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, 1997

                                       OR

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

                          Commission File No.: 0-21137

                            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) 758-2424

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.

As of March 20, 1998,  the aggregate  value of the  4,777,285  shares of Class B
Common  Stock of the  Registrant  issued and  outstanding  on such  date,  which
excludes  147,189 shares held by all directors and officers of the Registrant as
a group,  was  approximately  $149.0  million.  This figure is based on the last
known trade price of $31.19 per share of the  Registrant's  Class B Common Stock
on March 20, 1998.

Number of shares of Class B Common Stock outstanding as of March 20, 1998:
                                    4,924,474

                       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, 1997 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. In July 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.  In August 1996,  the Company  conducted  an  underwritten  public
offering of Class B common stock.  In December  1996,  the Company  acquired the
remaining 11.9% ownership  interest in the common stock of the Bank. At December
31 1997,  the  Company  had total  consolidated  assets of $1.5  billion,  total
consolidated borrowings of $627.9 million, total consolidated deposits of $722.4
million, and total consolidated  stockholders'  equity of $138.1 million.  After
taking into consideration an 80% stock dividend paid in 1997, as of December 31,
1997, the Company had 9,220,278 Class A shares of common stock outstanding,  all
of which were owned by Mr. Galan, and 4,924,474  publicly held Class B shares of
common stock outstanding.

        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 18 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  properties in Puerto
Rico.  During  the  year  ended  December  31,  1997,  R&G  Mortgage  originated
approximately 28.4% 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 91.3% since  December 31, 1991
and, at December 31, 1997, R&G Mortgage serviced  approximately  56,400 accounts
with an

                                       1
<PAGE>
aggregate loan balance of $3.0 billion. The Bank's asset size, which amounted to
$996.3  million at December 31, 1997,  has increased by $943.4 million since R&G
Mortgage  became  affiliated  with the Bank in February  1990,  while the branch
office network had increased from two to 15 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").  To a lesser  extent,  R&G
Mortgage   is   also   engaged   in   the   origination   of    subprime--credit
quality--residential mortgage loans through a wholly owned subsidiary ("Champion
Mortgage  Corporation") which commenced  operations in October 1997. Pursuant to
agreements  entered  into  between  R&G  Mortgage  and the Bank,  non-conforming
conventional  single-family residential loans and consumer loans secured by real
estate are also originated by R&G Mortgage for portfolio  retention by 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, 1997, 1996 and 1995, R&G
Mortgage originated a total of $598.2 million, $448.1 million and $322.7 million
of loans, respectively. These aggregate originations include loans originated by
R&G Mortgage directly for the Bank of $285.8 million,  $211.3 million and $156.3
million during such respective periods, or 47.8%, 47.2% and 48.4%, respectively,
of total originations.


                                        2
<PAGE>
        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, 1997, 1996 and 1995, R&G Mortgage
sold $246.1 million,  $244.8 million and $195.6 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, 1997, 1996 and 1995
amounted to $89.0 million, $122.8 million and $124.6 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 OCFI.

        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."

        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

                                        3
<PAGE>
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."


                           Mortgage Banking Activities

        Loan Originations,  Purchases and Sales. During the years ended December
31,  1997,  1996 and 1995,  R&G Mortgage  originated a total of $598.2  million,
$448.1  million  and $322.7  million  of loans,  respectively.  These  aggregate
originations  include loans originated by R&G Mortgage  directly for the Bank of
$285.8  million,  $211.3  million  and $156.3  million  during  the years  ended
December  31,  1997,  1996  and  1995,  respectively,   or  48%,  47%  and  48%,
respectively,  of total  originations.  The loans originated by R&G Mortgage for
the Bank are

                                        4
<PAGE>
comprised  primarily of conventional  residential loans and, to a lesser extent,
consumer loans 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, 1997, 1996 and 1995, R&G Mortgage  originated $280.1 million,
$222.0  million  and  $154.9  million,  respectively,  of  FHA/VA  loans,  which
represented  46.8%,  49.5% and 48.0%,  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, 1997, 1996 and 1995, R&G Mortgage originated $265.9 million, $204.9
million  and  $151.9  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,  1997,  1996 and 1995,
non-conforming  conventional  loans represented  approximately 39%, 42% and 43%,
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, 1997, 1996 and 1995, 77.5%,  88.9% and
81.0% 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."

        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 $68,200 and $73,000, respectively.


                                        5
<PAGE>
        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,  1997,  R&G  Mortgage  employed  66  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  $158.5  million,
$45.6  million and $19.5  million of loans from third  parties  during the years
ended December 31, 1997, 1996 and 1995, respectively.



                                        6
<PAGE>
        The following table sets forth loan originations, purchases and sales by
R&G Mortgage for the periods indicated.
<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                              ------------------------------------
                                                1997          1996          1995
                                              --------      --------      --------
                                                     (Dollars in Thousands)
<S>                                           <C>           <C>           <C>     
Loans Originated For the Bank:
  Conventional loans(1):
    Number of loans .....................        3,390         2,756         2,226
    Volume of loans .....................     $233,488      $190,072      $140,363
  FHA/VA loans:
    Number of loans .....................         --            --            --
    Volume of loans .....................         --        $   --        $   --
  Consumer loans(2):
    Number of loans .....................        2,318         1,004           974
    Volume of loans .....................     $ 52,287      $ 21,208      $ 15,944
  Total loans:
    Number of loans .....................        5,708         3,760         3,200
    Volume of loans .....................     $285,775      $211,280      $156,307
    Percent of total volume .............           35%           43%           46%
For Third Parties:
  Conventional loans(1):
    Number of loans .....................          444           214           151
    Volume of loans .....................     $ 32,419      $ 14,835      $ 11,496
  FHA/VA loans:
    Number of loans .....................        4,107         3,117         2,313
    Volume of loans .....................     $280,053      $221,967      $154,916
  Total loans:
    Number of loans .....................        4,551         3,331         2,464
    Volume of loans .....................     $312,472      $236,802      $166,412
    Percent of total volume .............           39%           48%           48%
                                              --------      --------      --------
      Total loan originations ...........     $598,247      $448,082      $322,719
                                              ========      ========      ========
Loans Purchased For R&G Mortgage:
  Number of loans .......................        2,052           583           305
  Volume of loans (3) ...................     $158,456      $ 45,604      $ 19,525
  Percent of total volume ...............           20%            9%            6%
GNMA Pools Purchased for R&G Mortgage:
  Volume of loans .......................     $ 51,537          --            --
  Percent of total volume ...............            6%         --            --
                                              --------      --------      --------
    Total loan originations and purchases     $808,240      $493,686      $342,244
                                              ========      ========      ========
</TABLE>


                                        7
<PAGE>
<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                               -----------------------------------------
                                                  1997            1996            1995
                                               ---------       ---------       ---------
                                                     (Dollars in Thousands)
<S>                                            <C>             <C>             <C>       
Loans Sold To Third Parties(4):
  Conventional loans(1):
    Number of loans ......................           429             178             151
    Volume of loans ......................     $  39,495       $  12,560       $  11,999
  FHA/VA loans:
    Number of loans ......................         2,775           3,564           2,252
    Volume of loans(3) ...................     $ 206,643       $ 232,254       $ 183,607
  Total loans:
    Number of loans ......................         3,204           3,742           2,403
    Volume of loans ......................     $ 246,138       $ 244,814       $ 195,606
    Percent of total volume ..............            30%             50%             57%
                                               ---------       ---------       ---------
Adjustments:
  Loans originated for the Bank ..........     $ 276,327       $(211,280)      $(156,307)
  Loans amortization .....................        (5,086)         (7,224)         (1,960)
                                               ---------       ---------       ---------
Increase (decrease) in loans held for sale     $ 271,241       $  30,368       $ (11,629)
                                               =========       =========       =========
Average Initial Loan Origination Balance:
  The Bank:
    Conventional loans(1) ................     $      69       $      69       $      63
    FHA/VA loans .........................          --              --              --
  Third Parties:
    Conventional loans(1) ................     $      73              69              76
    FHA/VA loans .........................            68              71              63
  Total Average Initial Balance:
    Conventional loans(1) ................            69              69              64
    FHA/VA loans .........................            68              71              63
Refinancings(5):
  The Bank ...............................            30%             33%             58%
  Third Parties ..........................            31%             24%             26%
</TABLE>

--------------
(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 and $36.1 million of loans  purchased from another
        financial  institution  and  securitized  and sold to the same financial
        institution during 1996 and 1995, 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, 1997,  1996 and 1995, R&G Mortgage sold $246.1  million,  $244.8 million and
$195.6 million 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,  $206.6  million or 83.9%,  $232.3  million or
94.9% and $183.6 million or 93.9% 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  described  below).  These
securities were sold primarily to securities  broker-dealers and other investors
in Puerto Rico.


