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

                                    FORM 10-K

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

              For the fiscal year ended: December 31, 2000

                                   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. [X]

As of March 27, 2001, the aggregate  value of the  10,073,168  shares of Class B
Common  Stock of the  Registrant  issued and  outstanding  on such  date,  which
excludes  167,661 shares held by all directors and officers of the Registrant as
a group, was approximately  $170.0 million.  This figure is based on the closing
price of $16.88 per share of the Registrant's  Class B Common Stock on March 27,
2001.

Number of  shares  of Class B Common  Stock  outstanding  as of March 27,  2001:
10,240,829.

                       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, 2000 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

                  The Company. R&G Financial  Corporation ("R&G Financial") is a
Puerto Rico chartered financial holding company that operates R&G Mortgage Corp.
("R&G  Mortgage"),  the second largest mortgage company  headquartered in Puerto
Rico,  R-G Premier Bank of Puerto Rico (the  "Bank"),  a Puerto Rico  commercial
bank, and Home and Property Insurance  Corporation,  which it recently acquired.
Through R&G Mortgage,  R&G Financial  also operates The Mortgage Store of Puerto
Rico, Inc., ("The Mortgage Store"), formerly Champion Mortgage Corporation,  and
through the Bank it operates  Continental Capital  Corporation  ("Continental"),
Huntington Station,  New York, a mortgage banking company.  With its acquisition
of Continental in late 1999, R&G Financial plans to expand its mortgage  banking
operations in the United  States,  concentrating  initially in New York and then
into other markets to the extent that it is presented with appropriate expansion
opportunities.  During  late 2000,  Continental  opened an office in  Charlotte,
North  Carolina.  Continental  presently  originates  loans in the states of New
York, Connecticut, New Jersey, North Carolina and Florida.

                  R&G Financial, through its subsidiaries,  is primarily engaged
in a wide  range  of real  estate  secured  lending  activities,  including  the
origination,   servicing,  purchase  and  sale  of  mortgages  on  single-family
residences,  the securitization and sale of various  mortgage-backed and related
securities and the holding and financing of mortgage  loans and  mortgage-backed
and related securities for sale or investment. R&G Financial also originates for
its portfolio  commercial  real estate loans,  residential  construction  loans,
commercial business loans and consumer loans.  Finally, R&G Financial provides a
variety of trust and investment services to its customers.

                  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 (1)  establishing  and  emphasizing the growth of its
mortgage  banking  activities,  including the  origination  and sale of mortgage
loans and growing its loan servicing operation; (2) expanding its retail banking
franchise in order to achieve  increased  market  presence and to increase  core
deposits; (3) enhancing its net interest income by increasing its loans held for
investment,   particularly   single-family   residential  loans  and  investment
securities;  (4)  developing  new  business  relationships  through an increased
emphasis  on  commercial  real  estate  and  commercial  business  lending;  (5)
diversifying its retail products and services, including an increase in consumer
loan originations  (such as credit cards);  (6) meeting the banking needs of its
customers  through,  among other  things,  the offering of trust and  investment
services and insurance products;  and (7) controlled growth and the pursuit of a
variety of acquisition opportunities when appropriate.

                  R&G  Financial   recently   promoted  Ramon  Prats,  its  Vice
Chairman,  to the office of President.  Mr. Prats  formerly was  Executive  Vice
President of R&G Mortgage.  Mr. Victor Galan  continues to hold the positions of
R&G Financial's Chairman of the Board and Chief Executive Officer.

                  R&G Financial  operates its business under the  regulations of
the  Federal  Deposit  Insurance  Corporation  ("FDIC")  and the  Office  of the
Commissioner of Financial  Institutions  ("OCFI") of Puerto Rico. As of December
31, 2000,  R&G Financial had  consolidated  total assets of  approximately  $3.5
billion,   consolidated   total  deposits  of  approximately  $1.7  billion  and
consolidated stockholders' equity of approximately $308.8 million. R&G Financial
operated 58 mortgage banking and bank branch offices at that date.



<PAGE>



                  R&G  Mortgage.  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"). R&G Mortgage also operates The Mortgage Store, a mortgage
banking company,  as a wholly-owned  subsidiary.  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.

                  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. 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.  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. Continental operates as a subsidiary of the Bank.

                           Mortgage Banking Activities

                  Loan Originations, Purchases and Sales. During the years ended
December  31,  2000,  1999 and 1998,  R&G  Financial  originated a total of $1.1
billion,  $1.1  billion  and  $914.1  million  of  residential  mortgage  loans,
respectively.  These  aggregate  originations  include  loans  originated by R&G
Mortgage  directly  for the Bank of $451.4  million,  $437.1  million and $450.6
million during the years ended December 31, 2000, 1999 and 1998, respectively of
such originations, or 43%, 41% and 49%, respectively, of total originations. The
loans  originated  by R&G  Mortgage  for the Bank  are  comprised  primarily  of
conventional  residential loans and, to a lesser extent,  consumer loans secured
by real estate.

                  R&G  Financial  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, 2000, 1999 and 1998, R&G Financial originated $307.1 million,
$288.8  million,  and  $255.6  million,  respectively,  of FHA/VA  loans,  which


                                       2
<PAGE>

represented  29.2%,  27.3% and 28.0%  respectively,  of total  loans  originated
during such respective periods.

                  R&G  Financial  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, 2000,  1999 and 1998, R&G Financial  originated  $699.7
million,  $738.6  million  and $610.4  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. All  non-conforming  conventional
loans  originated by R&G Mortgage  through The Money Store are held by The Money
Store in its portfolio or subsequently 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, 2000,
1999 and 1998, non-conforming  conventional loans represented approximately 38%,
38% and 44%,  respectively,  of R&G  Financial'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, 2000,  1999 and 1998,  83.8%,
86.6%  and  85.5% 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 Financial 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   $95,000  and  $87,000,
respectively.

                  R&G Financial 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 Financial is generally 80% (including the
amount of any first  mortgage).  In  addition,  R&G  Financial  also offers real
estate secured consumer loans up to $60,000 with a maximum term of 15 years. The
maximum  loan-to-appraised  value ratio on real estate  secured  consumer  loans
permitted  by R&G  Financial is generally  80%. R&G  Financial  will secure such
loans with either a first or second mortgage on the property.

                  The Company's loan  origination  activities in Puerto Rico are
conducted out of R&G Mortgage 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.

                  Loan origination  activities  performed by the Company 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, the
Company issues a commitment to the prospective borrower specifying the amount of

                                       3
<PAGE>

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
$145.9  million,  $307.8  million and $207.1 million of loans from third parties
during the years ended December 31, 2000, 1999 and 1998, respectively.




                                       4
<PAGE>




                  The following  table sets forth loan  originations,  purchases
and sales from its mortgage  banking  business by R&G  Financial for the periods
indicated.

<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,
                                                                           --------------------------------------------
                                                                               2000             1999            1998
                                                                           -----------       ----------       ---------
                                                                                       (Dollars in Thousands)
               <S>                                                          <C>              <C>              <C>
               Loans Originated For the Bank:
                    Conventional loans(1):
                        Number of loans                                          4,929            5,067            4,918
                        Volume of loans                                     $  407,461       $  404,886       $  402,447
                    FHA/VA loans:
                        Number of loans                                             --               --               --
                        Volume of loans                                             --               --               --
                    Consumer loans(2):
                        Number of loans                                          1,807            1,499            2,268
                        Volume of loans                                     $   43,943       $   32,219       $   48,155
                    Total loans:
                        Number of loans                                          6,736            6,566            7,186
                        Volume of loans                                     $  451,404       $  437,105       $  450,602
                        Percent of total volume                                     38%              32%              40%

               Loans Originated For Third Parties:
                    Conventional loans(1):
                        Number of loans                                          3,377            4,882            2,989
                        Volume of loans                                     $  292,283       $  333,673       $  207,937
                    FHA/VA loans:
                        Number of loans                                          3,241            3,315            3,298
                        Volume of loans                                     $  307,128       $  288,752       $  255,601
                    Total loans:
                        Number of loans                                          6,618            8,197            6,287
                        Volume of loans                                     $  599,411       $  622,425       $  463,538
                        Percent of total volume                                     50%              46%              41%
                                                                            ----------       ----------       ----------
                                 Total loan originations                    $1,050,815       $1,059,530       $  914,140
                                                                            ==========       ==========       ==========

               Loans Purchased For R&G Mortgage:
                        Number of loans (3)                                      1,627            3,418            2,506
                        Volume of loans                                     $  145,881       $  307,819       $  207,070
                        Percent of total volume                                     12%              22%              19%
                                 Total loan originations and purchases      $1,196,696       $1,367,349       $1,121,210
                                                                            ==========       ==========       ==========

               GNMA Pools Purchased for R&G Mortgage:
                        Volume of loans                                             --       $   22,487               --

</TABLE>


                                       5
<PAGE>

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                               ----------------------------------------------
                                                                   2000             1999              1998
                                                                   ----             ----              ----
                                                                           (Dollars in Thousands)
                <S>                                            <C>              <C>                <C>
                Loans Sold To Third Parties(4):
                     Conventional loans(1):
                         Number of loans                           3,937            6,511              2,513
                         Volume of loans                       $ 332,930        $ 470,443          $ 194,909
                     FHA/VA loans:
                         Number of loans                           4,167            4,255              4,413
                         Volume of loans                       $ 367,868        $ 373,730          $ 298,108
                     Total loans:
                         Number of loans                           8,104            9,434              6,926
                         Volume of loans                       $ 700,798        $ 844,173(3)       $ 493,017
                         Percent of total volume                      59%              62%                44%
                                                               ---------        ---------          ---------
                Adjustments:
                     Loans originated for the Bank             $(451,404)       ($437,105)         ($450,602)
                     Loan amortization                           (18,544)       (  38,863)            (1,479)
                                                               ---------        ---------          ---------
                Increase in loans held for sale                $  25,950        $  69,695          $ 176,112
                                                               =========        =========          =========

                Average Initial Loan Origination Balance:
                     The Bank:
                         Conventional loans(1)                 $      83        $      80          $      82
                         FHA/VA loans                                 --               --                 --
                     Third Parties:
                         Conventional loans(1)                 $      87        $      68          $      70
                         FHA/VA loans                                 95               87                 78
                     Total
                         Conventional loans(1)                 $      84        $      74          $      77
                         FHA/VA loans                                 95               87                 78
                Refinancings(5):
                     The Bank                                         56%              72%                74%
                     Third Parties                                    29%              49%                44%
</TABLE>

---------------
(1) Includes non-conforming loans.
(2) All of such loans were secured by real estate.
(3) Includes  $63.0  and  $123.2   million  of  loans   purchased  from  another
    institution, and securitized and sold to the same financial institution 2000
    and during 1999, respectively.
(4) Includes loans converted into mortgage-backed securities.
(5) As a percent of the total dollar volume of mortgage loans  originated by R&G
    Mortgage for the Bank (excluding  consumer  loans) 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.


                                       6
<PAGE>

                  All  loan  originations,   regardless  of  whether  originated
through the Company or purchased from third  parties,  must be  underwritten  in
accordance   with   R&G    Financial'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.  The Company's underwriting personnel, while operating out of its
loan offices, make underwriting  decisions independent of the Company'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. The Company receives these fees on mortgage loans originated  through
its retail  branches.  The Company may charge  additional  fees  depending  upon
market  conditions  and  regulatory  considerations  as  well  as the  Company's
objectives  concerning mortgage loan origination volume and pricing. The Company
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  Financial's  origination  activities has exceeded the net
costs attributable to such activities.

