mortgage Banking Law. For purposes of the Mortgage Banking Law, the term
"control" means the power to direct or influence decisively, directly or
indirectly, the management or policies of a mortgage banking institution. The
Mortgage Banking Law provides that a transaction that results in the holding of
less than 10% of the outstanding voting securities of a mortgage banking
institution shall not be considered a change of control. Pursuant to the
Mortgage Banking Law, upon receipt of notice of a proposed transaction that may
result in change of control, the OFCI is obligated to make such inquires as it
deems necessary to review the transaction. Under the Mortgage Banking Law, the
determination of the OFCI whether or not to authorize a proposed change of
control is final and non-appealable.


                                       57
<PAGE>

       As is the case with the Bank, the rate of interest that R&G Mortgage may
charge on mortgage loans to individuals is subject to Puerto Rico's usury laws.
Such laws are administered by the Financing Board which promulgates regulations
that specify maximum rates on various types of loans to individuals. Regulation
26-A promulgated by the Financing Board fixes the maximum rate (which is
adjusted on a weekly basis) which may be charged on residential first mortgage
loans. Effective April 1996, the Financing Board eliminated the regulations that
set forth the maximum interest rates that could be charged on non-federal
government guaranteed loans.

Item 2. Properties.

       The Company's principal executive office is located at 280 Jesus T.
Pinero Avenue, Hato Ray, San Juan, Puerto Rico 00918. The following table sets
forth the net book value (including leasehold improvements and equipment) and
certain other information with respect to the offices and other properties of
R&G Financial at December 31, 1996, all of which properties are leased. 

<TABLE>
<CAPTION>
                                                                          Net Book Value
       Description/Address                 Lease Term Expiration           of Property
----------------------------------------   --------------------------    ---------------
                                                                         (In Thousands)
<S>                                        <C>                              <C> 
The Bank:
Hato Rey Branch(1)(2)(3)                       November 30, 1998            $  951
280 Jesus T. Pinero Avenue                 Two (2) five year options
Hato Rey, PR 00919

Los Jardines Branch                            September 4, 1999               149
Los Jardines de Guaynabo Shopping Center    One (1) ten year option
PR Road No. 20
Guaynabo, PR 00969

San Patricio Branch                              July 31, 2007                 147
San Patricio Plaza
Ortegon Street
Guaynabo, PR 00969

Bayamon Branch(2)(3)                              May 31, 2001                 280
42-43 Betances Avenue                       One (1) ten year option
Urb. Hermanas Davila
Bayamon, PR 00959

Bayamon East(4)                                 January 10, 2001               365
Road #174, Lote 100
Urb. Ind. Minillas
Bayamon, PR 00959

Arecibo Branch(3)                              December 31, 2001               123
Marginal Vista Azul                        Two (2) five year options
Corner San Daniel Avenue
Arecibo, PR 00612
</TABLE>


                                       58
<PAGE>

<TABLE>
<CAPTION>
                                                                          Net Book Value
       Description/Address                 Lease Term Expiration           of Property
----------------------------------------   --------------------------    ---------------
                                                                         (In Thousands)
<S>                                        <C>                                <C> 
Manati Branch(3)                                 August 8, 2009                 537
Plaza Puerta del Sol                       Four (4) five year options
PR Road No. 2, Km. 49.7
Manati, PR 00674


Carolina Branch(3)                               July 31, 2003                  280
65th Infantry Avenue
Corner San Marcos Street
Carolina, PR 00985

Trujillo Alto Branch(5)                         October 31, 2004                142
Trujillo Alto Shopping Center
Trujillo Alto, PR 00976

Santurce Branch                                  April 30, 1999                  69
1077 Ponce de Leon Avenue                  Three (3) six year options
Santurce, PR 00917

Laguna Gardens Branch(5)                         April 30, 1999                 171
Laguna Gardens Shopping Center              One (1) five year option
Isla Verde
Carolina, PR 00979

Plaza Carolina Branch(5)                          May 31, 2000                  216
Plaza Carolina Mall
Carolina, PR 00985

Norte Shopping Branch(5)                         April 30, 2000                  73
Norte Shopping Center                      Two (2) five year options
Baldorioty de Castro Avenue
San Juan, PR 00907

Vega Baja Branch(5)                               May 31, 2003                  240
Cabo Caribe Development                     One (1) five year option
PR Road No. 2, Marginal
Vega Baja, PR 00693

Mayaguez Branch(3)                               April 30, 1997                 659
McKinley Street                            Four (4) five year options
Corner Dr. Vady
Mayaguez, PR 00680

Operations Center(2)                            January 10, 2001              1,367
                                                                              -----
Road #174, Lote #100
Urb. Ind. Minillas
Bayamon, PR 00959                                                             5,769
                                                                              -----
</TABLE>


                                       59
<PAGE>

<TABLE>
<CAPTION>
                                                                          Net Book Value
       Description/Address                 Lease Term Expiration           of Property
----------------------------------------   --------------------------    ---------------
                                                                         (In Thousands)
<S>                                        <C>                                <C> 
R&G Mortgage:
Caguas Office                                    July 31, 2000                    8
D-9 Degetau Street                          One (1) five year option
Urb. San Alfonso
Caguas, PR 00725