                                        9
<PAGE>
        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,  1997,  1996 and 1995,  R&G  Mortgage  issued GNMA
serial notes totalling  approximately $397.2 million,  $236.4 million and $184.4
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 year ended  December  31,  1995,  R&G
Mortgage and the Bank completed sales of approximately  $38.2 million of CMOs in
securitization transactions.  There were no sales in 1997 or 1996. In connection
with such  transactions,  either the Bank or R&G Mortgage  generally retains the
residual certificates issued by the respective trusts as well as the subordinate
certificates issued in such transactions.  As of December 31, 1997, R&G Mortgage
held CMOs (which were  primarily  issued by R&G  Mortgage)  with a fair value of
$15.2 million and residual certificates issued in CMO transactions involving R&G
Mortgage and the Bank with a fair value of $7.9 million.  In addition,  the Bank
held CMO subordinated certificates and

                                       10
<PAGE>
residual  certificates  from one of its issues with a fair value of $8.4 million
at  December  31,  1997.  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, 1997, R&G Financial did not deem
it necessary to establish  reserves for possible  losses related to its recourse
obligations.  At December  31, 1997,  R&G  Mortgage  had loans in its  servicing
portfolio with provisions for recourse in the principal  amount of approximately
$374.4 million,  as compared to $290.9 million and $238.2 million as of December
31, 1996 and 1995, respectively.  Of the recourse loans existing at December 31,
1997,  approximately  $340.5 million in principal amount consisted of loans sold
to  FNMA  and  FHLMC  and  converted  into  mortgage-backed  securities  of such
agencies,  and  approximately  $33.9  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."

        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

                                       11
<PAGE>
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
several years. At December 31, 1997, R&G Mortgage's servicing portfolio totalled
$3.0 billion and consisted of a total of 56,442 loans. At December 31, 1997, R&G
Mortgage's servicing portfolio included $448.9 million of loans serviced for the
Bank  or  15.0%  of the  total  servicing  portfolio.  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.
<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                               --------------------------------------------------
                                                                     1997               1996               1995
                                                               ----------------   ----------------   ----------------
                                                                               (Dollars in Thousands)
<S>                                                                   <C>                <C>              <C>       
Composition of Servicing Portfolio at End of Period:
  Conventional and other mortgage loans(1)...................         $1,148,739         $  971,327       $  811,269
  FHA/VA loans...............................................          1,852,149          1,578,842        1,486,931
                                                                      ----------         ----------       ----------
    Total servicing portfolio(2).............................         $3,000,888         $2,550,169       $2,298,200
                                                                      ==========         ==========       ==========
Activity in the Servicing Portfolio:
  Beginning servicing portfolio..............................         $2,550,169         $2,298,200       $2,114,743
  Add: Loan originations and purchases.......................            778,126            506,696          325,870
         Servicing of portfolio loans acquired...............              5,301             36,478          239,414
  Less: Sale of servicing rights.............................                 --             42,080          196,895(3)
         Run-offs(4).........................................            332,708            249,125          184,932
                                                                      ----------         ----------       ----------
  Ending servicing portfolio.................................         $3,000,888         $2,550,169       $2,298,200
                                                                      ==========         ==========       ==========
  Number of loans serviced(5)................................             56,442             50,979           48,240
  Average loan size(5).......................................         $       53         $       50              $48
  Average servicing fee rate(5)..............................             0.532%             0.532%           0.505%
</TABLE>
--------------
(1)     Includes non-conforming loans.

(2)     At the dates shown,  included $448.9 million,  $323.8 million and $290.8
        million of loans serviced for the Bank, respectively,  which constituted
        15.0%, 12.70% and 12.65% 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  amortization  of  loans,  prepayments  and
        foreclosures.  Includes  one-time  transfer in 1997 of $49.0  million of
        mortgage loans to a financial institution who acquired a commercial bank
        whose loans were being serviced by R&G Mortgage.

(5)     At December 31, 1997,  R&G  Mortgage was  servicing  6,507 loans for the
        Bank  with an  average  loan  size of  approximately  $69,000  and at an
        average  servicing  rate of  0.284%.  Amounts  include  late  and  other
        miscellaneous charges.


                                       13
<PAGE>
        The following table sets forth certain  information at December 31, 1997
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, 1997
                             ------------------------------------------------------------------------------
                                        Loans Serviced                         Loans Serviced              
                                         for the Bank                        for Third Parties             
                             ----------------------------------    -----------------------------------     
                               Number of           Aggregate          Number of           Aggregate        
                                 Loans         Principal Balance        Loans         Principal Balance    
  Mortgage Interest Rate     -------------   --------------------  --------------   --------------------   
                                             (Dollars in Thousands)                (Dollars in Thousands)  
<S>                                 <C>                 <C>                <C>               <C>           
Less than 7.00%............            51               $  2,646            2,734            $  136,804    
7.00% - 7.49%..............           260                 24,693            8,325               520,445    
7.50% - 7.99%..............           562                 57,188           15,127               833,118    
8.00% - 8.49%..............         2,732                201,968            7,442               454,494    
8.50% - 8.99%..............         1,818                119,252            7,803               338,867    
9.00% - 9.49%..............           478                 24,183            3,102               114,954    
9.50% - 9.99%..............           167                  7,380            2,445                68,646    
10.00% - 10.49%............           135                  3,964              981                33,224    
10.50% - 10.99%............           154                  4,146              596                16,801    
11.00% or more.............           150                  3,438            1,380                34,677    
                                    -----               --------           ------            ----------    
                                    6,507               $448,858           49,903            $2,552,030    
                                    =====               ========           ======            ==========    
<PAGE>
<CAPTION>
                                    At December 31, 1997
                             ---------------------------------
                                         Total Loans
                                           Serviced
                             ---------------------------------
                               Number of          Aggregate
                                 Loans        Principal Balance
  Mortgage Interest Rate     ------------   --------------------
                                            (Dollars in Thousands)
<S>                                 <C>              <C>       
Less than 7.00%............          2,785             $139,450
7.00% - 7.49%..............          8,585              545,138
7.50% - 7.99%..............         15,689              890,306
8.00% - 8.49%..............         10,174              656,462
8.50% - 8.99%..............          9,621              458,119
9.00% - 9.49%..............          3,580              139,137
9.50% - 9.99%..............          2,612               76,026
10.00% - 10.49%............          1,116               37,188
10.50% - 10.99%............            750               20,947
11.00% or more.............          1,530               38,115
                                    ------           ----------
                                    56,442           $3,000,888
                                    ======           ==========
</TABLE>

        The amount of principal  prepayments  on mortgage  loans serviced by R&G
Mortgage was $87.2 million,  $72.5 million and $68.2 million for the years ended
December 31, 1997, 1996 and 1995, respectively.  This represented  approximately
2.9%, 2.8% and 3.0% of the aggregate principal amount of mortgage loans serviced
during  such  periods.  The  primary  means used by R&G  Mortgage  to reduce the
sensitivity  of its servicing  fee income to changes in interest and  prepayment
rates is the  development of a strong internal  origination  capability that has
allowed R&G 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, 1997,  1996 and 1995, the monthly average amount of
funds advanced by R&G Mortgage under such servicing agreements was $1.4 million,
$1.3  million and $4.4  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, 1997,  R&G Mortgage
held $58.8 million of such escrow funds,  $50.2 million of which were  deposited
in the Bank and $8.6  million  of which  were  deposited  with  other  financial
institutions. The escrow funds deposited with the Bank lower its overall cost of
funds

                                       14
<PAGE>
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, 1997,  R&G
Mortgage was  servicing  mortgage  loans with an aggregate  principal  amount of
$374.4 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,
                                        ----------------------------------------------------------------------------------------

                                                    1997                           1996                           1995
                                        --------------------------     --------------------------     --------------------------

                                                         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..........................         2,531          4.48%           2,775        5.44%             3,366        6.98%
  60-89 days..........................           572           1.01             533         1.05               906         1.88
  90 days or more.....................           778           1.38             646         1.27               988         2.05
                                               -----          ----            -----        ----              -----       ----- 
    Total delinquencies(1)............         3,881          6.87%           3,954        7.76%             5,260       10.90%
                                               =====          ====            =====        ====              =====       ===== 
Foreclosures pending(2)...............           681          1.21%             693        1.36%               459        0.95%
                                               =====          ====            =====        ====              =====       =====
</TABLE>
-----------------
(1)     Includes  at  December  31,  1997,  an  aggregate  of $26.4  million  of
        delinquent  loans serviced for the Bank, or .88% of the total  servicing
        portfolio  and $2.7 million of delinquent  loans held in R&G  Mortgage's
        own portfolio.

(2)     At December 31, 1997, the Bank had foreclosures pending on $12.2 million
        of loans being serviced by R&G Mortgage,  which constituted 0.41% of the
        servicing  portfolio.  R&G Mortgage had foreclosures  pending on $2.1 of
        loans it is servicing for its own portfolio at December 31, 1997.


        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, 1997, 1996 and 1995, R&G Mortgage held
REO with a book value of approximately $165,000, $0 and $0, respectively.  Sales
of REO  resulted in gains to R&G  Mortgage of $145,000 and $30,000 for the years
ended December 31, 1997 and 1995,  respectively,  and a net loss to R&G Mortgage
of $57,000 for the year ended  December 31, 1996.  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, 1997.  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, 1997,  1996 and 1995,  total  expenses  related to FHA or VA loans
foreclosed amounted to $189,000, $302,000 and $230,000,  respectively.  Although
FNMA and FHLMC are  obligated  to  reimburse  R&G  Mortgage  for  principal  and
interest payments advanced

                                       16
<PAGE>
by R&G Mortgage as a servicer  (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  that  have  grants of tax  exemption  issued
thereunder  ("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.