                  R&G  Financial  customarily  sells  most of the loans  that it
originates,  except for those  originated  on behalf of the Bank pursuant to the
Master Production  Agreement with R&G Mortgage.  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.  During the years ended December 31, 2000,
1999 and 1998,  R&G Financial  sold $637.8  million,  $721.0  million and $493.0
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 or loans
securitized  for other  institutions.  With  respect to such loan sales,  $270.8
million or 42.5%, $271.9 million or 37.7%, and $298.1 million or 60.5% 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 GNMA  serial
notes) by R&G  Mortgage.  These  securities  were sold  through the Bank's Trust
Department or indirectly through securities broker-dealers.

                  Conforming  conventional  loans originated or purchased by the
Company 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 the
Company  sells  to  securities  broker-dealers.  In  connection  with  any  such
exchanges,  the Company pays guarantee  fees to FNMA and FHLMC.  The issuance of
mortgage-backed  securities  provides R&G Financial 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 by R&G Mortgage 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

                                       7
<PAGE>

time of  origination of the loan (such as missing tax returns,  slightly  higher
loan-to-value  ratios,  etc.).  R&G  Mortgage and the Bank have made no sales of
CMOs in  securitization  transactions  during the last three fiscal years.  When
such  transactions are made,  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, 2000,
R&G Mortgage held residual certificates issued in CMO transactions involving R&G
Mortgage and the Bank with a fair value of $3.7 million.  In addition,  the Bank
held CMO  subordinated  certificates and residual  certificates  from one of its
issues with a fair value of $9.3 million at December 31, 2000. See "- Investment
Activities."

                  While R&G Financial's  exchanges of mortgage loans into agency
securities  and sales of mortgage  loans are  generally  made on a  non-recourse
basis,  the Company 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.  As of December  31,  2000,  R&G  Financial  had
reserves for possible losses related to its recourse obligations of $472,000. At
December  31,  2000,  R&G Mortgage  had loans in its  servicing  portfolio  with
provisions for recourse in the principal amount of approximately $680.5 million,
as compared to $646.3  million  and $507.4  million as of December  31, 1999 and
1998,  respectively.  Of the  recourse  loans  existing  at December  31,  2000,
approximately $398.0 million in principal amount consisted of loans sold to FNMA
and FHLMC and converted into  mortgage-backed  securities of such agencies,  and
approximately  $282.5 million in principal  amount  consisted of  non-conforming
loans sold to other private investors.

                  Loan  Servicing.   R&G  Financial  acquires  servicing  rights
through its mortgage loan originations  (including originations on behalf of the
Bank) and purchases from third parties. The Company generally retains the rights
to service  mortgage  loans sold,  which it has  originated  or  purchased,  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. The Company receives
annual  loan  servicing  fees  ranging  from  0.25% to  0.50%  of the  declining
outstanding  principal  balance of the loans serviced plus any late charges.  In
general,  the Company'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 Financial's  servicing  portfolio has grown  significantly
over the past several  years.  At December 31, 2000, R&G  Financial's  servicing
portfolio totaled $6.6 billion and consisted of a total of 110,874 loans.  These
amounts  include R&G Mortgage's  servicing  portfolio  totaling $6.1 billion and
Continental's  servicing portfolio totaling $463.0 million at December 31, 2000.
At December 31, 2000, R&G Financial's  servicing portfolio included $1.1 billion
of  loans  serviced  for the Bank or 16.0%  of the  total  servicing  portfolio.
Substantially all of the mortgage loans in R&G Financial's  servicing  portfolio
are secured by single (one-to-four)  family residences.  Most of R&G Financial's
mortgage  servicing  portfolio is comprised of mortgages  secured by real estate
located in Puerto Rico.

                  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. R&G Mortgage services 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, 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

                                       8
<PAGE>

equal to between  $0.50 and $1.00 per loan.  See "- Regulation - R&G Financial -
Limitations on Transactions with Affiliates."

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




                                       9
<PAGE>




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

<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                           ----------------------------------------------
                                                                               2000              1999             1998
                                                                               ----              ----             ----
                                                                                         (Dollars in Thousands)
<S>                                                                         <C>              <C>              <C>
                Composition of Servicing Portfolio at End of
                Period:
                     Conventional and other mortgage loans(1)               $3,447,383       $3,095,920       $2,105,290
                     FHA/VA loans                                            3,186,676        3,081,590        2,722,508
                                                                            ----------       ----------       ----------
                         Total servicing portfolio(2)                       $6,634,059       $6,177,511       $4,827,798
                                                                            ==========       ==========       ==========

                Activity in the Servicing Portfolio:
                     Beginning servicing portfolio                          $6,177,511       $4,827,798       $3,000,888
                                                                            ----------       ----------       ----------
                     Add:  Loan originations and purchases                   1,280,898        1,610,945        1,237,415
                              Servicing of portfolio loans acquired(3)          31,404          552,235        1,109,825
                     Less:  Sale of servicing rights(4)                       (213,959)         (55,515)              --
                              Run-offs(5)                                     (641,795)        (757,952)        (520,330)
                                                                            ----------       ----------       ----------
                     Ending servicing portfolio                             $6,634,059       $6,177,511       $4,827,798
                                                                            ==========       ==========       ==========

                     Number of loans serviced(6)                               110,874          107,302           95,946
                     Average loan size(6)                                   $       60       $       58       $       50
                     Average servicing fee rate(6)                               0.483%           0.530%           0.510%
</TABLE>

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

(2) At the dates shown,  included $1.1 billion,  $1.1 billion and $754.6 million
    of loans serviced for the Bank, respectively, which constituted 16.0%, 17.3%
    and 15.6% of the  total  servicing  portfolio,  respectively.

(3) Includes $496.5 million related to the servicing  portfolio acquired as part
    of the Company's  acquisition  of  Continental  in October 1999,  and a $1.1
    billion  servicing  portfolio  acquired from another  Puerto Rico  financial
    institution in November 1998 comprised of approximately 32,400 loans.

(4) Includes loans sold,  servicing  released,  by Continental  totaling  $172.9
    million and $55.5 million in 2000 and 1999, respectively.
(5) Run-off  refers  to  regular   amortization   of  loans,   prepayments   and
    foreclosures.  Includes transfers in 1998 of $67.7 million of mortgage loans
    to financial  institutions who acquired certain banks whose loans were being
    serviced by R&G Mortgage.

(6) At December 31, 2000,  R&G Mortgage was servicing  12,411 loans for the Bank
    with  an  average  loan  size of  approximately  $85,000  and at an  average
    servicing  rate of  0.25%.  Amounts  include  late and  other  miscellaneous
    charges.


                                       10
<PAGE>




                  The following table sets forth certain information at December
31,  2000  regarding  the number of, and  aggregate  principal  balance  of, the
mortgage  loans  serviced by R&G Financial for the Bank and for third parties at
various mortgage interest rates.

<TABLE>
<CAPTION>
                                                            At December 31, 2000
                        ---------------------------------------------------------------------------------------------
                              Loans Serviced                   Loans Serviced                    Total Loans
                               for the Bank                  for Third Parties                    Serviced
                        ----------------------------    ----------------------------    -----------------------------
                        Number of      Aggregate        Number of      Aggregate        Number of       Aggregate
                          Loans    Principal Balance     Loans     Principal Balance      Loans     Principal Balance
                          -----    -----------------     -----     -----------------      -----     -----------------
                                                            (Dollars in Thousands)
<S>                      <C>          <C>                <C>          <C>               <C>           <C>
Mortgage Interest Rate
Less than 7.00%             277      $   30,691          10,743      $  746,085          11,020       $  776,776
7.00% - 7.49%             2,352         213,427          20,190       1,285,279          22,542        1,498,706
7.50% - 7.99%             3,247         303,345          24,432       1,498,789          27,679        1,802,134
8.00% - 8.49%             2,275         230,669          14,749         850,621          17,024        1,081,290
8.50% - 8.99%             2,610         205,428          14,061         674,613          16,671          880,041
9.50% - 9.99%               620          38,174           5,145         216,909           5,765          255,083
10.00% - 10.49%             411          18,089           4,261         126,423           4,672          144,512
10.50% - 10.99%             160           6,780           1,557          52,900           1,717           59,680
11.00% or more              279           8,662             990          32,976           1,269           41,638
                            180           5,621           2,337          88,578           2,517           94,199
                         ------       ---------          ------       ---------         -------        ---------
                         12,411      $1,060,886          98,465      $5,573,173         110,876       $6,334,059
                         ======       =========          ======       =========         =======        =========
</TABLE>

                  The amount of principal prepayments on mortgage loans serviced
by R&G Financial was $176.3  million,  $162.6 million and $96.5 million for the
years ended  December 31, 2000,  1999 and 1998  respectively.  This  represented
approximately  2.7%, 2.6% and 2.6% 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 Financial 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 Financial 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, 2000, 1999 and 1998, the monthly
average  amount  of  funds  advanced  by  R&G  Financial  under  such  servicing
agreements was $5.8 million, $5.5 million and $2.3 million , respectively. Funds
advanced by R&G Financial pursuant to these arrangements are generally recovered
by R&G Financial within 30 days.

                  In  connection  with  its  loan  servicing   activities,   R&G
Financial  holds escrow funds for the payment of real estate taxes and insurance
premiums with respect to the mortgage loans it services.

                  At December 31, 2000,  R&G  Financial  held $104.4  million of
such escrow funds,  $91.8 million of which were  deposited in the Bank and $12.6
million of which were deposited with other  financial  institutions.  The escrow
funds  deposited with the Bank lower its overall cost of funds and is a means of
compensating it for processing mortgages checks received by R&G Mortgage,  while
the escrow funds  deposited with other financial  institutions  serve as part of
R&G Financial's  compensating  balances which permit the Company 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


                                       11
<PAGE>

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, 2000,  R&G
Financial was servicing  mortgage  loans with an aggregate  principal  amount of
$680.5 million on a recourse basis. During the last three years, losses incurred
due to recourse servicing have not been significant.

                  R&G  Financial'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.  Although the Company
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  Financial'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 the Company's
mortgage loan  servicing  portfolio may also  decline.  Conversely,  as mortgage
interest  rates  increase,  the  market  value of the  Company'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. 125 and
the treatment of servicing rights, incorporated by reference into Item 8 hereof.


                                       12
<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,
                                          -------------------------------------------------------------------------------------
                                                    2000                          1999                       1998
                                          -------------------------------------------------------------------------------------
                                                        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                             5,336         4.81%            5,334         4.97%          6,276          6.54%
     60-89 days                             1,547         1.40             1,559         1.45           1,545          1.61
     90 days or more                        2,300         2.07             2,109         1.97           1,696          1.77
     --                                     -----        -----             -----        -----           -----         -----
         Total delinquencies(1)             9,183         8.28%            9,002         8.39%          9,517          9.92%
                                            =====         ====             =====         ====           =====          ====

Foreclosures pending(2)                     1,845         1.66%            1,262         1.18%            993          1.03%
                                            =====         ====             =====         ====             ===          ====
</TABLE>


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

(1) Includes at December 31, 2000, an aggregate of $122.2  million of delinquent
    loans serviced by R&G Mortgage for the Bank, or 1.84% of the total servicing
    portfolio and $11.2 million of delinquent  loans held in R&G  Mortgage's own
    portfolio.
(2) At December 31, 2000, the Bank had foreclosures  pending on $38.2 million of
    loans  being  serviced  by R&G  Mortgage,  which  constituted  0.58%  of the
    servicing portfolio.  R&G Mortgage had foreclosures pending on $12.0 million
    of loans it is servicing for its own portfolio at December 31, 2000.