Ponce Office                                      May 1, 1998                    11
25 Las Americas Avenue
Ext. Buena Vista
Ponce, PR 00731

Fajardo Office                                    May 16, 1999                    9
51 Celis Aguilera Street                    One (1) five year option
Fajardo, PR 00738

Los Jardines Office(6)                           August 1, 2006                  28
Los Jardines de Guaynabo Shopping Center    One (1) five year option
PR Road No. 20
Guaynabo, PR 00969

San Patricio Office(6)                            May 1, 1998                    16
K-4 Ebano Street                            One (1) five year option
Ponderosa Building
San Patricio
Guaynabo, PR 00969

Hato Rey Office(2)(3)                         Month to month basis            1,792
280 Jesus T. Pinero Avenue
Hato Rey, PR 00919

Bayamon Office(2)(3)                              May 30, 2001                   41
42-43 Betances Avenue                       One (1) ten year option
Urb. Hermanas Davila
Bayamon, PR 00959

Arecibo Office(3)                               January 1, 2002                  19
Marginal Vista Azul                        Two (2) five year options
Corner San Daniel Avenue
Arecibo, PR 00612

Manati Office(3)(7)                             October 30, 1998                 21
Plaza Puerta del Sol                        One (1) five year option
PR Road No. 2, Km. 49.7
Manati, PR 00674
</TABLE>


                                       60
<PAGE>

<TABLE>
<CAPTION>
                                                                          Net Book Value
       Description/Address                 Lease Term Expiration           of Property
----------------------------------------   --------------------------    ---------------
                                                                         (In Thousands)
<S>                                        <C>                                <C> 
Carolina Office(3)(7)                           October 30, 1998                 18
65th Infantry Avenue                        One (1) five year option
Corner San Marcos Street
Carolina, PR 00985

Mayaguez Office(3)(7)                           October 30, 1998                 36
                                                                              -----
McKinley Street                             One (1) five year option
Corner Dr. Vady
Mayaguez, PR 00680
                                                                              1,999
                                                                             $7,768
</TABLE>

----------
(1)    Also serves as the main office of R&G Financial.

(2)    Leased from VIG Leasing, S.E., which is owned by the family of Victor J.
       Galan, Chairman of the Board and Chief Executive Officer of R&G
       Financial.

(3)    The Bank and R&G Mortgage each maintain separate offices in the same
       building.

(4)    Application was approved by regulatory authorities in June 1996. The Bank
       is operating in a temporary trailer facility at the site beginning July
       1, 1996 until improvements to the branch office are completed in March
       1997.

(5)    Facility includes an R&G Mortgage Banking Center.

(6)    The Bank maintains an office at this location in a separate facility.

(7)    Office is subleased from the Bank.

Item 3. Legal Proceedings.

       The Company is not involved in any pending legal proceedings other than
nonmaterial legal proceedings occurring in the ordinary course of business.

Item 4. Submission of Matters to a Vote of Security-Holders.

       Not applicable.


                                       61
<PAGE>

PART II.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

       Shares for the Company's Class B common stock are traded nationally under
the symbol "RGFC" on the NASDAQ National Market. The following table shows
market price information for the Company's Class B common stock. The prices set
forth below represent the high and low prices during the quarterly periods
indicated:

                          Price Per Share          
                      -----------------------      Dividends
                          High         Low            Paid
                      ------------  ---------    --------------

September 30, 1996(1)    $18.75       $16.50            --
December 31, 1996        $25.75       $17.75       $0.0625

----------
(1)    The Company's Class B common stock commenced trading on August 27, 1996.

       There have been no stock dividends, stock splits or reverse stock splits.

       At December 31, 1996 the Company had approximately 77 stockholders of
record, which does not take into consideration investors who hold their stock
through brokerage and other firms.

Item 6. Selected Financial Data.

       The information required herein is incorporated by reference from page 17
of the Registrant's 1996 Annual Report.

Item 7. Management's Discussion and Analysis of Financial Condition and Results 
        of Operations.

       The information required herein is incorporated by reference from pages
20 to 44 of the Registrant's 1996 Annual Report.

Item 8. Financial Statements and Supplementary Data.

       The information required herein is incorporated by reference from pages
45 to 86 of the Registrant's 1996 Annual Report.

Item 9. Changes in and Disagreements With Accountants on Accounting and
        Financial Disclosure.

       Not applicable.


                                       62
<PAGE>

PART III.

Item 10. Directors and Executive Officers of the Registrant.

       The information required herein is incorporated by reference from pages
2-6 of the Registrant's Proxy Statement dated March 25, 1997 ("Proxy
Statement").

Item 11. Executive Compensation.

       The information required herein is incorporated by reference from pages
12 to 16 of the Registrant's Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

       The information required herein is incorporated by reference from pages 8
to 11 of the Registrant's Proxy Statement.

Item 13. Certain Relationships and Related Transactions.

       The information required herein is incorporated by reference from pages
17 to 19 of the Registrant's Proxy Statement.