        A new Industrial  Incentive Act was approved by the Government of Puerto
Rico effective  January 1, 1998: the Tax Incentive Act of 1998 (the "1998 TIA").
Grants  issued  under  the 1998 TIA will  provide  for a flat rate of tax on the
operating income of Exempt  Companies.  The same types of investment income that
qualified for exemption under the Industrial  Incentive Acts will continue to be
exempt under the 1998 TIA.  Because grantees of tax exemption under the 1998 TIA
will not be subject to Tollgate Taxes, they will not have an incentive to invest
their IDI in  qualifying  investments  in Puerto  Rico,  as  grantees  under the
Industrial  Incentive Acts presently do in order to reduce their Tollgate Taxes.
It should be noted,  however, that Exempt Companies currently operating pursuant
to grants issued under the  Industrial  Incentives  Acts  generally  will not be
affected by the provisions of the 1998 TIA.  Although such Exempt  Companies may
renegotiate  their  grants under the 1998 TIA, an amount of IDI equal to the IDI
derived  in the  taxable  year  preceding  the  change  to the 1998 TIA (or,  if
greater, the average annual IDI by

                                       17
<PAGE>
taking the three years, out of the previous five years, where the highest amount
of IDI is derived) will continue to be subject to the tax  treatment,  including
Tollgate Taxes, provided in the Industrial Incentive Act under which their grant
was originally issued.

        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 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

                                       18
<PAGE>
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 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

                                       19
<PAGE>
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.

        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,  or under the laws of foreign  countries.  Generally,  a
non-U.S.  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, or
a foreign corporation  operating in Puerto Rico, is subject to local Puerto Rico
taxes,  the benefits under the Industrial  Incentives  Acts and the 1998 TIA 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 or other
non-U.S. corporation would be allowed to claim a foreign tax credit with respect
to income  tax paid in Puerto  Rico.  United  States  shareholders  are also not
required to recognize  income  attributable  to  manufacturing  operations  of a
Puerto Rico or other  non-U.S.  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 or other non-U.S.  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 July 1997,  the  Government  of Puerto Rico  amended the tax law that
provided  Puerto Rico income tax exemption on interest  income  generated by FHA
and VA  loans  secured  by real  estate  property  located  in  Puerto  Rico and
mortgage-backed  securities secured by such mortgage loans ("GNMAs").  Under the
amended law, FHA and VA loans closed prior to August 1, 1997 will continue to be
exempt.  The interest income on FHA and VA mortgage loans originated on or after
August 1,  1997 for  purposes  other  than to  finance  the  acquisition  of new
housing,  and GNMAs secured by such loans, are no longer exempt, and are taxable
at a preferential  17% tax rate to individuals and certain  taxpayers other than
corporations. FHA and VA loans to finance the purchase of new housing, and GNMAs
secured by such  loans,  continue  to be exempt.  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 qualifying 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 further
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.

                                       20
<PAGE>
                         Lending Activities of the Bank

        General.  At December 31, 1997, R&G Financial's  loans  receivable,  net
totalled $765.1 million, which represented 50.6% of R&G Financial's $1.5 billion
of  total  assets.  At  December  31,  1997,  $733.1  million  or  95.8%  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 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, 1997,  $475.5 million or 99.7% 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,
                                                      ------------------------------------------------------------------------------
                                                                 1997                      1996                       1995          
                                                      -----------------------    ----------------------     ----------------------  
                                                         Amount       Percent        Amount      Percent       Amount       Percent 
                                                      -----------   ----------   ------------   ---------   ------------   ---------
                                                                                  (Dollars in Thousands)
<S>                                                     <C>            <C>          <C>          <C>          <C>          <C>      
Residential real  estate - first
  mortgage(1).......................................    $476,729        61.25%       $370,876     60.75%       $282,498     58.23%  
Residential real estate - second
  mortgage..........................................      17,831        2.29           15,757      2.58          14,372      2.96   
Residential construction............................      13,367        1.72            5,351       .88          15,046      3.10   
Commercial construction and land
  acquisition.......................................       5,785         .74            5,700       .93           5,523      1.14   
Commercial real estate..............................      81,722       10.50           69,514     11.39          61,862     12.74   
Commercial business.................................      38,069        4.89           31,063      5.09          27,816      5.74   
Consumer loans:
  Loans secured by deposits.........................      12,472        1.60            9,409      1.54           7,497      1.55   
  Real estate secured consumer loans................      81,252       10.44           42,893      7.03          33,381      6.88   
  Unsecured consumer loans..........................      51,162        6.57           59,864      9.81          37,180      7.66   
                                                         -------      ------          -------    ------         -------    ------   
    Total loans receivable..........................     778,389      100.00%         610,427    100.00%        485,175    100.00%  
                                                         -------      ------          -------    ------         -------    ------   
Less:
  Allowance for loan losses.........................     (6,772)                      (3,332)                   (3,510)             
  Loans in process..................................     (6,218)                      (2,430)                   (5,727)             
  Deferred loan fees................................         172                           41                     (266)             
  Unearned interest.................................       (512)                        (955)                   (1,831)             
                                                         -------                      -------                   -------             
                                                        (13,330)                      (6,676)                  (11,334)             
                                                         -------                      -------                   -------             
  Loans receivable, net(2)..........................    $765,059                     $603,751                  $473,841             
                                                        ========                     ========                  ========             
<PAGE>
<CAPTION>
                                                                               December 31,
                                                      ----------------------------------------------------------
                                                                   1994                           1993
                                                      ---------------------------     --------------------------
                                                          Amount         Percent          Amount         Percent
                                                      -------------   -------------   --------------   -----------
                                                                           (Dollars in Thousands)
<S>                                                      <C>              <C>             <C>            <C>   
Residential real  estate - first
  mortgage(1).......................................      $194,707         62.14%          $137,396       60.95%
Residential real estate - second
  mortgage..........................................        13,298          4.24             11,135        4.94
Residential construction............................        12,039          3.84              3,940        1.75
Commercial construction and land
  acquisition.......................................         1,062          0.34              1,084        0.48
Commercial real estate..............................        43,029         13.72             30,290       13.44
Commercial business.................................        14,102          4.51             15,417        6.84
Consumer loans:
  Loans secured by deposits.........................         5,829          1.86              3,815        1.69
  Real estate secured consumer loans................        29,279*         9.34*            22,355*       9.92*
  Unsecured consumer loans..........................              *             *                  *           *
                                                           -------        ------            -------      ------ 
    Total loans receivable..........................       313,345        100.00%           225,432      100.00%
                                                           -------        ------            -------      ------ 
Less:
  Allowance for loan losses.........................       (2,887)                          (3,029)
  Loans in process..................................       (5,945)                          (1,531)
  Deferred loan fees................................         (424)                            (456)
  Unearned interest.................................       (2,475)                          (3,796)
                                                           -------                          -------            
                                                          (11,731)                          (8,812)
                                                           -------                          -------            
  Loans receivable, net(2)..........................      $301,614                         $216,620
                                                          ========                         ========
</TABLE>

(1)     Includes $33.9  million,  $49.7 million and $55.2 million of residential
        real estate - first  mortgage  loans  which are held by R&G  Mortgage at
        December 31, 1997, 1996 and 1995, respectively.

(2)     Does not include  mortgage loans held for sale of $46.9  million,  $54.5
        million, $21.3 million, $22.0 million and $174.2 million at December 31,
        1997, 1996, 1995, 1994 and 1993, respectively.

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

                                       22
<PAGE>
         Contractual  Principal  Repayments  and Interest  Rates.  The following
table sets forth certain  information  at December 31, 1997 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                 1997                     1997            Total(1)
                                                       -----------            -------------          --------------      -----------
                                                                                          (In Thousands)
<S>                                                     <C>                     <C>                     <C>                <C>     
Residential real estate...........................      $    77                 $    683                $493,724           $494,484
Residential construction..........................       13,443                       --                      --             13,443
Commercial real estate(2).........................       21,342                   25,296                  40,869             87,507
Commercial business...............................        6,224                   25,305                   6,540             38,069
Consumer:
  Loans on savings................................        6,572                    5,320                     580             12,472
  Real estate secured consumer loans..............        2,342                    8,741                  70,169             81,252
  Unsecured consumer loans........................        3,677                   41,213                   6,272             51,162
                                                        -------                 --------                --------           --------
Total(3)..........................................      $53,677                 $106,558                $618,154           $778,389
                                                        =======                 ========                ========           ========
</TABLE>
---------------
(1)     Amounts have not been reduced for the allowance  for loan losses,  loans
        in process, deferred loan fees or unearned interest.

(2)     Includes $5.8 million of commercial  construction  and land  acquisition
        loans.

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



                                       23
<PAGE>
         The  following  table sets forth the dollar  amount of total  loans due
after one year from December 31, 1997, as shown in the  preceding  table,  which
have fixed interest rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
                                                                            Floating or
                                                   Fixed rate             adjustable-rate                Total
                                              --------------------   -----------------------   -----------------------
                                                                            (In Thousands)

<S>                                                    <C>                        <C>                       <C>     
Residential real estate.....................           $494,407                    $    --                  $494,407
Residential construction....................                 --                         --                        --
Commercial real estate(1)...................              4,652                     61,513                    66,165
Commercial business.........................             23,613                      8,232                    31,845
Consumer:
  Loans on savings..........................              5,900                         --                     5,900
  Real estate secured consumer loans........             78,910                         --                    78,910
  Unsecured consumer loans..................             47,485                         --                    47,485
                                                       --------                   --------                  --------
   Total....................................           $654,967                   $ 69,745                  $724,712
                                                       ========                   ========                  ========
</TABLE>

---------------
(1)     Includes $5.8 million of commercial  construction  and land  acquisition
        loans.