                  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, 2000, 1999 and 1998, R&G Mortgage
held REO with a book value of approximately $1.3 million, $128,000 and $128,000,
respectively.  Sales  of REO  resulted  in gains to R&G  Mortgage  of  $168,000,
$209,000  and $26,000  for the years ended  December  31,  2000,  1999 and 1998,
respectively. There is no liquid secondary market for the sale of R&G Mortgage's
REO.

                  With  respect  to  mortgage  loans  securitized  through  GNMA
programs, the Company 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, 2000.  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, 2000,  1999 and 1998,  total  expenses  related to FHA or VA
loans  foreclosed  amounted to  $235,000,  $35,000 and  $286,000,  respectively.
Although FNMA and FHLMC are obligated to reimburse the Company for principal and
interest  payments  advanced by the Company as a servicer  (except for  recourse
servicing),  the funding of delinquent  payments or the exercise of  foreclosure
rights involves costs to the Company 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.

                                       13
<PAGE>


                   Lending Activities from Banking Operations

                  General.   At  December  31,  2000,  R&G   Financial's   loans
receivable, net totaled $1.6 billion, which represented 46.1% of R&G Financial's
$3.5 billion of total assets.  At December 31, 2000, all but $1.2 million 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,  2000,  all but $1.3  million of R&G  Financial's  first
mortgage  single-family  residential loans consisted of conventional  loans. The
other principal  categories of loans in R&G Financial's  loans  receivable,  net
portfolio are second mortgage residential real estate loans, construction loans,
commercial real estate loans, commercial business loans and consumer loans.


                                       14
<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,
                                           ----------------------------------------------------------------------------------------
                                                       2000                           1999                             1998
                                           ----------------------------------------------------------------------------------------
                                                Amount      Percent           Amount        Percent            Amount       Percent
                                                ------      -------           ------        -------            ------       -------
                                                                              (Dollars in Thousands)
<S>                                          <C>             <C>           <C>             <C>             <C>              <C>
Residential real estate - first
     mortgage                                $ 1,005,371     56.87%        $ 1,099,843     67.75%          $   735,795      66.87%
Residential real estate - second
     mortgage                                     27,419      1.55              13,029      0.80                18,634       1.69
Retail construction                               47,698      2.70              38,950      2.40                23,280       2.12
Commercial construction and land
     acquisition                                 184,906     10.46              78,133      4.81                15,353       1.39
Commercial real estate                           270,459     15.30             204,155     12.57               117,151      10.65
Commercial business                               59,120      3.34              54,231      3.34                46,532       4.23
Consumer loans:
     Loans secured by deposits                    26,926      1.52              20,539      1.27                17,225       1.56
     Real estate secured consumer loans          100,357      5.68              76,944      4.74                85,055       7.73
     Unsecured consumer loans                     45,563      2.58              37,653      2.32                41,381       3.76
                                             -----------     -----         -----------     -----           -----------      -----
         Total loans receivable                1,767,819    100.00%          1,623,477    100.00%            1,100,406     100.00%
                                             -----------    ======         -----------    ======           -----------     ======
Less:
     Allowance for loan losses                   (11,600)                       (8,971)                         (8,055)
     Loans in process                           (125,429)                      (50,622)                        (18,170)
     Deferred loan fees                              909                          (437)                           (166)
     Unearned interest                              (423)                         (440)                           (347)
                                                (136,543)                      (60,471)                        (26,738)
                                             -----------                   -----------                     -----------
     Loans receivable, net(2)                $ 1,631,276                   $ 1,563,007                     $ 1,073,668
                                             ===========                   ===========                     ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                  December 31,
                                             -----------------------------------------------------
                                                     1997                             1996
                                             -----------------------------------------------------
                                               Amount     Percent            Amount         Percent
<S>                                          <C>           <C>             <C>               <C>
Residential real  estate - first
     mortgage(1)                             $ 476,729     61.25%          $ 370,876         60.75%
Residential real estate - second
     mortgage(1)                                17,831      2.29              15,757          2.58
Retail construction                             13,367      1.72               5,351          0.88
Commercial construction and land
     acquisition                                 5,785      0.74               5,700          0.93
Commercial real estate                          81,722     10.50              69,514         11.39
Commercial business                             39,128      5.03              31,063          5.09
Consumer loans:
     Loans secured by deposits                  12,472      1.60               9,409          1.54
     Real estate secured consumer loans         81,252     10.44              42,893          7.03
     Unsecured consumer loans                   50,103      6.43              59,864          9.81
                                             ---------    ------           ---------        ------
         Total loans receivable                778,389    100.00%            610,427        100.00%
                                             ---------    ======           ---------        ======
Less:
     Allowance for loan losses                  (6,772)                       (3,332)
     Loans in process                           (6,218)                       (2,430)
     Deferred loan fees                            172                            41
     Unearned interest                            (512)                        ( 955)
                                             ---------                     ---------
                                               (13,330)                       (6,676)
                                             ---------                     ---------
     Loans receivable, net(2)                $ 765,059                     $ 603,751
                                             =========                     =========
</TABLE>


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

(1) Includes $33.9 million and $49.7 million of residential  real estate - first
    mortgage loans which are held by R&G Mortgage at December 31, 1997 and 1996,
    respectively.
(2) Does not  include  mortgage  loans  held for  sale of $95.7  million,  $77.3
    million,  $117.1  million,  $46.9  million and $54.5 million at December 31,
    2000, 1999, 1998, 1997 and 1996, respectively.

                                       15
<PAGE>

                  Contractual  Principal  Repayments  and  Interest  Rates.  The
following  table sets forth certain  information  at December 31, 2000 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      Due 5 or more
                                                             years after     years after
                                              Due 1 year     December 31,    December 31,
                                               or less          2000            2000          Total(1)
                                             ----------      ----------      ----------       --------
                                                                    (In Thousands)
<S>                                          <C>             <C>             <C>             <C>
Residential real estate                      $      122      $    3,078      $1,029,590      $1,032,790
Retail construction                              47,698              --              --          47,698
Commercial real estate(2)                       100,187         235,946         119,232         455,365
Commercial business                              33,130          24,378           1,612          59,120
Consumer:
     Loans on savings                            15,245          11,174             507          26,926
     Real estate secured consumer loans           1,004           6,609          92,744         100,357
     Unsecured consumer loans                    20,765          17,366           7,432          45,563
                                             ----------      ----------      ----------      ----------
Total(3)                                     $  218,151      $  298,551      $1,251,117      $1,767,819
                                             ==========      ==========      ==========      ==========
--------
</TABLE>


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

(1) Amounts have not been reduced for the  allowance  for loan losses,  loans in
    process, deferred loan fees or unearned interest.
(2) Includes  $184.9  million of commercial  construction  and land  acquisition
    loans.
(3) Does not include mortgage loans held for sale.


                                       16
<PAGE>




                  The  following  table sets  forth the  dollar  amount of total
loans due  after one year from  December  31,  2000,  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.........................    $1,032,790       $     --         $1,032,790
Retail Construction.............................        47,698             --             47,698
Commercial real estate(1).......................       113,343        342,022            455,365
Commercial business.............................        34,605         24,515             59,120
Consumer:
     Loans on savings...........................        26,926             --             26,926
     Real estate secured consumer loans.........       100,357             --            100,357
     Unsecured consumer loans...................        45,563             --             45,563
                                                    ----------        -------          ---------
Total...........................................    $1,401,282       $366,537         $1,767,819
                                                    ==========        =======          =========
</TABLE>

---------------------
(1) Includes  $184.9  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.


                                       17
<PAGE>



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

<TABLE>
<CAPTION>
                                                                                                 Year Ended December 31,
                                                                                        --------------------------------------
                                                                                           2000           1999           1998
                                                                                           ----           ----           ----
                                                                                                 (Dollars in Thousands)
<S>                                                                                     <C>            <C>            <C>
Loan originations:
Loans originated by R&G Mortgage:
     Residential mortgages................................................              $ 378,398      $ 378,740      $385,416
     Commercial mortgages.................................................                     --             --           265
     Residential construction.............................................                 29,063         26,146        16,766
     Consumer loans.......................................................                 43,943         32,219        48,155
         Total loans originated by R&G Mortgage...........................                451,404        437,105       450,602
Other loans originated:
     Commercial real estate...............................................                150,329        175,803        54,426
     Commercial business..................................................                 48,060         36,222        26,191
     Construction and development.........................................                127,473         54,070        11,365
Consumer loans:
     Loans on deposit.....................................................                 45,474         34,758        27,172
     Real estate secured consumer loans...................................                     --             --            --
     Unsecured consumer loans.............................................                 32,517         29,631         9,970
         Total other loans originated.....................................                403,853        330,484       129,124
     Loans purchased......................................................                128,824        279,489       175,735
         Total loans originated and purchased.............................                984,081      1,047,078       755,461
     Loans sold...........................................................               (105,653)      (133,731)     (282,005)
     Loan principal reductions............................................               (329,591)      (253,534)     (142,560)
     Net increase before other items, net.................................                548,837        659,813       330,896
     Loans securitized and transferred to mortgage-backed securities......               (410,453)      (106,237)           --
                                                                                         --------      ---------     ---------
     Net increase in loan portfolio.......................................               $138,384      $ 553,576      $330,896
                                                                                         ========      =========      ========
</TABLE>



                  R&G   Financial,   through  the  Bank,   originates  for  both
investment and sale mortgage loans secured by residential  real estate  (secured
by both  first and second  mortgage  liens) as well as  construction  loans (for
residential  real estate),  commercial  real estate loans,  commercial  business
loans and consumer loans.

                  R&G Mortgage  assists 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.  During the years ended December 31, 2000, 1999 and 1998,
R&G Mortgage received $8.1 million, $7.5 million and $7.5 million, respectively,
of loan  origination  fees with respect to loans  originated  by R&G Mortgage on
behalf  of  the  Bank.  These  fees  are  eliminated  in  consolidation  in  R&G
Financial's Consolidated Financial Statements. See "- Regulation - R&G Financial
- Limitations on Transactions with Affiliates."

                  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

                                       18
<PAGE>

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 $5.0 million,  and the Executive  Committee of the Board
of Directors is authorized  to approve all loans  exceeding  $5.0  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, 2000, 1999 and 1998, the Bank purchased $128.8 million,
$279.5 million and $175.7 million of loans, respectively.

                  During the years ended December 31, 2000, 1999 and 1998, loans
sold from banking  operations  were $105.7  million,  $133.7  million and $282.0
million.  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.

                  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.  R&G  Mortgage  services  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,  the
Bank  processes  payments on all loans serviced by R&G Mortgage on behalf of the
Bank. Finally, 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."

                  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, 2000, $1.0 billion or 57.9% of R&G Financial's total loans held for
investment  consisted of such loans, of which all but $1.3 million  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, 2000,  $27.4 million or
1.6% of R&G  Financial's  total loans held for  investment  consisted  of second
mortgage loans on  single-family  residential  properties.  The Bank offers such
second  mortgage  loans in  amounts up to  $125,000  for a term not to exceed 15
years. The loan-to-value  ratio of second mortgage loans generally is limited to
75% of the property's appraised value (including the first mortgage).