PART IV.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

       (a) Documents Filed as Part of this Report

       (1) The following financial statements are incorporated by reference from
Item 8 hereof (see Exhibit 13):

           Independent Auditors' Report.

           Consolidated Statements of Financial Condition as of December 31, 
           1996 and 1995.

           Consolidated Statements of Income for the Years Ended December 31, 
           1996, 1995 and 1994.

           Consolidated Statements of Cash Flows for the Years Ended December 
           31, 1996, 1995 and 1994.

           Consolidated Statements of Changes in Stockholders' Equity for the 
           Years Ended December 31, 1996, 1995 and 1994.

           Notes to Consolidated Financial Statements.


                                       63
<PAGE>

       (2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information is
included in the consolidated financial statements and related notes thereto.

       (3) The following exhibits are filed as part of this Form 10-K, and this
list includes the Exhibit Index.

No.                                Description
------  --------------------------------------------------------------------

2.0     Amended and Restated Agreement and Plan of Merger by and between
          R&G Financial Corporation, the Bank and R-G Interim Premier Bank,
          dated as of September 27, 1996.(1)
3.1     Certificate of Incorporation of R&G Financial Corporation.(2)
3.2     Certificate of Amendment to Certificate of Incorporation of R&G
          Financial Corporation.(2)
3.3     Bylaws of R&G Financial Corporation.(2)
4.0     Specimen of Stock Certificate of R&G Financial Corporation.(2)
10.1    Master Purchase, Servicing and Collection Agreement between R&G
          Mortgage and the Bank dated February 16, 1990, as amended on
          April 1, 1991, December 1, 1991, February 1, 1994 and July 1,
          1994.(2)
10.2    Master Custodian Agreement between R&G Mortgage and the Bank
          dated February 16, 1990, as amended on June 27, 1996.(2)
10.3    Master Production Agreement between R&G Mortgage and the Bank
          dated February 16, 1990, as amended on August 30, 1991 and March 31,
          1995.(2)
10.4    Data Processing Computer Service Agreement between R&G Mortgage
          and R-G Premier Bank dated December 1, 1994.(2)
10.5    Securitization Agreement by and between R&G Mortgage and the Bank,
          dated as of July 1, 1995.(2)
10.6    R&G Financial Corporation Stock Option Plan.(2)(*)
13.0    1996 Annual Report to Stockholders.
21.0    Subsidiaries of the Registrant - Reference is made to "Item 1.
           Business" for the required information.
27.0    Financial Data Schedule.
99.1    Valuation Report on Minority Interest of Bank Stockholders, prepared by
          Friedman, Billings, Ramsey & Co., Inc., dated June 13, 1996.(2)
99.2    Update to Valuation on Minority Interest of Bank Stockholders, prepared
          by Friedman, Billings, Ramsey & Co., Inc., dated September 27, 
          1996.(1)

----------
(1)    Incorporated by reference from the Registration Statement on Form S-4
       (Registration No. 333-13199) filed by the Registrant with the Securities
       and Exchange Commission ("SEC") on October 1, 1996.

(2)    Incorporated by reference from the Registration Statement on Form S-1
       (Registration No. 333-06245) filed by the Registrant with the SEC on June
       18, 1996, as amended.

(*)    Management contract or compensatory plan or arrangement.

       (3)(b) Reports on Form 8-K.

          None.


                                       64
<PAGE>

                                   SIGNATURES


       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                       R&G FINANCIAL CORPORATION



                                       By: /s/ Victor J. Galan
                                           -------------------------------------
                                           Victor J. Galan
                                           Chairman of the Board, President and
                                            Chief Executive Officer

       Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.



/s/ Victor J. Galan                                     March 13, 1997
----------------------------------
Victor J. Galan
Chairman of the Board, President and
 Chief Executive Officer
 (principal executive officer)


/s/ Ana M. Armendariz                                   March 13, 1997
----------------------------------
Ana M. Armendariz
Director, Controller and Treasurer
 (principal financial and
 accounting officer)


/s/ Ramon Prats                                         March 13, 1997
----------------------------------
Ramon Prats
Executive Vice President and Director
<PAGE>

/s/ Enrique Umpierre-Suarez                             March 13, 1997
----------------------------------
Enrique Umpierre-Suarez
Director and Secretary


/s/ Victor L. Galan Fundora                             March 13, 1997
----------------------------------
Victor L. Galan Fundora
Director


/s/ Juan J. Diaz                                        March 13, 1997
----------------------------------
Juan J. Diaz
Director


/s/ Pedro Ramirez                                       March 13, 1997
----------------------------------
Pedro Ramirez
Director


/s/ Laureno Carus Abarca                                March 13, 1997
----------------------------------
Laureno Carus Abarca
Director


/s/ Eduardo McCormack                                   March 13, 1997
----------------------------------
Eduardo McCormack
Director


/s/ Gilberto Rivera-Arrega                              March 13, 1997
----------------------------------
Gilberto Rivera-Arreaga
Director


/s/ Benigno R. Fernandez                                March 13, 1997
----------------------------------
Benigno R. Fernandez
Director