         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.


                                       24
<PAGE>
         Origination,  Purchase  and Sales of Loans.  The  following  table sets
forth  loan  originations,  purchases  and  sales by the  Bank  for the  periods
indicated.
<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                         -------------------------------------------------------
                                                                1997                1996                1995
                                                         ------------------  -----------------   ------------------
                                                                           (Dollars in Thousands)
<S>                                                                 <C>                <C>                  <C>     
Loan originations:
Loans originated by R&G Mortgage:
  Residential mortgages................................             $221,451           $187,845             $126,599
  Commercial mortgages.................................                  555                 --                   --
  Construction loans...................................               11,482              2,227               13,764
  Consumer loans.......................................               52,287             21,208               15,944
    Total loans originated by R&G Mortgage.............              285,775            211,280              156,307
Other loans originated:
  Commercial real estate...............................               37,129             36,140               48,497
  Commercial business..................................               15,393             33,318               21,556
Consumer loans:
  Loans on deposit.....................................               19,711             13,988               12,546
  Real estate secured consumer loans...................                   --                 80                3,436
  Unsecured consumer loans.............................               16,742             39,312               38,589
    Total other loans originated.......................               88,975            122,838              124,624
  Loans purchased(1)...................................               60,646              8,047                  807
    Total loans originated and purchased...............              435,396            342,165              281,738
  Loans sold(2)........................................             (107,217)           (49,726)             (75,093)
  Loan principal reductions............................             (133,837)          (114,792)             (78,519)
  Net increase before other items, net.................              194,329            177,647              128,126
  Loans securitized and transferred to
    mortgage-backed securities.........................              (11,346)           (43,673)             (17,631)
  Other increases (decreases)..........................                   --                 --                  179
  Net increase in loan portfolio.......................             $182,996           $133,974             $110,674
</TABLE>

--------------
(1)      Comprised of conventional,  commercial real estate and secured consumer
         loans purchased from other  financial  institutions  aggregating  $54.0
         million, $4.6 million and $2.0 million, respectively, in the year ended
         December 31, 1997, and conventional  loans of $8.1 million and $807,000
         in the years ended December 31, 1996 and 1995.

(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

                                       25
<PAGE>
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, 1997,
1996 and 1995,  R&G  Mortgage  received  $5.2  million,  $4.5  million  and $3.6
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
$2.5  million,  and  the  Executive  Committee  of the  Board  of  Directors  is
authorized to approve all loans exceeding $2.5 million.  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  purchases  conventional  loans secured by first liens on
single-family  residential  real estate 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 from time to time
securitized  by R&G  Mortgage  and sold by the  Bank.  During  the  years  ended
December 31, 1997, 1996 and 1995, the Bank purchased $60.6 million, $8.1 million
and $807,000 of loans, respectively.

         During the years ended December 31, 1997,  1996 and 1995, the Bank sold
$107.2  million,  $49.7 million and $75.1 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.

                                       26
<PAGE>
         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,  1997,  R&G  Financial's  five  largest  loans-to-one
borrower and their related entities amounted to $1.5 million, $1.3 million, $1.2
million,  $800,000 and $711,000.  The largest loan  concentration is a loan to a
developer  of a new  shopping  center in  Carolina.  The project is in its final
stages of  completion.  The second  largest  loan  concentration  consists  of a
commercial  loan for the  financing of new  equipment  for a medical  laboratory
located  in  Bayamon.  The  third  largest  loan  concentration  is  an  interim
construction  loan with an  aggregate  balance of $681,000 to a developer  of 55
single  family  detached  residential  units located in Humacao with the balance
comprised of other  commercial  loans.  The fourth  largest  loan  concentration
represents a cash collateral  personal loan at the Bank's Mayaguez  branch.  The
fifth  largest  loan  consist of a  commercial  working  capital  line of credit
secured  by the  assignment  of lease  contracts.  All of R&G  Financial's  five
largest loan concentrations were performing in accordance with their terms as of
December 31, 1997.

         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,  1997,
$476.7  million or 61.3% of R&G  Financial's  total  loans  held for  investment
consisted  of such  loans,  $475.5  million  or  99.7%  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, 1997,  $17.8 million or
2.3% 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

                                       27
<PAGE>
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,
1997,  residential  construction  loans amounted to $13.4 million or 1.7% of R&G
Financial's total loans held for investment,  while commercial  construction and
land acquisition  loans amounted to $5.8 million or 0.7% 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 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,  1997,  the  Bank's   construction  loan  portfolio  included  127
construction/permanent  loans  with an  aggregate  principal  balance  of  $12.7
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, 1997, the Bank
had one  residential  construction  loan  outstanding to develop a single-family
subdivision,  consisting of 55 units in Humaco.  The loan, which involved a $1.2
million credit facility for the fourth phase of the project,  had an outstanding
balance of $681,000 at December 31, 1997.  The loan is  performing in accordance
with its terms.  This loan is referenced in the discussion of the Bank's largest
loan concentrations above.

         In addition to the foregoing,  at December 31, 1997, the Bank had seven
land  acquisition  loans with  outstanding  balances  ranging  from  $186,000 to
$650,000,  and an  aggregate  balance  of  $2.9  million,  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 some of these projects.  The
Bank does not expect to be active in this business.


                                       28
<PAGE>
         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  thereof.  At December 31, 1997,
$368,000 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, 1997, $81.7 million or
10.5% 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  775 loans  with an  average  principal  balance of
$105,000. At December 31, 1997, $6.0 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

                                       29
<PAGE>
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 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, 1997,
commercial  business loans amounted to $38.1 million or 4.9% 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.

         Consumer Loans. The Bank has begun to emphasize the origination of real
estate  secured  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 other  mortgage  loans.  At December  31, 1997,
$144.9  million or 18.6% of R&G  Financial's  total  loans  held for  investment
consisted  of consumer  loans.  This amount is  comprised  mostly of real estate
secured consumer loans (which are originated by R&G Mortgage), but the Bank also
offers 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 collateralized 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 $12.5  million at  December  31,  1997.  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, 1997,  real estate secured  consumer
loans totalled  $81.2  million.  In November 1995, the Bank began issuing credit
cards in its own name. At December 31, 1997,  credit card  receivables  totalled
$2.3 million.


                                       30
<PAGE>
         Consumer loans  generally have shorter terms and higher  interest rates
than mortgage  loans but generally  involve more credit risk than mortgage loans
because of the type and nature of the  collateral  and,  in certain  cases,  the
absence of collateral.  In addition,  consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss,  divorce,  illness and personal  bankruptcy.  In
many cases,  any repossessed  collateral for a defaulted  consumer loan will not
provide an adequate source of repayment of the outstanding  loan balance because
of improper  repair and  maintenance of the underlying  security.  The remaining
deficiency may not warrant further  substantial  collection  efforts against the
borrower.  At December 31, 1997,  $4.0 million 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,
                                          ------------------------------------------------------------------------------
                                               1997             1996            1995           1994             1993
                                          -------------   ----------------  -----------   -------------   --------------
                                                                       (Dollars in Thousands)
<S>                                            <C>                <C>            <C>             <C>              <C>   
Non-accruing loans:
  Residential real estate(1)............       $21,619            $12,991        $7,921          $4,963           $3,678
  Residential construction..............           368                363            --              --               --
  Commercial real estate................         6,000              3,141         1,903             789            1,311
  Commercial business...................           765                823            --              --               --
  Consumer..............................         1,217                686            40              --               --
  Other (2) ............................           117                726            --              --               --
                                                ------             ------         -----           -----            -----
    Total...............................       30,086(3)           18,730         9,864           5,752            4,989
                                               ------              ------         -----           -----            -----
Accruing loans greater than 90 days
  delinquent:
  Residential real estate...............            --                 --            --              --               --
  Residential construction..............            --                 --           611              --               --
  Commercial real estate................            --                 --            --              --               --
  Commercial business...................            54                 22             8              10               70
  Consumer..............................           172                134            94              --               --
                                                ------              -----        ------         -------           ------
    Total accruing loans greater than
      90 days delinquent................           226                156           713              10               70
                                                ------             ------         -----          ------           ------
    Total non-performing loans..........        30,312             18,886        10,577           5,762            5,059
                                                ------             ------        ------           -----            -----
Real estate owned, net of reserves(4)...         1,715                834           654             722              699
Other repossessed assets................            85                 31            --              --               --
                                                    --                 --            --              --               --
                                                 1,800                865           654             722              699
                                               -------
    Total non-performing assets.........       $32,112            $19,751       $11,231          $6,484           $5,758
                                               =======            =======       =======          ======           ======
    Total non-performing loans as a
      percentage of total loans.........         3.89%              3.09%         2.18%           1.84%            2.24%
                                               =======            =======       =======          ======           ======
    Total non-performing assets as a
      percentage of total assets........         2.12%              1.90%         1.32%           1.04%            1.07%
                                               =======            =======       =======          ======           ======
</TABLE>
-------------

(1)      Includes  residential  real  estate  secured  by both  first and second
         mortgage  loans.  Also includes  $2,610,000,  $882,000,  $918,000,  and
         $736,000  consumer  loans  secured  by first and  second  mortgages  on
         residential  real estate at December 31,  1997,  1996,  1995,  1994 and
         1993, respectively.