                                       19
<PAGE>

                  Construction  Loans.  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, 2000, retail
construction ("spot") loans amounted to $47.7 million or 2.7% of R&G Financial's
total  loans  held  for  investment,  while  commercial  construction  and  land
acquisition  loans  amounted to $184.9  million or 10.5% of total loans held for
investment.

                  The Bank offers "spot" 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,  2000,  the  Bank's  construction  loan  portfolio  included  432
construction/permanent  loans  with an  aggregate  principal  balance  of  $47.7
million.

                  The Bank also originates  construction  loans to developers to
develop  single  family  residential  properties.   The  Bank  has  organized  a
Construction Loan Department to work primarily with real estate  developers.  At
December 31, 2000, the Bank had 13 residential construction loans outstanding to
develop  single-family  residences with an aggregate  principal balance of $36.0
million;  commitments for future funding approximate $97.4 million. In addition,
the  Bank  had 5 loans  to  develop  commercial  properties  with  an  aggregate
principal  balance of $6.8 million;  commitments for future fnding  approximates
$9.8  million.  All loans are  performing  in  accordance  with their  terms at
December 31, 2000.

                  In addition to the  foregoing,  at December 31, 2000, the Bank
had 31 land acquisition loans with outstanding  balances ranging from $29,000 to
$4.4 million,  and an aggregate balance of $24.9 million,  the majority of which
were made in connection with projects to construct single-family residences. The
Bank and another  financial  institution,  which makes the interim  construction
loans, 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 has also made a working  capital/pre-development  loan
with an  outstanding  principal  balance of $10.0  million at December 31, 2000,
which is secured by land.

                  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, 2000,
$487,000  of  the  Bank's   retail   construction   loans  were   classified  as
non-performing.  As of such date, no commercial construction or land acquisition
loans were non-performing.

                                       20
<PAGE>


                  Commercial  Real  Estate  Loans.   The  Bank  also  originates
mortgage loans secured by commercial real estate.  At December 31, 2000,  $270.5
million or 15.3% 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  1,084 loans with an average  principal  balance of
$250,000.  At December 31, 2000,  $11.9  million of the Bank'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  1.20 or  more.  It is  also  the  Bank's  general  policy  to seek
additional  protection to mitigate any weaknesses identified in the underwriting
process.  Additional  coverage  may  be  provided  through  mortgage  insurance,
secondary  collateral  and/or  personal  guarantees  from the  principals of the
borrower.

                  Commercial   real  estate   lending   entails   different  and
significant  risks when compared to  single-family  residential  lending because
such loans typically involve large loan balances to single borrowers and because
the payment  experience on such loans is typically  dependent on the  successful
operation  of the project or the  borrower's  business.  These risks can also be
significantly  affected by supply and demand  conditions in the local market for
apartments,  offices, warehouses or other commercial space. The Bank attempts to
minimize  its risk  exposure by limiting  the extent of its  commercial  lending
generally.  In  addition,  the  Bank  imposes  stringent  loan-to-value  ratios,
requires  conservative  debt  coverage  ratios,  and  continually  monitors  the
operation and physical condition of the collateral.  Although the Bank has begun
to increase its emphasis on commercial real estate lending,  management does not
currently  anticipate  that its portfolio of  commercial  real estate loans will
grow significantly as a percentage of the total loan portfolio.

                  Commercial Business Loans. The Bank offers commercial business
loans,  including  working  capital  lines of  credit,  inventory  and  accounts
receivable loans,  equipment financing (including equipment leases), term loans,
insurance   premiums   loans  and  loans   guaranteed  by  the  Small   Business
Administration.  Depending on the collateral  pledged to secure the extension of
credit,  maximum loan to value ratios are 75% or less, with exceptions permitted
to a maximum  of 80%.  Loan  terms may vary from one to 15 years.  The  interest
rates on such loans are generally variable and are indexed to a designated prime
rate, plus a margin.  The Bank also generally  obtains personal  guarantees from
the principals of the borrowers. At December 31, 2000, commercial business loans
amounted to $59.1 million or 3.3% 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  originates  real  estate  secured
consumer  loans.  Such loans  generally  have shorter terms and higher  interest
rates than other mortgage loans. At December 31, 2000, $172.8 million or 9.8% of
the Bank'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

                                       21
<PAGE>

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 $26.9 million at December 31, 2000.  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,  including loans where another  institution  holds the
first mortgage. At December 31, 2000, real estate secured consumer loans totaled
$100.4  million.  At December 31, 2000,  credit card  receivables  totaled $13.8
million.

                  Consumer  loans   generally  have  shorter  terms  and  higher
interest rates than mortgage  loans but generally  involve more credit risk than
mortgage loans because of the type and nature of the collateral  and, in certain
cases, the absence of collateral. In addition,  consumer lending collections are
dependent on the borrower's  continuing financial  stability,  and thus 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, 2000, $1.2 million of consumer loans were
classified as non-performing.

                  Asset  Quality.  When a  borrower  fails  to  make a  required
payment on a loan,  R&G Financial  attempts to cure the deficiency by contacting
the borrower and seeking  payment.  Contacts are generally made between the 10th
and 15th day after a  payment  is due.  In most  cases,  deficiencies  are cured
promptly.  If a delinquency extends beyond 15 days, the loan and payment history
is  reviewed  and  efforts  are made to collect  the loan.  While R&G  Financial
generally  prefers to work with  borrowers  to resolve such  problems,  when the
account becomes 90 days delinquent in the case of mortgage loans,  R&G Financial
does institute foreclosure or other proceedings,  as necessary,  to minimize any
potential  loss.  In the case of  consumer  loans,  the 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"),  which  provides  guidance on
determining the balance sheet treatment of foreclosed assets in annual financial
statements,  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.

                                       22
<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,
                                                            -------------------------------------------------------
                                                            2000         1999        1998        1997          1996
                                                            ----         ----        ----        ----          ----
                                                                           (Dollars in Thousands)
<S>                                                        <C>          <C>         <C>         <C>          <C>
Non-accruing loans:
     Residential real estate(1)...................         $79,234      $47,413     $32,973     $21,619      $12,991
     Residential construction.....................             487          478         441         368          363
     Commercial real estate.......................          11,881        9,005       6,463       6,000        3,141
     Commercial business..........................           1,414        1,255       3,224         765          823
     Consumer unsecured...........................           1,186          802       1,358       1,217          686
     Other........................................              --           61          67         117          726
                                                          --------      -------     -------     -------   ----------
         Total....................................          94,202       59,014      44,526      30,086       18,730
                                                          --------      -------     -------     -------   ----------
Accruing loans greater than 90 days delinquent:
     Residential real estate......................              --           --          --          --           --
     Residential construction.....................              --           --          --          --           --
     Commercial real estate.......................              --           --          --          --           --
     Commercial business..........................             420           63          61          54           22
     Consumer.....................................             360          274         357         172          134
                                                          --------      -------     -------     -------   ----------
         Total accruing loans greater than
              90 days delinquent..................

                                                               780          337         418         226          156
                                                          --------      -------     -------     -------   ----------
         Total non-performing loans...............          94,982       59,351      44,944      30,312       18,886
                                                          --------      -------     -------     -------   ----------
Real estate owned, net of reserves................           9,056        5,852       4,041       1,715          834
Other repossessed assets..........................             583          466         237          85           31
                                                          --------      -------     -------     -------   ----------
                                                             9,639        6,318       4,278       1,800          865
                                                          ========      =======     =======     =======      =======
Total non-performing assets.......................        $104,621      $65,669     $49,222     $32,112      $19,751
         Total non-performing loans as a
              percentage of total loans (2).......            5.38%        3.66%       4.08%       3.89%        3.09%
                                                          ========      =======     =======     =======      =======
         Total non-performing assets as a
              percentage of total assets..........            2.96%        2.26%       2.41%       2.12%        1.90%
                                                          ========      =======     =======     =======      =======
</TABLE>

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

(1) Includes $6.2 million,  $6.1  million,  $5.3 million,  $2.6 million and $1.1
    million  consumer  loans  held by the  Bank  secured  by  first  and  second
    mortgages on residential  real estate at December 31, 2000, 1999, 1998, 1997
    and 1996,  respectively.  Also includes  $17.6 million,  $5.9 million,  $4.3
    million and $2.8  million  residential  real estate  loans  secured by first
    mortgages  held by R&G Mortgage at December 31, 2000,  1999,  1998 and 1997,
    respectively.

(2)  While the ratio of non-performing loans to total loans increased from 3.66%
     to 5.38% from  December 31, 1999 to December 31, 2000,  the increase in the
     ratio was made larger than it would  otherwise have been due to significant
     loan  securitizations  during the last two quarters of 2000,  which reduced
     the amount of loans  considered in the  calculation  of the ratio.  Without
     giving effect to loan securitizations,  during the years ended December 31,
     2000 and 1999, the ratio of non-performing  loans to total loans would have
     been 4.37% and 3.44%, respectively.


                  While  the  level  of  total  non-performing   assets  of  R&G
Financial has increased on an absolute basis during the periods presented,  from
$19.8 million at December 31, 1996 to $104.6  million at December 31, 2000,  R&G
Financial's  net loans  receivable  portfolio  has increased by 170% during this
period, from $603.8 million at December 31, 1996 to $1.6 billion at December 31,
2000.


                                       23
<PAGE>


                  While  non-performing  loans  amounted  to  $95.0  million  at
December 31,  2000,  as compared to $59.4  million at December  31, 1999,  $31.8
million or 89.3% of such  increase  consisted  of  residential  mortgage  loans.
Because  of the  nature  of  the  collateral,  R&G  Financial  has  historically
recognized  a  low  level  of  loan  charge-offs.   R&G  Financial's   aggregate
charge-offs  amounted to 0.17%  during  2000,  as compared to 0.25% during 1999.
Although loan delinquencies have historically been higher in Puerto Rico than in
the United States,  loan  charge-offs have  historically  been lower than in the
United States.

                  Non-performing residential loans increased by $31.8 million or
67.1% from  December 31, 1999 to December 31, 2000.  The average loan balance on
non-performing  mortgage  loans  amounted to $59,000 at December 31, 2000. As of
such date, 808 loans with an aggregate  balance of $53.1 million  (including 134
consumer loans secured by real estate with an aggregate balance of $2.9 million)
were in the process of foreclosure. The total delinquency ratio (including loans
past due less than 90 days) on  residential  mortgages  of the  Bank,  excluding
consumer loans secured by real estate,  increased from 7.11% in 1999 to 8.55% in
2000. 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 31.9% from $9.0 at December 31, 1999 to $11.9 million at December 31,
2000.  The  number of loans  delinquent  over 90 days  amounted  to 92 loans at
December  31,  2000,   with  an  average   balance  of  $129,000.   The  largest
non-performing commercial real estate loan as of December 31, 2000 had a balance
of $564,000.

                  Non-performing  commercial business loans consist of 65 loans.
Such loans include 12 loans with an aggregate  balance of $451,000 which are 90%
guaranteed by the Small Business Administration,  47 commercial leases amounting
to $788,000 and 6 other commercial  business loans with an aggregate  balance of
$175,000.  These loans have a combined average loan size of $22,000. The largest
non-performing  commercial  business loan as of December 31, 2000 had a $199,000
balance.