(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, 1997,  comprised of 365 loans secured by residential
         real estate, 47 loans secured by commercial real estate, 8 construction
         loans, 59 commercial business loans and 143 consumer loans.


                                       32
<PAGE>
(4)      Includes  properties held by R&G Mortgage of $165,000 and $43,000 as of
         December 31, 1997 and 1994, respectively.  As of December 31, 1997, the
         Bank had 20 residential properties aggregating $1,550,000.


         While the level of total  non-performing  assets of R&G  Financial  has
increased on an absolute basis during the periods  presented,  from $5.8 million
at December 31, 1993 to $32.1 million at December 31, 1997, R&G  Financial's net
loans receivable portfolio has increased by 253% during this period, from $216.6
million at December 31, 1993 to $765.1 million at December 31, 1997. Thus, total
non-performing  assets as a percent  of total  assets  increased  from  1.07% at
December 31, 1993 to 2.12% at December 31, 1997.

         Non-performing  residential  loans  increased  by $8.6 million or 64.6%
from  December  31, 1996 to December  31,  1997.  The  average  loan  balance on
non-performing  mortgage  loans  amounted to $60,000 at December 31, 1997. As of
such date,  174 loans with an aggregate  balance of $12.5  million  (including 9
consumer  loans  secured by real estate with an  aggregate  balance of $250,000)
were in the process of foreclosure.  The total  delinquency ratio on residential
mortgages,  including loans past due less than 90 days,  slightly increased from
4.87% in 1996 to 4.93% in 1997. The Company's loss  experience on such portfolio
has been minimal over the last several years.

         Non-performing  commercial  real estate loans increased by $2.9 million
or 91.0% from  December  31,  1996 to  December  31,  1997.  The number of loans
delinquent  over 90 days  amounted to 47 loans at  December  31,  1997,  with an
average balance of $99,000.  The largest  non-performing  commercial real estate
loan as of December 31, 1997 had a balance of $550,000.

         Non-performing  commercial business loans consist of 14 loans which are
90% guaranteed by the Small Business Administration with an aggregate balance of
$1.5 million and 42 commercial leases amounting to $731,000.  These loans have a
combined  average loan size of $39,000.  The majority of loans in this portfolio
were  originated  during 1995 and 1996.  The largest  non-performing  commercial
business loan as of December 31, 1997 had a $270,000 balance.

         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.


                                       33
<PAGE>
         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,
                                         ---------------------------------------------------------------------------
                                               1997              1996             1995            1994             1993
                                         ----------------   --------------   --------------  --------------   --------------
                                                                       (Dollars in Thousands)
<S>                                              <C>              <C>              <C>              <C>             <C>   
Balance at beginning of period.........          $ 3,332           $3,510          $2,887           $3,029          $1,230
                                                 -------           ------          ------           ------          ------
Charge-offs:
  Residential real estate..............               13               45              53               --              --
  Construction.........................               --               50              --               --              --
  Commercial real estate...............              170               --              --               --              --
  Commercial business..................              480              110              91                3              56
  Consumer.............................            3,953            1,922             365              139              90
  Other ...............................              761           2,535(1)            --               --              --
                                                 -------           ------          ------           ------          ------
    Total charge-offs..................            5,377            4,662             509              142             146
                                                 -------           ------          ------           ------          ------
Recoveries:
  Residential real estate..............               21               --               1               --              --
  Construction.........................               --               --              --               --              --
  Commercial real estate...............               50               --              --               --              --
  Commercial business..................               32               31              85               --              20
  Consumer.............................              344              195              96               --             242
  Other................................           2,000(2)             --              --               --              --
                                                 -------           ------          ------           ------          ------
    Total recoveries...................            2,447              226             182               --             262
                                                 -------           ------          ------           ------          ------
Net charge-offs........................            2,930            4,436             327              142               (116)
                                                 -------           ------          ------           ------          ------
Allowance for loan losses acquired from
  Caribbean Federal....................               --               --              --               --           1,683
Provision for losses on loans..........            6,370            4,258          950(3)               --              --
                                                 -------           ------          ------           ------          ------
Balance at end of period...............          $ 6,772          $ 3,332          $3,510           $2,887          $3,029
                                                 =======          =======          ======           ======          ======
Allowance for loan losses as a percent
  of total loans outstanding...........             .87%             .55%           0.72%            0.92%           1.34%
                                                 =======          =======          ======           ======          ======
Allowance for loan losses as a percent
  of non-performing loans..............           22.43%           17.64%          33.19%           50.10%          59.87%
                                                 =======          =======          ======           ======          ======
Ratio of net charge-offs to average
  loans outstanding....................            0.40%            0.75%           0.08%            0.05%          (0.06)%
                                                 =======          =======          ======           ======          ======
</TABLE>
------------------

(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 Operations -- Results of Operations
         --  Provision  for Loan  Losses"  incorporated  by  reference in Item 7
         hereof.

(2)      Corresponds  to $2.0  million  received  on January  15,  1998 from the
         Company's  fidelity  insurance  carrier  accounted for as a recovery of
         loans previously charged-off as of December 31, 1997. See "Management's
         Discussion   and  Analysis  of  Financial   Condition  and  Results  of
         Operations  -- Results of  Operations  --  Provision  for Loan  Losses"
         incorporated by reference in Item 7 hereof.

(3)      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,
                              --------------------------------------------------------------------------------------------
                                           1997                            1996                            1995           
                              ---------------------------    -----------------------------     -------------------------  
                                               Percent of                       Percent of                     Percent of 
                                                 Loans in                        Loans in                       Loans in  
                                                  Each                             Each                           Each    
                                               Category to                     Category to                    Category to 
                                 Amount        Total Loans      Amount         Total Loans        Amount      Total Loans 
                              ------------   --------------  -----------    -----------------  ----------   --------------
                                                                  (Dollars in Thousands)

<S>                                <C>              <C>            <C>             <C>              <C>            <C>    
Residential real estate.....       $  593            8.76%          $  810          24.31%           $2,094         59.66%
Construction................            7             0.10              51            1.53               32           0.90
Commercial real estate......        1,386            20.47             489           14.68               --             --
Commercial business.........          806            11.90             109            3.27              782          22.28
Consumer....................        3,980            58.77           1,873           56.21              602          17.16
                                   ------          ------           ------         ------            ------        ------ 
Total.......................       $6,772          100.00%          $3,332         100.00%           $3,510        100.00%
                                   ======          ======           ======         ======            ======        ====== 
<PAGE>
<CAPTION>
                                                    December 31,
                              --------------------------------------------------------
                                          1994                          1993
                              -------------------------     --------------------------
                                              Percent of                    Percent of
                                               Loans in                      Loans in
                                                 Each                          Each
                                             Category to                   Category to
                                 Amount      Total Loans       Amount      Total Loans
                              ----------   --------------   ----------   --------------
                              

<S>                                <C>            <C>            <C>            <C>   
Residential real estate.....        $1,962         67.95%         $2,029         66.99%
Construction................            --             --             --             --
Commercial real estate......            --             --             --             --
Commercial business.........           403          13.96            576          19.02
Consumer....................           522          18.09            424          13.99
                                    ------        ------          ------        ------ 
Total.......................        $2,887        100.00%         $3,029        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, 1997, R&G Mortgage held GNMA  mortgage-backed  securities with a
fair value of $375.7  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,  1997,  R&G
Mortgage's CMOs and CMO residuals, which are classified as held for trading, had
an amortized cost of $23.8 million and a fair value of $23.1 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, 1997,  the Bank's  securities  portfolio  consisted of
$44.0 million of securities held for investments, consisting of $18.4 million of
tax-free  mortgage-backed  securities,  $14.9 million of other  mortgage  backed
securities,  and $10.4 million of Puerto Rico  Government  obligations and other
Puerto Rico securities,  and $310,000 U.S. Treasury securities.  In addition, at
December 31, 1997, the Bank had a securities  portfolio  classified as available
for sale with a fair value of $121.9  million,  consisting  of $37.6  million of
mortgage-backed securities, $4.9 million of FHLB stock, $8.4 million of CMOs and
CMO residuals,  $30.9 million U.S. Treasury securities and $40.1 million of U.S.
Government agency securities. Finally, at December 31, 1997, $1.7 million of the
Bank's  securities  were  classified  as held for  trading,  consisting  of $1.7
million of GNMA certificates.

                                       36

<PAGE>
         In February 1996, the Company  entered into various  agreements with an
independent  investment  management firm whereby such firm has been appointed as
investment  advisor  with  respect  to a  portion  of the  Company's  securities
portfolio for trading  purposes.  Such firm had also been engaged by the Company
to, among other things, assist it in achieving the objectives established by the
Company's  IRRBICO through the execution of various hedging  strategies.  During
1997,  the Company  discontinued  hedging  activities  for its  mortgage  backed
securities held for trading and available sale after management  determined that
the relatively low volatility of such  securities and current market  conditions
did not warrant  hedging  against  such assets.  In late 1997,  the Company also
discontinued  trading  activities through the advisory firm; the Bank's Treasury
Department  continues from time to time to conduct  certain  trading  activities
mainly through investments in U.S. Treasury securities.



                                       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,
                                    -----------------------------------------------------------------------------------------
                                                      1997                                          1996                     
                                    ----------------------------------------   ------------------------------------------    
                                                                   Weighted                                      Weighted    
                                      Carrying        Market       Average       Carrying        Market           Average    
                                        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.......           49            50         10.00             --             --                 -- 
    Due from five-ten years.......           --            --            --             97            100             10.00% 
    Due over ten years............       18,321        17,705          6.05         21,591         20,571               6.03 
FNMA
  Due within one year.............           --            --            --             --             --                 -- 
  Due from one-five years.........           --            --            --             --             --                 -- 
  Due from five-ten years.........           --            --            --             --             --                 -- 
  Due over ten years..............       14,675        15,164          7.17         15,895         16,124               7.18 
FHLMC
  Due within one year.............           --            --            --             --             --                 -- 
  Due from one-five years.........           --            --            --             --             --                 -- 
  Due from five-ten years.........           --            --            --             --             --                 -- 
  Due over ten years..............          281           266          6.00            317            309               5.38 
Investment Securities:
  Puerto Rico Government
    obligations
  Due within one year.............        4,433         4,439          5.39             --             --                 -- 
  Due from one-five years.........           --            --            --          4,960          4,930               5.38 
  Due from five-ten years.........        5,920         5,910          5.34             --             --                 -- 
  Due over ten years..............           30            30          8.37             --             --                 -- 
  U.S. Government Agency
  Due within one year.............           --            --            --             --             --                 -- 
  Due within one-five years.......          310           311          6.13            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..................      $44,019       $43,875          6.18%       $46,152        $45,327               6.34%
<PAGE>
<CAPTION>
                                                 December 31,
                                    --------------------------------------
                                                     1995
                                    --------------------------------------
                                                                 Weighted
                                     Carrying       Market       Average
                                       Value        Value         Yield
                                    ----------   -----------   -----------
                                            (Dollars in Thousands)
<S>                                    <C>          <C>              <C>  
Mortgage-backed securities:
GMNA
    Due within one year...........    $     --     $     --            --%
    Due from one-five years.......          --           --            --
    Due from five-ten years.......         118          108         10.00
    Due over ten years............      24,617       23,681          6.03
FNMA
  Due within one year.............          --           --            --
  Due from one-five years.........          --           --            --
  Due from five-ten years.........          --           --            --
  Due over ten years..............      16,623       16,623          7.18
FHLMC
  Due within one year.............          --           --            --
  Due from one-five years.........          --           --            --
  Due from five-ten years.........          --           --            --
  Due over ten years..............         373          373          5.50
Investment Securities:
  Puerto Rico Government
    obligations
  Due within one year.............         377          377          2.69
  Due from one-five years.........       1,042        1,000          6.25
  Due from five-ten years.........          --           --            --
  Due over ten years..............         627          619          4.25
  U.S. Government Agency
  Due within one year.............          --           --            --
  Due within one-five years.......          --           --            --
  Due within five-ten years.......          --           --            --
  Due over ten years..............          --           --            --
Commercial paper:
  Due within one year.............          --           --            --
  Due within one-five years.......          --           --            --
  Due within five-ten years.......          --           --            --
  Due over ten years..............          --           --            --
    Total Securities held for
      investment..................     $43,777      $42,781          6.42%
</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,
                                                     --------------------------------------------
                                                                         1997                    
                                                     --------------------------------------------
                                                                                        Weighted 
                                                         Amortized         Fair         Average  
                                                           Cost            Value         Yield   
                                                     ---------------   -----------    -----------
                                                                                                 
<S>                                                         <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..............................          $9,468         9,670          7.00 
  FHLMC mortgage-backed securities
    Due within one year.............................              --            --            -- 
    Due from one-five years.........................              71            70          9.00 
    Due from five-ten years.........................             360           368          9.38 
    Due over ten years..............................          27,104        27,513          6.86 
  CMO residuals and other mortgage-backed
    securities (2)
    Due within one year.............................              --            --            -- 
    Due from one-five years.........................              --            --            -- 
    Due from five-ten years.........................              --            --            -- 
    Due over ten years..............................           7,007         8,382         8.125 
Investment Securities Available for Sale(1)
  U.S. Treasury
    Due within one year.............................             773           772          5.22 
    Due from one-five years.........................          30,010        30,100          5.85 
    Due from five-ten years.........................              --            --            -- 
    Due over ten years..............................              --            --            -- 
  U.S. Government Agency
    Due within one year.............................              --            --            -- 
    Due from one-five years.........................          35,145        35,105          6.15 
    Due from five-ten years.........................           5,023         4,981          6.73 
    Due over ten years..............................              --            --            -- 
  FHLB stock........................................           4,906         4,906          6.61 
                                                            --------      --------          ---- 
                                                            $119,867      $121,867          6.59%
                                                            ========      ========          ==== 
Securities held for trading(3):
  GNMA certificates.................................        $367,177      $377,362          6.78%
  CMO certificates..................................          16,200        15,228          5.95 
  CMO residuals(4)..................................           7,630         7,868          8.00 
  U.S. Treasury Bills...............................             581           581          5.23 
                                                            --------      --------          ---- 
                                                            $391,588      $401,039          6.77%
                                                            ========      ========          ==== 
<PAGE>
<CAPTION>
                                                                    December 31,
                                                     -----------------------------------------
                                                                        1996                  
                                                     ---------------------------------------- 
                                                                                    Weighted  
                                                      Amortized        Fair          Average  
                                                         Cost          Value          Yield   
                                                     -----------   ------------   ------------
                                                             (Dollars in Thousands)
<S>                                                     <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 
  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 
    Due over ten years..............................     32,454         31,806           6.77 
  CMO residuals and other mortgage-backed
    securities (2)
    Due within one year.............................         --             --             -- 
    Due from one-five years.........................         --             --             -- 
    Due from five-ten years.........................         --             --             -- 
    Due over ten years..............................      7,067          8,195          8.125 
Investment Securities Available for Sale(1)
  U.S. Treasury
    Due within one year.............................         --             --             -- 
    Due from one-five years.........................         --             --             -- 
    Due from five-ten years.........................         --             --             -- 
    Due over ten years..............................         --             --             -- 
  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 
                                                        -------        -------           ---- 
                                                        $81,889        $81,814           6.75%
                                                       ========       ========           ==== 
Securities held for trading(3):
  GNMA certificates.................................     83,848         84,460           6.53%
  CMO certificates..................................     16,200         15,147           5.95 
  CMO residuals(4)..................................      8,489          8,539           8.00 
  U.S. Treasury Bills...............................      1,370          1,316           5.72 
                                                        -------        -------           ---- 
                                                       $109,907       $109,462           6.55%
                                                       ========       ========           ==== 
<PAGE>
<CAPTION>
                                                                   December 31,
                                                     -----------------------------------------
                                                                        1995
                                                      ----------------------------------------
                                                                                     Weighted
                                                         Amortized        Fair        Average
                                                           Cost           Value        Yield
                                                      --------------   ----------   ----------
                                                                   (Dollars in Thousands)
<S>                                                      <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..............................         14,846       14,946         7.12
  FHLMC mortgage-backed securities
    Due within one year.............................             --           --           --
    Due from one-five years.........................             --           --           --
    Due from five-ten years.........................          1,122        1,180         8.90
    Due over ten years..............................         36,353       36,759         6.94
  CMO residuals and other mortgage-backed
    securities (2)
    Due within one year.............................             --           --           NA
    Due from one-five years.........................             --           --           NA
    Due from five-ten years.........................             --           --           NA
    Due over ten years..............................          7,126        8,123        8.125
Investment Securities Available for Sale(1)
  U.S. Treasury
    Due within one year.............................             --           --           --
    Due from one-five years.........................             --           --           --
    Due from five-ten years.........................             --           --           --
    Due over ten years..............................             --           --           --
  U.S. Government Agency
    Due within one year.............................             --           --           --
    Due from one-five years.........................             --           --           --
    Due from five-ten years.........................             --           --           --
    Due over ten years..............................             --           --           --
  FHLB stock........................................          3,280        3,280         7.68
                                                           --------     --------         ---- 
                                                           $ 62,727     $ 64,288         6.42%
                                                           ========     ========         ==== 
Securities held for trading(3):
  GNMA certificates.................................       $ 87,656     $ 88,448         6.71%
  CMO certificates..................................         16,200       15,570         5.95
  CMO residuals(4)..................................         10,248        9,791         8.00
  U.S. Treasury Bills...............................             --           --           --
                                                           --------     --------         ---- 
                                                           $114,104     $113,809         6.72%
                                                           ========     ========         ==== 
</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,  $1.7
        million and $1.8  million as of December 31,  1997,  1996 and 1995,  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 in 1995 from its 1993 CMO
        Grantor Trust, and from R&G Mortgage's CMO Grantor Trusts.


         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  their  loans
secured by a single-family, owner-occupied residence to $227,150. 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.

                                       40
<PAGE>
         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, 1997,  $40.2
million or 8.6% 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, 1997, the Bank's CMOs and CMO residuals,  which had a
fair value of $8.4 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

                                       41
<PAGE>
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 $197.0 million of certificates of deposit with balances of $100,000 or more,
which  amounted to 27.0% of the Bank's  total  deposits at  December  31,  1997.
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,
1997 it held $7.5  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.