                  At  December   31,   2000,   R&G   Financial's   five  largest
loans-to-one  borrower and their  related  entities  amounted to $21.7  million,
$19.5 million, $18.7 million, $15.9 million and $14.3 million. All of such loans
concentrations were performing at December 31, 2000.



                                       24
<PAGE>


                  At December  31,  2000,  R&G  Financial's  allowance  for loan
losses totaled $11.6 million, which represented a $2.6 million or 29.3% increase
from the level  maintained  at December  31, 1999.  At December  31,  2000,  R&G
Financial's  allowance  represented   approximately  0.66%  of  the  total  loan
portfolio  and 12.21% of total  non-performing  loans,  as compared to 0.55% and
15.11% at December  31,  1999.  The  increase in the  allowance  for loan losses
reflected  the  increase  in  R&G   Financial's   commercial   real  estate  and
construction   loan   portfolio  as  well  as  the  increase  in  R&G  Financial
non-performing loans during the year.

                  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.


                                       25
<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,
                                                                           -------------------------------------------------------
                                                                           2000       1999        1998          1997          1996
                                                                           ----       ----        ----          ----          ----
                                                                                                (Dollars in Thousands)

<S>                                                                     <C>         <C>         <C>           <C>           <C>
Balance at beginning of period ......................................   $ 8,971     $ 8,055     $ 6,772       $ 3,332       $ 3,510
                                                                        -------     -------     -------       -------       -------
Charge-offs:
     Residential real estate ........................................        38          17          73            13            45
     Construction ...................................................        --          --          --            --            50
     Commercial real estate .........................................       468         353          --           170            --
     Commercial business ............................................     1,539       1,548       1,485           480           110
     Consumer .......................................................     1,940       2,518       4,455         3,953         1,922
     Other ..........................................................        --           4          --           761         2,535
                                                                        -------     -------     -------       -------       -------
         Total charge-offs ..........................................     3,985       4,440       6,013         5,377         4,662
                                                                        -------     -------     -------       -------       -------
Recoveries:
     Residential real estate ........................................        --          --          --            21            --
     Commercial real estate .........................................        80          69          --            50            --
     Commercial business ............................................       381         332          20            32            31
     Consumer .......................................................       402         429         312           344           195
     Other ..........................................................        --          --          --         2,000            --
                                                                        -------     -------     -------       -------       -------
         Total recoveries ...........................................       863         830         332         2,447           226
                                                                        -------     -------     -------       -------       -------
Net charge-offs .....................................................     3,122       3,610       5,681         2,930         4,436
                                                                        -------     -------     -------       -------       -------
Allowance for loan losses acquired
     from Fajardo Federal............................................        --          --         364            --            --

Provision for losses on loans .......................................     5,751       4,525       6,600         6,370         4,258
                                                                        -------     -------     -------       -------       -------
Balance at end of period ............................................   $11,600     $ 8,971     $ 8,055       $ 6,772       $ 3,332
                                                                        =======     =======     =======       =======       =======
Allowance for loan losses as a percent of total loans outstanding ...
                                                                           0.66%       0.55%        .74%          .87%          .55%
                                                                        =======     =======     =======       =======       =======
Allowance for loan losses as a percent of non-
performing loans.....................................................     12.21%      15.11%      17.92%        22.34%        17.64%
                                                                        =======     =======     =======       =======       =======
Ratio of net charge-offs to average loans
     outstanding.....................................................      0.17%        .25%        .55%         0.40%         0.75%
                                                                        =======     =======     =======       =======       =======
</TABLE>



                                       26
<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,
                                    ------------------------------------------------------------------------------------
                                             2000                             1999                         1998
                                    --------------------------      ----------------------       -----------------------
                                                    Percent of                  Percent of                   Percent of
                                                  Loans in Each               Loans in Each                Loans in 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.......      $ 1,278          11.02%         $ 1,419       15.82%         $ 1,272          15.79%
Construction .................          432           3.72              186        2.07               46           0.57
Commercial real estate........        4,880          42.07            3,258       36.32            2,655          32.96
Commercial business ..........        1,321          11.39            1,063       11.85            1,033          12.82
Consumer .....................        3,689          31.80            3,045       33.94            3,049          37.86
                                    -------         ------          -------      ------          -------         ------
Total ........................      $11,600         100.00%         $ 8,971      100.00%         $ 8,055         100.00%
                                    =======         ======          =======      ======          =======         ======
</TABLE>

<TABLE>
<CAPTION>
                                                                       December 31,
                                             ------------------------------------------------------------
                                                        1997                              1996
                                             --------------------------        --------------------------
                                                            Percent of                        Percent of
                                                          Loans in Each                     Loans in Each
                                                           Category to                       Category to
                                             Amount        Total Loans         Amount        Total Loans
                                             ------        -----------         ------        -----------
                                                              (Dollars in Thousands)
<S>                                           <C>           <C>              <C>               <C>
Residential real estate.................        $593           8.76%           $810              24.31%
Construction............................           7           0.10              51               1.53
Commercial real estate..................       1,386          20.47             489              14.68
Commercial business.....................         806          11.90             109               3.27
Consumer................................       3,980          58.77           1,873              56.21
                                              ------         ------          ------             ------
Total...................................      $6,772         100.00%         $3,332             100.00%
                                              ======         ======          ======             ======

</TABLE>



                                       27
<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,  2000,  R&G  Mortgage  held GNMA
mortgage-backed  securities  with  a fair  value  of  $12.0  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,  as of such date,
R&G Mortgage held GNMA and FHLMC mortgage-backed securities with a fair value of
$408.0  million  and  $11.7  million,  respectively,  which  are  classified  as
available  for sale.  At December 31, 2000,  R&G  Mortgage's  CMO  interest-only
residuals and interest only strips,  which are classified as available for sale,
had an amortized cost of $8.5 million and a fair value of $8.5 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,  2000,  the  Bank's   securities   portfolio
consisted of $23.5 million of  securities  held for  investments,  consisting of
$10.7  million of tax-free  mortgage-backed  securities,  $9.1  million of other
mortgage  backed  securities,   and  $1.0  million  of  Puerto  Rico  Government
obligations and other Puerto Rico securities. In addition, at December 31, 2000,
the Bank had a securities portfolio classified as available for sale with a fair
value of $1.0 billion,  consisting of $90.9 million of tax-free  mortgage-backed
securities,  $527.9 million of FHLMC and FNMA mortgage-backed securities,  $46.0
million of FHLB stock,  $14.7 million of CMOs  certificates,  CMO  interest-only
residuals and interest only strips,  $5.2 million corporate debt obligations and
$317.1 million of U.S.  Government agency  securities,  the interest on which is
tax-exempt to the Company.

                  The  Bank's  Treasury  Department  from time to time  conducts
certain  trading   activities  mainly  through   investments  in  U.S.  Treasury
securities. However, at December 31, 2000 no securities for trading were held by
the Bank.

                  At  December  31,  2000,   $380.9  million  or  24.5%  of  R&G
Financial's  mortgage-backed  and investment  securities  were pledged to secure
various obligations of R&G Financial (excluding repurchase agreements).


                                       28
<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,
                                                  ----------------------------------------------------------------------------------
                                                                   2000                                       1999
                                                  ---------------------------------------     -------------------------------------
                                                                                 Weighted                                 Weighted
                                                    Carrying                      Average       Carrying                   Average
                                                     Value     Market Value       Yield          Value     Market Value     Yield
                                                  -----------  ------------    ----------     ----------   ------------    --------
                                                                                 (Dollars in Thousands)
Mortgage-backed securities:
GNMA
<S>                                                  <C>          <C>           <C>            <C>          <C>              <C>
     Due within one year.......................      $    2       $     3       10.00%         $    --      $    --             --%
     Due from one-five years...................          --            --          --               15           16          10.00
     Due from five-ten years...................       8,865         8,605        5.79           10,660       10,391           5.79
     Due over ten years........................       1,845         1,766        6.17            2,133        2,074           6.17
FNMA
     Due within one year.......................          --            --          --               --           --             --
     Due from one-five years...................          --            --          --               --           --             --
     Due from five-ten years...................          --            --          --               --           --             --
     Due over ten years........................       8,947         9,145        7.08           10,252       10,644           7.09
FHLMC
     Due within one year.......................          --            --          --               --           --             --
     Due from one-five years...................          --            --          --               --           --             --
     Due from five-ten years...................          --            --          --               --           --             --
     Due over ten years........................         160           154        6.57              189          180           5.58
Investment securities:
Puerto Rico Government
         obligations
         Due within one year...................          --            --          --               --           --             --
         Due from one-five years...............       1,948         1,948        5.88            1,280        1,272           5.85
         Due from five-ten years...............       1,755         1,755        5.98            4,158        4,132           5.95
         Due over ten years....................          --            --          --               --           --             --
         U.S. Treasury and Government
              Agency
         Due within one year...................          --            --          --               --           --             --
                                                    -------       -------                      -------      -------
         Total securities held for
              investment.......................     $23,522       $23,376        6.34%         $28,687      $28,709           6.31%
                                                    =======       =======        ====          =======      =======           ====
</TABLE>



                                       29
<PAGE>

<TABLE>
<CAPTION>
                                                            December 31,
                                             ----------------------------------------
                                                               1998
                                             ----------------------------------------
                                             Carrying                      Weighted
                                               Value   Market Value     Average Yield
                                               -----   ------------     -------------
                                                    (Dollars in Thousands)
<S>                                          <C>          <C>            <C>
Mortgage-backed securities:
GNMA
     Due within one year ..............      $    --      $    --            --%
     Due from one-five years ..........           27           29         10.00
     Due from five-ten years ..........       13,025       12,752          5.79
     Due over ten years ...............        2,360        2,306          6.17
FNMA
     Due within one year ..............           --           --            --
     Due from one-five years ..........           --           --            --
     Due from five-ten years ..........           --           --            --
     Due over ten years ...............       12,608       12,944          7.13
FHLMC
     Due within one year ..............           --           --            --
     Due from one-five years ..........           --           --            --
     Due from five-ten years ..........           --           --            --
     Due over ten years ...............          236          230          5.99
Investment securities:
     Puerto Rico Government obligations
        Due within one year ...........           --           --            --
        Due from one-five years .......           --           --            --
        Due from five-ten years .......        5,945        5,979          5.80
        Due over ten years ............           --           --            --
     U.S. Treasury and Government
     Agency
        Due within one year ...........          399          400          5.40
        Due from one-five years .......           --           --            --
        Due from five-ten years .......           --           --            --
        Due over ten years ............           --           --            --
                                            --------     -------
         Total securities held for
              investment ..............     $ 34,600     $34,640           6.31%
                                            ========     =======           ====
</TABLE>