         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,
                                ----------------------------------------------------------------------------------
                                            1997                         1996                        1995
                                -------------------------     ------------------------    ------------------------
                                    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......................        $75,958         3.79%      $73,216          3.77%      $ 59,860          3.66%
NOW and Super NOW
accounts                               86,843         3.84        78,183          3.85         65,135          3.82
Checking......................         23,859           --        20,451            --          6,050            --
Commercial checking(1)........         46,301           --        30,173            --         24,601            --
Certificates of deposit.......        435,743         6.02       359,525          6.05        276,187          6.25
                                     --------         ----      --------          ----       --------          ---- 
  Total deposits..............       $668,704         4.85%     $561,548          4.90%      $431,833          5.05%
                                     ========         ====      ========          ====       ========          ==== 
</TABLE>

----------------

(1)      Includes $50.2 million,  $10.6 million and $9.7 million of escrow funds
         of R&G  Mortgage at December  31,  1997,  1996 and 1995,  respectively,
         maintained with the Bank.

                                       42
<PAGE>
         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, 1997.
<TABLE>
<CAPTION>
                                                                            Amount
                                                                    ----------------------
                                                                        (In Thousands)
<S>                                                                          <C>     
Certificates of deposit maturing:
Three months or less..............................................            $59,977
Over three through six months.....................................             30,802
Over six through twelve months....................................             56,249
Over twelve months................................................             49,934
                                                                              -------
  Total...........................................................           $196,962
                                                                              =======
</TABLE>
         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  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, 1997,  R&G
Financial  had  $328.3  million of reverse  repurchase  agreements  outstanding,
$334.2 million of which represented  borrowings of R&G Mortgage. At December 31,
1997, the weighted average interest rate on R&G Financial's  reverse  repurchase
agreements amounted to 5.81%.

         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, 1997, R&G Mortgage was permitted to borrow
under such  Warehouse  Lines up to $138.4  million,  $75.2  million of which was
drawn upon and outstanding as of such date. The

                                       43
<PAGE>
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, if available,  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,  1997,  the weighted  average  interest  rate being paid by R&G
Mortgage under its Warehouse Lines amounted to 5.85%.

         The Warehouse Lines include various  covenants and  restrictions on R&G
Mortgage's operations,  including maintenance of minimum levels of net worth and
debt service, 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.  Management of R&G Financial  believes that as
of December  31,  1997,  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 seven 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 5.55% 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, 1997,  $38.6 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

                                       44
<PAGE>
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, 1997, the Bank had $84.1
million of 936 Notes outstanding,  $23.6 million of which matures in 1999, $25.0
million of which matures in 2000 and $35.5 million of which matures in 2001.

         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,  1997,  the Bank had access to $223.4
million  in  advances  from the FHLB of New  York,  and had two FHLB of New York
advances  aggregating $42.0 million outstanding as of such date, which mature in
January 1998 and have a weighted average interest rate of 6.03%. In addition, at
December 31,  1997,  the Bank  maintained  $51.3  million in standby  letters of
credit with the FHLB of New York, which secured $45.5 million of outstanding 936
Notes payable and $4.1 million of 936  certificates of deposit.  At December 31,
1997, the Bank had pledged specific collateral aggregating $112.9 million to the
FHLB of New York under its advances program and to 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, 1997. 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 $34.4

                                       45
<PAGE>
million at December 31, 1997) 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 $33.9 million
as of  December  31,  1997) have been  reported  as an asset in R&G  Financial's
Consolidated Financial Statements.

         The  following  table  sets forth  certain  information  regarding  the
short-term borrowings of R&G Financial at or for the dates indicated.
<TABLE>
<CAPTION>
                                                                      At or For the Year Ended
                                                                            December 31,
                                                      ----------------------------------------------------
                                                             1997               1996               1995
                                                      ------------------  ---------------   ----------------
                                                                       (Dollars in Thousands)
<S>                                                           <C>                <C>                <C>     
R&G Mortgage:
Securities sold under agreements to repurchase:
  Average balance outstanding.......................          $187,682           $ 93,653           $ 99,145
  Maximum amount outstanding at any month-end
    during the period...............................           334,203            108,240            112,507
  Balance outstanding at end of period..............           334,203             97,444             87,958
  Average interest rate during the period...........             6.03%              5.00%              5.87%
  Average interest rate at end of period............             5.85%              5.67%              5.47%
Notes Payable:
  Average balance outstanding.......................           $67,558            $40,805           $ 24,521
  Maximum amount outstanding at any month-end
    during the period...............................            93,523             85,135             31,626
  Balance outstanding at end of period..............            75,204             40,342             30,130
  Average interest rate during the period...........             5.92%              5.32%              5.46%
  Average interest rate at end of period............             5.85%              4.97%              5.27%
The Bank:
FHLB of New York advances:
  Average balance outstanding.......................           $23,524            $ 6,366           $ 11,796
  Maximum amount outstanding at any month-end
    during the period...............................            42,200             15,000             13,562
  Balance outstanding at end of period..............            42,200             15,000              6,007
  Average interest rate during the period...........             5.80%              5.84%              6.00%
  Average interest rate at end of period............             6.03%              5.75%              6.74%
Securities sold under agreements to repurchase:
  Average balance outstanding.......................           $39,090            $ 6,954          $   7,737
  Maximum amount outstanding at any month-end
    during the period...............................            63,088             19,000             14,673
  Balance outstanding at end of period..............            48,080                 --             10,525
  Average interest rate during the period...........              5.55%              4.74%              5.16%
  Average interest rate at end of period............              5.56%                --%              5.11%
Notes Payable:
  Average balance outstanding.......................           $85,034            $85,365           $ 30,597
  Maximum amount outstanding at any month-end
    during the period...............................            86,500            111,500             51,000
  Balance outstanding at end of period..............            84,100             86,500             51,000
  Average interest rate during the period...........              6.60%              5.55%              6.42%
  Average interest rate at end of period............              5.97%              5.82%              5.93%
</TABLE>

                                       46
<PAGE>
                          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,  1997,  the Bank's  Trust
Department  administered  approximately  6,135 trust  accounts,  with  aggregate
assets of $23.3  million as of such  date.  In  addition,  during the year ended
December  31,  1997,  the Bank's  Trust  Department  sold $39.9  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.


                                    Personnel

         As of December 31, 1997,  R&G Financial (on a  consolidated  basis) had
809  full-time  employees  and 42 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 OCFI. 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 OCFI.

         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

                                       47
<PAGE>
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 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

                                       48
<PAGE>
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  stockholders  be made on
terms  substantially  the same as offered in  comparable  transactions  to other
persons unless the loans are made pursuant to a benefit or compensation  program
that (i) is widely  available to employees of the  institution and (ii) does not
give preference to any director,  executive officer or principal stockholder, or
certain  affiliated  interests  of either,  over other  employees of the savings
institutions.  Section  22(h) 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

                                       49
<PAGE>
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.

         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  OCFI,  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 OCFI 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 OCFI,  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 Savings Association Insurance Fund ("SAIF") and Bank Insurance Fund
("BIF") 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"

                                       50
<PAGE>
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 .0% for well  capitalized,  healthy
institutions  to  .27%  for   undercapitalized   institutions  with  substantial
supervisory   concerns.   The  Bank  was  classified  as  a   "well-capitalized"
institution  as of December 31, 1997. An  additional  assessment is added to the
regular  SAIF-assessment  and the regular  BIF-assessment,  respectively,  until
December 31, 1999 in order to cover Financing Corporation debt service payments.
Such additional  assessments amount to 6.3 basis points and 1.3 basis points for
SAIF insured deposits and BIF insured deposits, respectively.

         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  SAIF  and the  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 in 1995 from a Puerto Rico commercial bank are BIF
insured and subject to deposit insurance assessments at BIF rates.

         Both the SAIF and the BIF are required by law to attain and  thereafter
maintain a reserve ratio of 1.25% of insured deposits.  The BIF has achieved the
required  reserve ratio,  and as a result,  the FDIC reduced the average deposit
insurance premium paid by BIF-insured banks to a level  substantially  below the
average premium previously paid by savings institutions. Banking legislation was
enacted on September  30, 1996 to  eliminate  the premium  differential  between
SAIF-insured institutions and BIF-insured institutions. The legislation provided
that all insured  depository  institutions with  SAIF-assessable  deposits as of
March 31,  1995 pay a special  one-time  assessment  to  recapitalize  the SAIF.
Pursuant to this  legislation,  the FDIC promulgated a rule that established the
special  assessment  necessary to recapitalize  the SAIF at 65.7 basis points of
SAIF-assessable deposits held by affected institutions as of March 31, 1995. The
Bank's one-time special  assessment  amounted to $1.6 million 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 and reducing  future  assessment
rates for the Bank, effective January 1, 1997, to those previously applicable to
BIF insured institutions.

                                       51
<PAGE>
         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 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,
1997, 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

                                       52
<PAGE>
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.

         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 OCFI 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
the sum of the Bank's paid-in common and preferred stock capital. As of December
31, 1997, the Bank had credited $2.2 million to such reserve fund.

         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

                                       53
<PAGE>
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;  (iii) money  deposited  in other banks  provided  said  deposits  are
authorized  by the  Commissioner,  subject  to  immediate  collection;  and (iv)
federal funds sold and securities purchased under agreements to resell, provided
such funds are repaid on or prior to the close of the next business day.