                                       30
<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,
                                                                --------------------------------------------------------------------
                                                                                 2000                             2000
                                                                --------------------------------------------------------------------
                                                                                           Weighted                         Weighted
                                                                 Amortized                  Average    Amortized            Average
                                                                   Cost       Fair Value     Yield       Cost    Fair Value  Yield
                                                                   ----       ----------     -----       ----    ----------  -----
                                                                                          (Dollars in Thousands)
<S>                                                            <C>           <C>              <C>     <C>         <C>        <C>
Mortgage-backed securities available for sale:
     GNMA
         Due within one year ..............................    $       --    $       --         --%   $     --    $     --     --%
         Due from one-five years ..........................            26            26       8.50          --          --      --
         Due from five-ten years ..........................        10,492        10,419       5.68          --          --      --
         Due over ten years ...............................       584,419       576,869       6.62     570,749     563,533    6.62
     FNMA mortgage-backed securities
         Due within one year ..............................            --            --         --          --          --      --
         Due from one-five years ..........................            --            --         --          --          --      --
         Due from five-ten years ..........................           634           634       6.50         741         719    6.50
         Due over ten years ...............................        98,779        99,968       7.15     110,855     109,705    7.15
     FHLMC mortgage-backed securities
         Due within one year ..............................            13            13       9.00          --          --      --
         Due from one-five years ..........................           132           130       8.94          99          99    8.79
         Due from five-ten years ..........................         1,587         1,587       6.61       1,891       1,841    6.77
         Due over ten years ...............................       434,865       437,227       7.26      14,586      14,036    6.87
     CMO residuals and other mortgage-backed securities (1)
         Due within one year ..............................            --            --         --          --          --      --
         Due from one-five years ..........................        10,710        10,190      12.00       8,886       8,886   12.00
         Due from five-ten years ..........................            --            --         --          --          --      --
         Due over ten years ...............................        10,688        13,037       8.08      11,823      13,886    8.07
Investment securities available for sale(1)
     U.S. Treasury
         Due within one year ..............................            --            --         --       4,998       4,945    4.50
         Due from one-five years ..........................            --            --         --          --          --      --
         Due from five-ten years ..........................            --            --         --          --          --      --
         Due over ten years ...............................            --            --         --          --          --      --
     U.S. Government & Agencies ...........................            --            --         --          --          --      --
         Due within one year ..............................         8,500         8,446       5.48          --          --      --
         Due from one-five years ..........................       192,763       193,298       6.26     133,956     130,950    6.19
         Due from five-ten years ..........................       114,881       115,352       7.30      92,237      89,444    7.28
         Due over ten years ...............................            --            --         --          --          --      --
     Corporate debt obligations
         Due within one year ..............................            --            --         --          --          --      --
         Due from one-five years ..........................            --            --         --          --          --      --
         Due from five-ten years ..........................         5,097         5,202       6.80          --          --      --
         Due over ten years ...............................            --            --         --          --          --      --
     FHLB stock ...........................................        45,973        45,973       7.30      32,825      32,825    6.75
                                                               ----------    ----------               --------    --------
                                                               $1,519,559    $1,518,371       6.90%   $983,646    $970,869    6.75%
                                                               ==========    ==========       ====    ========    ========    ====
Securities held for trading:
     GNMA certificates ....................................    $   11,630    $   12,038       7.28%   $ 43,303    $ 43,564    5.27%
     CMO certificates .....................................            --            --         --          --          --      --
     CMO residuals ........................................            --            --         --          --          --      --
     U.S. Treasury Bills ..................................            --            --         --          --          --      --
                                                               ----------    ----------               --------    --------
                                                               $   11,630    $   12,038       7.28%   $ 43,303    $ 43,564    5.27%
                                                               ==========    ==========       ====    ========    ========    ====
</TABLE>


                          (Footnotes on following page)


                                       31
<PAGE>


<TABLE>
<CAPTION>
                                                             December 31,
                                                  -------------------------------------
                                                                 1998
                                                  -------------------------------------
                                                                             Weighted
                                                   Amortized                  Average
                                                     Cost       Fair Value     Yield
                                                     ----       ----------     -----
                                                         (Dollars in Thousands)
<S>                                               <C>         <C>            <C>
Mortgage-backed securities available for sale:
     GNMA
         Due within one year .................    $     --    $     --          --%
         Due from one-five years .............          --          --          --
         Due from five-ten years .............          --          --          --
         Due over ten years ..................      55,159      55,159        6.41
     FNMA mortgage-backed securities
         Due within one year .................          --          --          --
         Due from one-five years .............          --          --          --
         Due from five-ten years .............          --          --          --
         Due over ten years ..................       8,092       8,161        6.96
     FHLMC mortgage-backed securities
         Due within one year .................          --          --          --
         Due from one-five years .............          89          91        8.83
         Due from five-ten years .............         240         244        8.99
         Due over ten years ..................      21,369      21,724        6.86
     CMO residuals and other mortgage-backed
         securities (1)
         Due within one year .................          --          --          --
         Due from one-five years .............          --          --          --
         Due from five-ten years .............          --          --          --
         Due over ten years ..................       7,845       9,661       8.125
Investment securities available for sale(1)
     U.S. Treasury
         Due within one year .................          --          --          --
         Due from one-five years .............       4,995       4,991        4.50
         Due from five-ten years .............          --          --          --
         Due over ten years ..................          --          --          --
     U.S. Government & Agencies
         Due within one year .................          --          --          --
         Due from one-five years .............      38,100      38,106        5.64
         Due from five-ten years .............       5,010       5,000        6.72
         Due over ten years ..................          --          --          --
     FHLB stock ..............................      11,405      11,405        7.21
                                                  --------    --------
                                                  $152,304    $154,542        6.41%
                                                  ========    ========        ====
Securities held for trading:
     GNMA certificates .......................    $427,915    $443,399        6.69%
     CMO certificates ........................          --          --          --
     CMO residuals ...........................       7,134       7,147        8.00
     U.S. Treasury Bills .....................          --          --          --
                                                  --------    --------
                                                  $435,049    $450,546        6.71%
                                                  ========    ========        ====
</TABLE>

                          (Footnotes on following page)


                                       32
<PAGE>


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

(1) Comprised  of  subordinated  tranches  and  residuals  from the Bank's  1992
    Grantor Trust  residuals  purchased  from the Bank in 1995 from its 1993 CMO
    Grantor  Trust,  residuals  from R&G  Mortgage's  CMO  Grantor  Trusts,  and
    interest-only  strips  resulting from sales of loans by R&G Mortgage and the
    Bank.

                  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 $252,700
($275,000  effective  January 1, 2001.) To accommodate  larger-sized  loans, and
loans that, for other reasons,  do not conform to the agency programs,  a number
of private  institutions  have established  their own home-loan  origination and
securitization programs.

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

                  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


                                       33
<PAGE>

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.

                  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,  2000,  the Bank's  CMOs,  and
interest-only securities and residuals, which had a fair value of $14.7 million,
were designated as "high-risk  mortgage  securities" and classified as available
for sale.

                                Sources of Funds

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

                  Deposits.  Deposits are the major  sources of the Bank's funds
for lending and other investment purposes.  Consumer and commercial deposits are
attracted  principally  from within the Bank's  primary  market area through the
offering of a broad selection of deposit  instruments,  including passbook,  NOW
and Super NOW,  checking and  commercial  checking and  certificates  of deposit
ranging in terms from 7 days to 10 years.  Included among these deposit products
are $749.1 million of certificates of deposit with balances of $100,000 or more,
which  amounted to 44.7%of the Bank's  total  deposits  at  December  31,  2000.
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 obtain funds through brokers on a regular basis,
although at December 31, 2000 it held $184.3  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.


                                       34
<PAGE>



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

<TABLE>
<CAPTION>
                                                               December 31,
                             ------------------------------------------------------------------------------
                                          2000                     1999                     1998
                             --------------------------   ------------------------ ------------------------
                                 Average   Average Rate   Average    Average Rate   Average   Average Rate
                                 Balance       Paid       Balance        Paid       Balance       Paid
                                 -------       ----       -------        ----       -------       ----
                                                         (Dollars in Thousands)
<S>                           <C>              <C>      <C>              <C>       <C>            <C>
Passbook .................    $  113,660       3.73%    $  112,107       3.74%     $ 88,754       3.75%
NOW and Super NOW accounts       134,573       3.93        126,300       3.95        99,336       3.93
Checking .................        40,455         --         41,128         --        39,052         --
Commercial checking(1) ...       110,937         --        111,146         --        77,329         --
Certificates of deposit ..     1,106,294       6.43        762,856       5.83       522,016       5.98
                              ----------                ----------                 --------
     Total deposits ......    $1,505,919       5.36%    $1,153,537       4.65%     $826,487       4.65%
                              ==========       ====     ==========       ====      ========       ====
</TABLE>

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

(1) Includes $91.8 million,  $92.4 million and $109.9 million of escrow funds of
    R&G Mortgage at December 31, 2000, 1999 and 1998,  respectively,  maintained
    with the Bank.

                  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, 2000.

                                                      Amount
                                                  --------------
                                                  (In Thousands)
Certificates of deposit maturing:
Three months or less.......................          $221,196
Over three through six months..............           178,235
Over six through twelve months.............           180,384
Over twelve months.........................           169,266
                                                      -------
         Total.............................          $749,081
                                                      =======

                  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.

                                       35
<PAGE>


                  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, 2000, R&G Financial had
$827.7 million of reverse repurchase agreements  outstanding,  $396.9 million of
which represented borrowings of R&G Mortgage. At December 31, 2000, the weighted
average interest rate on R&G Financial's reverse repurchase  agreements amounted
to 6.75%.

                  R&G  Financial's   loan   originations   are  also  funded  by
borrowings  under  various   warehouse  lines  of  credit  provided  by  various
commercial banks  ("Warehouse  Lines").  At December 31, 2000, R&G Financial was
permitted  to borrow  under such  Warehouse  Lines up to $243.4  million,  $64.4
million of which was drawn upon and  outstanding  as of such date. The Warehouse
Lines are used by R&G Financial to fund loan  commitments  and must generally be
repaid within 180 days after the loan is closed or when payment from the sale of
the funded loan is received, 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 a general
assignment of mortgage payments receivable and an assignment of certain mortgage
servicing   rights.   Certain  of  these  warehousing  lines  of  credit  impose
restrictions  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.  Management of R&G Financial believes that as of December
31, 2000, it was in compliance with all of such covenants and  restrictions  and
does not  anticipate  that  such  covenants  and  restrictions  will  limit  its
operations.

                  The interest rate on funds borrowed  pursuant to the Warehouse
Lines  is  based  on  Libor  rates  plus a  negotiated  amount.  By  maintaining
compensating balances, R&G Financial 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
Financial  for  principal  and interest  payments and related tax and  insurance
payments on loans its  services.  At December  31, 2000,  the  weighted  average
interest rate being paid by R&G Financial  under its Warehouse Lines amounted to
7.85%.

                  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 bear  interest  payable
quarterly for variable  interest rate notes and  semiannually for fixed interest
rate  notes.  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. At December 31, 2000, the Bank had $35.5 million of 936
Notes  outstanding,  all  maturing  in  2001.  The  936  Notes  contain  certain
provisions  which  indemnify the holders  thereof from the federal tax liability
which would be incurred,  plus any penalties  and interest,  if the Bank did not
invest the proceeds as required in eligible  activities,  and also provide for a
"gross up"  provision  which  permits the Bank to continue the  obligation at an
adjusted interest rate based on LIBOR in the event the interest on the 936 Notes
is subject in whole or in part to federal and/or Puerto Rico income tax.

                  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, 2000, the Bank had access

                                       36
<PAGE>

to $634.2  million in advances from the FHLB of New York, and had 14 FHLB of New
York advances  aggregating  $505.0 million  outstanding  as of such date,  which
mature at various dates  commencing in January 2, 2001 through  October 20, 2005
and have a weighted  average  interest rate of 6.42 %. In addition,  at December
31, 2000, the Bank  maintained  $36.8 million in standby  letters of credit with
the FHLB of New York,  which  secured  $35.5  million of  outstanding  936 Notes
payable.  At  December  31,  2000,  the Bank  had  pledged  specific  collateral
aggregating  $732.8  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.




                                       37
<PAGE>



                  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,
                                                                        -------------------------------
                                                                        2000         1999          1998
                                                                        ----         ----          ----
                                                                           (Dollars in Thousands)
<S>                                                                   <C>          <C>          <C>
R&G Mortgage:
Securities sold under agreements to repurchase:
     Average balance outstanding .................................    $450,443     $365,177     $354,786
     Maximum amount outstanding at any month-end during the period     499,626      493,527      415,960
     Balance outstanding at end of period ........................     494,353      493,527      415,960
     Average interest rate during the period .....................        6.69%        5.52%        5.73%
     Average interest rate at end of period ......................        6.92%        6.15%        5.46%
Notes Payable:
     Average balance outstanding .................................    $117,085     $127,565     $102,047
     Maximum amount outstanding at any month-end during the period
                                                                       143,114      154,922      152,060
     Balance outstanding at end of period ........................      85,030       56,907      107,648
     Average interest rate during the period .....................        6.41%        6.67%        7.07%
     Average interest rate at end of period ......................        8.06%        6.89%        6.43%

The Bank:
FHLB of New York advances:
     Average balance outstanding .................................    $438,276     $222,575     $ 94,025
     Maximum amount outstanding at any month-end during the period
                                                                       510,500      384,000      160,100
     Balance outstanding at end of period ........................     505,000      384,000      121,000
     Average interest rate during the period .....................        6.34%        5.31%        5.55%
     Average interest rate at end of period ......................        6.42%        5.75%        5.25%
Securities sold under agreements to repurchase:
     Average balance outstanding .................................    $392,755     $187,857     $ 55,915
     Maximum amount outstanding at any month-end during the period     430,852      327,009       79,513
     Balance outstanding at end of period ........................     430,852      327,009       75,222
     Average interest rate during the period .....................        6.47%        5.77%        5.57%
     Average interest rate at end of period ......................        6.60%        5.73%        5.35%
Notes Payable:
     Average balance outstanding .................................    $ 69,663     $ 84,463     $ 84,100
     Maximum amount outstanding at any month-end
         during the period .......................................      76,263       84,100       84,100
     Balance outstanding at end of period ........................      53,828       75,800       84,100
     Average interest rate during the period .....................        6.03%        6.53%        6.45%
     Average interest rate at end of period ......................        6.75%        6.00%        5.74%
</TABLE>


                                       38
<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, 2000,  the
Bank's Trust  Department  administered  trust accounts with aggregate  assets of
$51.1 million as of such date. In addition,  during the year ended  December 31,
2000,  the Bank's Trust  Department  sold $33.1 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, 2000,  R&G  Financial  (on a  consolidated
basis) had 1,295 full-time employees and 53 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 and its subsidiary companies 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  financial  holding
company  pursuant  to the Bank  Holding  Company  Act of 1956,  as amended  (the
"BHCA"). R&G Financial, as a financial 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 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.

                                       39
<PAGE>


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

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

                  The   Gramm-Leach-Bliley   Act,   described  under  "-  Recent
Legislation"  below,  amended several  provisions of Sections 23A and 23B of the
Federal Reserve Act. The amendments provide that financial subsidiaries of banks
are treated as  affiliates  for  purposes of Sections 23A and 23B of the Federal
Reserve Act, but that (i) the 10% capital limit on transactions between the bank
and such financial  subsidiary as an affiliate is not  applicable,  and (ii) the
investment by the bank in the  financial  subsidiary  does not include  retained
earnings in the financial subsidiary.  Certain anti-evasion provisions have been
included that relate to the relationship  between any financial  subsidiary of a
bank and sister  companies of the bank:  (1) any purchase of, or investment  in,
the  securities  of a  financial  subsidiary  by any  affiliate  of the  bank is
considered a purchase or investment  by the bank; or (2) if the Federal  Reserve
Board determines that such treatment is necessary, any loan made by an affiliate
of the bank to the  financial  subsidiary is to be considered a loan made by 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

                                       40
<PAGE>

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.

                  R&G  Mortgage  and the Bank are parties to various  agreements
which  address  how  each  would  conduct  itself  in  specifically   delineated
affiliated   transactions  (the  "Affiliated   Transaction   Agreements").   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.  The  terms of these  agreements  were
negotiated at arm's length on the basis that they are substantially the same, or
at  least  as  favorable  to  the  Bank,  as  those  prevailing  for  comparable
transactions with, or involving, other nonaffiliated companies.

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

                  The Master  Purchase  Agreement  provides  for the sale by the
Bank to R&G Mortgage of the  servicing  rights to all first and second  mortgage
loans  secured by  residential  properties  which become part of the Bank's loan
portfolio once the related loans are sold. R&G Mortgage services 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."

                  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

                                       41
<PAGE>

which is not eligible to be included as Tier I capital;  term  subordinated debt
and  intermediate-term  preferred stock;  and,  subject to limitations,  general
allowances for loan losses.  Assets are adjusted under the risk-based guidelines
to take into account different risk characteristics, with the categories ranging
from 0% (requiring  no  additional  capital) for assets such as cash to 100% for
the bulk of assets which are typically held by a bank holding company, including
multi-family  residential and commercial real estate loans,  commercial business
loans and consumer loans.  Single-family  residential first mortgage loans which
are not past-due (90 days or more) or non-performing and which have been made in
accordance with prudent  underwriting  standards are assigned a 50% level in the
risk-weighing system, as are certain privately-issued mortgage-backed securities
representing indirect ownership of such loans.  Off-balance sheet items also are
adjusted to take into account certain risk characteristics.

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

                  Recent Legislation.  The  Gramm-Leach-Bliley  Act, signed into
law on November 12, 1999,  revises and expands the  existing  provisions  of the
BHCA by including a new section that permits a bank holding  company to elect to
become  a  financial  holding  company,  which  may  engage  in a full  range of
financial activities.  The qualification requirements and the process for a bank
holding  company  that  elects to be  treated  as a  financial  holding  company
requires that all the subsidiary banks controlled by the bank holding company at
the time of election to become a financial holding company must be and remain at
all times well  capitalized  and well  managed.  R&G  Financial  applied for and
became a financial holding company in 2000.

                  Financial   holding   companies   may   engage,   directly  or
indirectly,  in any activity  that is  determined to be (i) financial in nature,
(ii)  incidental  to  such  financial  activity,  or  (iii)  complementary  to a
financial  activity and which does not pose a substantial risk to the safety and
soundness of depository  institutions  or the financial  system  generally.  The
Gramm-Leach-Bliley  Act specifically provides that the following activities have
been  determined  to be  "financial  in nature":  (a)  lending,  trust and other
banking activities;  (b) insurance activities;  (c) financial or economic advice
or services;  (d) pooled investments;  (e) securities  underwriting and dealing;
(f) existing bank holding company domestic activities; (g) existing bank holding
company foreign activities and (h) merchant banking activities.


                                       42
<PAGE>


                  In addition, the Gramm-Leach-Bliley Act specifically gives the
Federal Reserve Board the authority,  by regulation or order, to expand the list
of "financial" or "incidental"  activities,  but requires  consultation with the
U.S.  Treasury,  and  gives  the  Federal  Reserve  Board  authority  to allow a
financial holding company to engage in any activity that is "complementary" to a
financial  activity  and does not "pose a  substantial  risk to the  safety  and
soundness of depository institutions or the financial system generally."

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"  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, 2000.

                  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.

                  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.

                                       43
<PAGE>


                  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 increases 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, 2000, the Bank met each of its capital requirements.

                  The FDIC and the other federal banking agencies have published
a joint policy  statement 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. The FDIC and other federal banking agencies have also adopted
a  joint  policy  statement  on  interest  rate  risk  policy.   Because  market
conditions,  bank structure,  and bank activities  vary, the agencies  concluded
that each bank needs to develop its own interest  rate risk  management  program
tailored to its needs and circumstances.  The policy statement describes prudent
principles  and  practices  that are  fundamental  to sound  interest  rate risk
management,  including  appropriate board and senior management  oversight and a
comprehensive  risk management  process that effectively  identifies,  measures,
monitors and controls risks.

                  Activities   and   Investments.   The  activities  and  equity
investments  of  FDIC-insured,  state-chartered  banks  (which under the Federal
Deposit Insurance Act includes banking institutions  incorporated under the laws
of Puerto Rico) are generally limited to those that are permissible for national
banks. Under regulations dealing with equity investments,  an insured state bank
generally may not directly or indirectly acquire or retain any equity investment
of a type,  or in an amount,  that is not  permissible  for a national  bank. An
insured state bank is not prohibited from, among other things,  (i) acquiring or
retaining  a majority  interest in a  subsidiary,  (ii)  investing  as a limited
partner  in a  partnership  the sole  purpose  of which is  direct  or  indirect
investment in the acquisition, rehabilitation or new construction of a qualified
housing  project,  provided that such limited  partnership  investments  may not
exceed 2% of the bank's total  assets,  (iii)  acquiring up to 10% of the voting
stock of a company that solely provides or reinsures  directors',  trustees' and
officers'  liability insurance coverage or bankers' blanket bond group insurance
coverage for insured  depository  institutions,  and (iv) acquiring or retaining
the voting shares of a depository  institution if certain  requirements are met.
In addition,  an insured  state-chartered bank may not, directly,  or indirectly
through  a  subsidiary,  engage  as  "principal"  in any  activity  that  is not

                                       44
<PAGE>

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, 1999, the Bank had credited $5.1 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
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,  plus  15%  of  50% of  undistributed  earnings  for  "well
capitalized" institutions.  As of December 31, 2000, the legal lending limit for
the Bank under these provisions was approximately  $22.0 million and its maximum
extension  of credit to any one borrower  was $21.5 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,  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.  Loans to  non-banking  affiliates  of the Bank,  are subject
however to the  lending  limitations  set forth in  Sections  23A and 23B of the
Federal  Reserve Act. 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 Bank may
repurchase its own stock for the purpose of reducing its capital, subject to the
approval of the OCFI.

                  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

                                       45
<PAGE>

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  eliminated the regulations that set forth the maximum interest rates that
could be charged on consumer  loans,  mortgage loans and commercial  loans.  The
origination charges on residential  mortgage loans may not exceed 6% of the loan
amount.

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

Mortgage Banking Subsidiaries

                  The mortgage banking business  conducted by R&G Mortgage,  The
Mortgage Store and  Continental are 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.  The affairs of these  subsidiaries 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.

                  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.

                  The  mortgage  subsidiaries  are  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 the mortgage subsidiaries in any escrow account for the
payment of taxes, insurance premiums or other charges.

                                       46
<PAGE>


                  R&G  Mortgage  and The  Mortgage  Store  are 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  and The  Mortgage  Store are  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,
neither  R&G  Mortgage  nor The  Mortgage  Store 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 either company 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 and The Mortgage  Store 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.

                  Continental   is   subject   to   regulation   and   licensing
requirements  of the New York Banking  Department,  and is also subject to North
Carolina licensing requirements.



                                       47
<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 aggregate net
book value  (including  leasehold  improvements  and equipment) of the Company's
offices and other  properties at December 31, 2000,  amounted to $20.1 million .
Set forth below is a list of the Company's  offices and other  facilities all of
which properties are leased.