         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, 1997,  the legal lending limit for the Bank under this provision
was  approximately  $6.6 million and its maximum  extension of credit to any one
borrower,  including  affiliates  thereof,  was $1.5 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 to  subsidiaries  of  banks,  and  loans  to  non-banking
affiliates of the Bank, which are subject however to the lending limitations set
forth in  Sections  23A and 23B of the  Federal  Reserve  Act; or loans that are
secured by mortgages by real estate,  or 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 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,

                                       54
<PAGE>
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.

         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.

                                       55
<PAGE>
         R&G Mortgage is also subject to  regulation  by the OCFI,  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
OCFI 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 OCFI 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 OCFI is obligated to make such  inquires as it
deems necessary to review the  transaction.  Under the Mortgage Banking Law, the
determination  of the OCFI  whether or not to  authorize  a  proposed  change of
control is final and non-appealable.

         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.


                                       56
<PAGE>
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, 1997, 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                       $1,056
280 Jesus T. Pinero Avenue                                         Two (2) five year options
Hato Rey, PR 00919

Los Jardines Branch                                                    September 4, 1999                          125
Los Jardines de Guaynabo Shopping Center                            One (1) ten year option
PR Road No. 20
Guaynabo, PR 00969

San Patricio Branch                                                      July 31, 2007                            107
San Patricio Plaza
Ortegon Street
Guaynabo, PR 00969

Bayamon Branch(2)(3)                                                     May 31, 2001                             251
42-43 Betances Avenue                                               One (1) ten year option
Urb. Hermanas Davila
Bayamon, PR 00959

Bayamon East                                                           January 10, 2001                           478
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

Manati Branch(3)                                                        August 8, 2009                            492
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                            154
65th Infantry Avenue
Corner San Marcos Street
Carolina, PR 00985
</TABLE>
                                       57
<PAGE>
<TABLE>
<CAPTION>
                                                                                                        Net Book Value
                   Description/Address                               Lease Term Expiration               of Property
--------------------------------------------------------    --------------------------------------   -------------------
                                                                                                        (In Thousands)
<S>                                                         <C>                                      <C>
Trujillo Alto Branch(4)                                                October 31, 2004                           121
Trujillo Alto Shopping Center
Trujillo Alto, PR 00976

Santurce Branch                                                         April 30, 1999                            362
1077 Ponce de Leon Avenue                                         Three (3) six year options
Santurce, PR 00917

Laguna Gardens Branch(4)                                                April 30, 1999                            147
Laguna Gardens Shopping Center                                     One (1) five year option
Isla Verde
Carolina, PR 00979

Plaza Carolina Branch(4)                                                 May 31, 2000                             197
Plaza Carolina Mall
Carolina, PR 00985

Norte Shopping Branch(4)                                                April 30, 2000                             69
Norte Shopping Center                                              Two (2) five year options
Baldorioty de Castro Avenue
San Juan, PR 00907

Vega Baja Branch(4)                                                      May 31, 2003                             365
Cabo Caribe Development                                            One (1) five year option
PR Road No. 2, Marginal
Vega Baja, PR 00693

Mayaguez Branch(3)                                                      April 30, 1997                            636
McKinley Street                                                   Four (4) five year options
Corner Dr. Vady
Mayaguez, PR 00680

Branch locations to be                                                        --                                  318
opened in early 1998

Operations Center(2)                                                   January 10, 2001                         2,328
                                                                                                                -----
Road #174, Lote #100
Urb. Ind. Minillas
Bayamon, PR 00959                                                                                               7,329
</TABLE>

                                       58
<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                              6
D-9 Degetau Street                                                 One (1) five year option
Urb. San Alfonso
Caguas, PR 00725

Ponce Office                                                              May 1, 1998                               7
25 Las Americas Avenue
Ext. Buena Vista
Ponce, PR 00731

Fajardo Office                                                           May 16, 1999                               8
51 Celis Aguilera Street                                           One (1) five year option
Fajardo, PR 00738

Los Jardines Office(5)                                                  August 1, 2006                             19
Los Jardines de Guaynabo Shopping Center                           One (1) five year option
PR Road No. 20
Guaynabo, PR 00969

San Patricio Office(5)                                                    May 1, 1998                              12
K-4 Ebano Street                                                   One (1) five year option
Ponderosa Building
San Patricio
Guaynabo, PR 00969

Hato Rey Office(2)(3)                                                  December 31, 2002                        2,050
280 Jesus T. Pinero Avenue                                         Two (2) five year options
Hato Rey, PR 00919

Bayamon Office(2)(3)                                                     May 30, 2001                              28
42-43 Betances Avenue                                               One (1) ten year option
Urb. Hermanas Davila
Bayamon, PR 00959

Arecibo Office(3)                                                       January 1, 2002                            10
Marginal Vista Azul                                                Two (2) five year options
Corner San Daniel Avenue
Arecibo, PR 00612

Manati Office(3)(6)                                                    October 30, 1998                            17
Plaza Puerta del Sol                                               One (1) five year option
PR Road No. 2, Km. 49.7
Manati, PR 00674
</TABLE>
                                       59
<PAGE>
<TABLE>
<CAPTION>
                                                                                                        Net Book Value
                   Description/Address                               Lease Term Expiration               of Property
--------------------------------------------------------    --------------------------------------   -------------------
                                                                                                        (In Thousands)
<S>                                                         <C>                                      <C>
Carolina Office(3)(6)                                                  October 30, 1998                            15
65th Infantry Avenue                                               One (1) five year option
Corner San Marcos Street
Carolina, PR 00985

Mayaguez Office(3)(6)                                                  October 30, 1998                            27
                                                                                                                -----
McKinley Street                                                    One (1) five year option
Corner Dr. Vady
Mayaguez, PR 00680
</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)      Facility includes an R&G Mortgage Banking Center.

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

(6)      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.


                                       60
<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 as adjusted for an 80% stock split paid in September 1997:
<TABLE>
<CAPTION>
                                                         Price Per Share                           
                                        -----------------------------------------------
                                                                                                  Dividends
                                                High                      Low                        Paid
                                        -------------------   -------------------------   -------------------------
<S>                                             <C>                          <C>                  <C>
September 30, 1996(1)                           $10.42                       $ 9.17               $ --
December 31, 1996                               $14.31                       $ 9.86               $0.0347
March 31, 1997                                  $15.55                       $12.64               $0.0382
June 30, 1997                                   $14.44                       $12.92               $0.0417
September 30, 1997                              $22.50                       $14.17               $0.0431
December 31, 1997                               $22.00                       $18.875              $0.0457
</TABLE>

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

         At December 31, 1997 the Company had  approximately  97 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 pages
23 to 24 of the Registrant's 1997 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
26 to 40 of the Registrant's 1997 Annual Report.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

         The information required herein is incorporated by reference from pages
29 to 30 of the Registrant's 1997 Annual Report.


                                       61
<PAGE>
Item 8.  Financial Statements and Supplementary Data.

         The information required herein is incorporated by reference from pages
42 to 77 of the Registrant's 1997 Annual Report.

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

         Not applicable.


PART III.

Item 10.  Directors and Executive Officers of the Registrant.

         The information required herein is incorporated by reference from pages
2 to 7 of  the  Registrant's  Proxy  Statement  dated  March  23,  1998  ("Proxy
Statement").

Item 11.  Executive Compensation.

         The information required herein is incorporated by reference from pages
12 to 15 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
15 to 18 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, 1997 and 1996.


                                       62
<PAGE>
                  Consolidated Statements of Income for the Years Ended December
                     31, 1997, 1996 and 1995.

                  Consolidated  Statements  of Cash  Flows for the  Years  Ended
                     December 31, 1997, 1996 and 1995.

                  Consolidated Statements of Changes in Stockholders' Equity for
                     the Years Ended December 31, 1997, 1996 and 1995.

                  Notes to Consolidated Financial Statements.


         (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.


                                       63
<PAGE>
         (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              1997 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 27, 1998
--------------------------
Victor J. Galan
Chairman of the Board, President and
 Chief Executive Officer
 (principal executive officer)


/s/ Joseph R. Sandoval                                   March 27, 1998
-----------------------------
Joseph R. Sandoval
Vice President and Chief Financial
  Officer (principal financial and
  accounting officer)


/s/ Ana M. Armendariz                                    March 27, 1998
-------------------------
Ana M. Armendariz
Director and Treasurer



/s/ Ramon Prats                                          March 27, 1998
Ramon Prats
Executive Vice President and Director
<PAGE>
/s/ Enrique Umpierre-Suarez                              March 27, 1998
----------------------------
Enrique Umpierre-Suarez
Director and Secretary


/s/ Victor L. Galan Fundora                              March 27, 1998
----------------------------
Victor L. Galan Fundora
Director


/s/ Juan J. Diaz                                         March 27, 1998
----------------------------------
Juan J. Diaz
Director


/s/ Pedro Ramirez                                        March 27, 1998
Pedro Ramirez
Director


/s/ Laureno Carus Abarca                                 March 27, 1998
------------------------------
Laureno Carus Abarca
Director


/s/ Eduardo McCormack                                    March 27, 1998
Eduardo McCormack
Director


/s/ Gilberto Rivera-Arrega                               March 27, 1998
Gilberto Rivera-Arreaga
Director


/s/ Benigno R. Fernandez                                 March 27, 1998
--------------------------------
Benigno R. Fernandez
Director