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


               Description/Address
-------------------------------------------------------------------------------

The Bank:
Hato Rey Branch(1)(2)(3)
280 Jesus T. Pinero Avenue
Hato Rey, PR 00919

Los Jardines Branch
Los Jardines de Guaynabo Shopping Center
PR Road No. 20
Guaynabo, PR 00969

San Patricio Branch(4)
San Patricio Plaza
Ortegon Street
Guaynabo, PR 00969

Bayamon Branch(2)(3)
42-43 Betances Avenue
Hermanas Davila
Bayamon, PR 00959

Bayamon East Branch (2)(4)
Road #174, Lot 100
Minillas Industrial Park
Bayamon, PR 00959

Arecibo Branch(3)
Marginal Vista Azul
Corner San Daniel Avenue
Arecibo, PR 00612

Manati Branch(3)
Plaza Puerta del Sol
PR Road No. 2, Km. 49.7
Manati, PR 00674


                                       48
<PAGE>


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


               Description/Address
--------------------------------------------------------------------------------

Carolina Branch(4)
65th Infantry Avenue
Corner San Marcos Street
Carolina, PR 00985

Trujillo Alto Branch
Trujillo Alto Shopping Center
Trujillo Alto, PR 00976

Santurce Branch(4)
1077 Ponce de Leon Avenue
Santurce, PR 00917

Laguna Gardens Branch(4)
Laguna Gardens Shopping Center
Isla Verde
Carolina, PR 00979

Plaza Carolina Branch(4)
Plaza Carolina Mall
Carolina, PR 00985

Norte Shopping Branch(4)
Norte Shopping Center
Baldorioty de Castro Avenue
San Juan, PR 00907

Vega Baja Branch(3)
Cabo Caribe Development
PR Road No. 2, Marginal
Vega Baja, PR 00693

Mayaguez Branch(3)
McKinley Street
Corner Dr. Vady
Mayaguez, PR 00680

Fajardo I Branch(2)(4)
Garrido Morales Street
Corner San Rafael
Fajardo, PR 00738

Martinez Nadal Branch(4)
Paradise Mall
Corner Jesus T. Pinero Ave.
Rio Piedras, PR 00925



                                       49
<PAGE>


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


               Description/Address
--------------------------------------------------------------------------------

Ponce Branch(4)
Lifetime Building Lot 5
Industrial San Rafael
Ponce, PR 00731

Fajardo II Branch(4)
Celis Aguilera #161
Fajardo, PR 00738

Plaza del Sol Branch(4)
Plaza del Sol Mall
725 West Main Ave.
Bayamon, PR 00961

Operations Center(2)
Road #174, Lote 100
Minillas Industrial Park
Bayamon, PR 00959

Plaza Interamericana Branch (2)(4)
Plaza Interamericana Mall
Sein Street and PR Road No. 177
San Juan, PR 00908

Plaza Las Americas Branch
Plaza Las Americas Shopping Center
Hato Rey, PR 00918

Caguas Branch (2)
PR Road No. 1, Km 33.6
Villa Blanca Industrial Area
Caguas, PR 00725


Aguadilla Branch (4)
Victoria Plaza Shopping Center
Road #2, KM.129.5
Aguadilla, PR 00603


Continental Capital:
Huntington Office
1841 New York Avenue
Huntington Station, NY 11746

Bay Shore Office
1555 Sunrise Hwy.
Bay Shore, NY 11706

Administrative Office
125 Bayless Rd.
Melville, NY 11747

Woodhaven Office
94-11 Jamaica Avenue
Woodhaven, NY 11421

North Carolina Office
4630 Highway 74 West
Monroe, NC  28110


                                       50
<PAGE>


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


               Description/Address
--------------------------------------------------------------------------------

The Mortgage Store:

Hato Rey Office
295 Jesus T. Pinero
San Juan, PR 00918

Ponce Office (8)
Las Americas Ave
Ext. Buena Vista #25
Ponce, PR 00731

Bayamon Office (7)
Street No. 1, #44
Hermanas Davila
Bayamon, PR 00959

Aguadilla Office
PR Road No. 2
Punto Oro Shopping Center
Aguadilla, PR 00603

Caguas Office
Pino Street, H22
Villa Tarabo
Caguas, PR 00725

Guayama Office
Ashford Ave., #45 South
Guayama, PR 00784

Rio Grande Office
BAA Street, Marginal #3
Alturas de Rio Grande, PR, 00745


R&G Mortgage:

Caguas Office
D-9 Degetau Street
San Alfonso
Caguas, PR 00725

Los Jardines Office(5)
Los Jardines de Guaynabo Shopping Center
PR Road No. 20

Guaynabo, PR 00969
Hato Rey Office(2)(3)
280 Jesus T. Pinero Avenue
Hato Rey, PR 00919



                                       51
<PAGE>


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


               Description/Address
--------------------------------------------------------------------------------



Bayamon Office(2)(3)
42-43 Betances Avenue
Hermanas Davila
Bayamon, PR 00959

Arecibo Office(3)
Marginal Vista Azul
Corner San Daniel Avenue
Arecibo, PR 00612

Manati Office(3)(6)
Plaza Puerta del Sol
PR Road No. 2, Km. 49.7
Manati, PR 00674

Mayaguez Office(3)(6)
McKinley Street
Corner Dr. Vady
Mayaguez, PR 00680

Vega Baja Office (3)
Cabo Caribe Development
PR Road No. 2., Marginal
Vega Baja, PR  00693

Trujillo Alto Office (5)
Trujillo Alto Shopping Center
Trujillo Alto, PR  00976

Plaza Las Americas Office (5)
Plaza Las Americas Shopping Mall
Office Tower Suite 805
Hato Rey, PR 00918


                          (Footnotes on following page)

                                       52
<PAGE>



(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.

(7) Office is leased from the Bank.

(8) Office is subleased form R&G Mortgage.


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.

                                     PART II

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

                  The  information  required herein is incorporated by reference
from pages 87 and 88 of the Registrant's 2000 Annual Report.

ITEM 6: Selected Financial Data.

                  The  information  required herein is incorporated by reference
from pages 31 to 32 of the Registrant's 2000 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 33 to 48 of the Registrant's 2000 Annual Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

                  The  information  required herein is incorporated by reference
from pages 37 to 38 of the Registrant's 2000 Annual Report.

ITEM 8: Financial Statements and Supplementary Data.

                  The  information  required herein is incorporated by reference
from pages 49 to 85 of the Registrant's 2000 Annual Report.

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

                  Not applicable.

                                       53
<PAGE>

                                    PART III

ITEM 10: Directors and Executive Officers of the Registrant.

                  The  information  required herein is incorporated by reference
from pages 2 to 5, 6-7 and 9-10 of the Registrant's  Proxy Statement dated April
6, 2001 ("Proxy Statement").

ITEM 11: Executive Compensation.

                  The  information  required herein is incorporated by reference
from pages 11 to 14 and 15 to 17 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 9 of the Registrant's Proxy Statement.

ITEM 13: Certain Relationships and Related Transactions.

                  The  information  required herein is incorporated by reference
from pages 14 to 15 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, 2000 and
           1999.

      Consolidated  Statements of Income for the Years Ended  December 31, 2000,
           1999 and 1998.

      Consolidated  Statements  of Cash Flows for the Years Ended  December  31,
           2000, 1999 and 1998.

      Consolidated  Statements of Changes in Stockholders'  Equity for the Years
           Ended December 31, 2000, 1999 and 1998.

      Notes to Consolidated Financial Statements.

                                       54
<PAGE>


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

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

No.   Description
--    -----------
2.0   Amended  and  Restated  Agreement  and Plan of Merger by and  between  R&G
      Financial Corporation,  the Bank and R-G Interim Premier Bank, dated as of
      September 27, 1996(1)
3.1   Certificate of Incorporation of R&G Financial Corporation(2)
3.2   Certificate of Amendment to Certificate of  Incorporation of R&G Financial
      Corporation(2)
3.2.1 Amended  and  Restated  Certificate  of  Incorporation  of  R&G  Financial
      Corporation(4)
3.3   Bylaws of R&G Financial Corporation(2)
3.4   Certificate of Resolutions designating the terms of the Series A Preferred
      Stock(6)
3.5   Certificate of Resolutions designating the terms of the Series B Preferred
      Stock(7)
3.6   Certificate of Resolutions designating the terms of the Series C Preferred
      Stock
4.0   Specimen of Stock Certificate of R&G Financial Corporation(2)
4.1   Form  of  Series  A  Preferred   Stock   Certificate   of  R&G   Financial
      Corporation(3)
4.2   Form  of  Series  B  Preferred   Stock   Certificate   of  R&G   Financial
      Corporation(5)
4.3   Form of Series C Preferred Stock Certificate of R&G Financial Corporation
      (9)
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  2000 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.
(3)   Incorporated by reference from the Registrant's  Registration Statement on
      Form S-3 (Registration No. 333-60923),  as amended,  filed with the SEC on
      August 7, 1998.
(4)   Incorporated by reference from the Registrant's Current Report on Form 8-K
      filed with the SEC on November 19, 1999.


                                       55
<PAGE>

(5)   Incorporated by reference from the Registrant's  Registration Statement on
      Form S-3 (Registration No.  333-90463),  filed with the SEC on November 5,
      1999.
(6)   Incorporated by reference from the Registrant's Current Report on Form 8-K
      filed with the SEC on August 31, 1998.
(7)   Incorporated by reference from the  Registrants'  Form 10-K filed with the
      SEC on April 13, 2000.
(8)   Incorporated  by  reference  from  Pre-Effective  Amendment  No. 1. to the
      Registrant's  Registration  Statement  of Form S-3 (File  No.  333-55834),
      filed with the SEC on March 7, 2001.

(*)   Management contract or compensatory plan or arrangement.

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

                None.

                                       56
<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

March 30, 2001                                    By: /s/ Victor J. Galan
                                                      -------------------------
                                                      Victor J. Galan
                                                      Chairman of the Board 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 30, 2001
------------------------------------------
Victor J. Galan
Chairman of the Board and
  Chief Executive Officer
  (principal executive officer)


/s/ Ramon Prats                                   March 30, 2001
------------------------------------------
Ramon Prats
President and Director


/s/ Joseph R. Sandoval                            March 30, 2001
------------------------------------------
Joseph R. Sandoval
Senior Vice President and Chief Financial
  Officer (principal financial and
  accounting officer)


/s/ Ana M. Armendariz                             March 30, 2001
------------------------------------------
Ana M. Armendariz
Director and Treasurer


/s/ Enrique Umpierre-Suarez                       March 30, 2001
------------------------------------------
Enrique Umpierre-Suarez
Director and Secretary


/s/ Victor L. Galan Fundora                       March 30, 2001
------------------------------------------
Victor L. Galan Fundora
Director


                                       57

<PAGE>



/s/ Pedro Ramirez                                 March 30, 2001
------------------------------------------
Pedro Ramirez
Director


/s/ Laureno Carus Abarca                          March 30, 2001
------------------------------------------
Laureno Carus Abarca
Director


/s/ Eduardo McCormack                             March 30, 2001
------------------------------------------
Eduardo McCormack
Director


/s/ Gilberto Rivera-Arrega                        March 30, 2001
------------------------------------------
Gilberto Rivera-Arreaga
Director


/s/ Benigno R. Fernandez                          March 30, 2001
------------------------------------------
Benigno R. Fernandez
Director


/s/ Ileana M. Colon-Carlo                         March 30, 2001
------------------------------------------
Ileana M. Colon-Carlo
Director


/s/ Roberto Gorbea                                March 30, 2001
------------------------------------------
Roberto Gorbea
Director


                                       58