<PAGE>










                               1997 Annual Report

                           R-G Financial Corporation











                    25 Years Providing Customer Satisfaction
<PAGE>
                              Financial Highlights
                   (In Thousands, except for Per Share Data)
<TABLE>
<CAPTION>
                                            1997           1996         1995
                                            ----           ----         ----
<S>                                        <C>           <C>           <C>   
Loan Production                            $906.3        $624.6        $467.7
                                                                       
Revenues                                     77.6          58.2          44.7
                                                                       
Net Earnings                                 23.5          13.2          10.4
                                                                       
Total Assets                                1,511         1,038           853
                                                                       
Servicing Portfolio                         3,001         2,550         2,298
                                                                       
Common Shareholders' Equity                 138.1         115.6          70.3
                                                                       
Diluted Earnings per Share                   1.62          1.19          1.12
                                                                       
Common Shareholders' Equity per Share        9.76          8.17          7.11
</TABLE>

<PAGE>
Mission Statement

We will strive for long-term  financial  strength and profitability by centering
our strategy on customer satisfaction.

We seek to be a high-performance  financial  organization that delivers one-stop
financial  services to its clients;  that is  recognized as the best provider of
value-added,  service oriented financial  services;  and that offers services of
unmatched quality in terms of accessibility, responsiveness and turnaround time.
We will achieve these goals by making available a growing number of services and
products  within  an  environment  that is  both  technologically  advanced  and
friendly.

                                       1
<PAGE>
The beginning of the company, 25 years ago was based on mortgage lending. At the
time this  represented  a large  opportunity  for growth,  being a market  where
commercial banks had not ventured into home lending,  the economy was strong and
the people's  needs were pressing for new homes and  facilities.  R-G began with
that vision and commitment.

Less than 10 years ago,  customers  focused on personal  service and traditional
branches. Now satisfaction is redefined by advanced technologies, more products,
faster  services and the convenience of electronic  banking.  Our emphasis is on
people.  We  offer  innovative   concepts,   leading  edge  technologies  and  a
knowledgeable personnel able to handle different situations,  make decisions and
solve  problems.  This customer focus defines all our areas of business.  We not
only focus on when and where we provide  services,  but on how fast and how well
we do this.

Listening to customers and addressing  their needs,  directs and defines the way
R-G  delivers  its array of products  and  services.  Learning  from 25 years of
experience  and being  able to foresee  and take  action on market  changes  and
trends has kept the Company ahead of its competitors in customer satisfaction.

                                       2
<PAGE>
Our 25th Anniversary

Last  year we  celebrated  our 25th year of  operations.  The  quality  that has
defined R-G  throughout  this  quarter of a century has been its  dedication  to
customer satisfaction. Providing superior products and services to our customers
is a challenge we have undertaken  with passion and commitment,  and we have met
the  challenge  through  the   professionalism  and  knowledge  of  our  skilled
employees. They are the people who, every day, deliver excellent service to each
and every one of our  customers.  Listening to our customers,  addressing  their
needs and anticipating how these needs will change is the way R-G has kept ahead
of its  competitors.  Customer  satisfaction  will  continue  to be our  guiding
principle as we embark on our next 25 years.

                                       3
<PAGE>










                                    [BLANK]














                                       4
<PAGE>
Board of Directors
of R-G Financial Corporation:

                    [GRAPHIC - PHOTO OF BOARD OF DIRECTORS]

(From left to right)

Gilberto Rivera Arreaga

Eduardo McCormack

Laureano Carus Abarca

Juan J. Diaz

Enrique Umpierre Suarez

Victor L. Galan

Pedro Ramirez

Benigno R. Fernandez

Ramon Prats,

Victor J. Galan

Ana M. Armendariz (not pictured)

                                       5
<PAGE>
About the Company

R-G Financial  Corporation -the holding company for R-G Mortgage Corporation and
R-G Premier Bank of Puerto Rico- is a financial  services  company with 25 years
of operations and a history of outstanding growth in Puerto Rico.

Since its  inception in 1972 as R-G  Mortgage,  the Company has succeeded in its
highly competitive market by focusing on customer satisfaction.  Decisions about
technology,  pricing, services and facilities are all driven by customers' needs
and  expectations.  R-G now  provides a  complete  range of  financial  services
through branch offices and mortgage banking facilities in 18 different locations
throughout the island.

R-G Mortgage has become the leading residential  mortgage lender and servicer on
the island. Innovation in services,  products and technology has been key to the
growth of the  Company.  R-G  originates  FHA,  VA and  conventional  mortgages,
conforming to Freddie Mac and Fannie Mae guidelines; non-conforming products and
credit quality  subprime  first-lien  mortgages;  consumer  mortgage loans;  and
second mortgage loans.

R-G Financial  securitizes  and sells its loan  production to investors or holds
such loans in its banking portfolio, retaining the right to service these loans.
R-G  Financial  has a  loan  servicing  operation  which  serves  nearly  60,000
homeowners.  Its  rapidly  expanding  banking  operation  offers  a  variety  of
complementary  financial  products,  including  all types of deposit and savings
accounts. A Private Banking department sells investment products to individuals,
including GNMA pools and mutual funds.

                                       6
<PAGE>
The Company has surpassed the  expectations  of  competitors  and  knowledgeable
financial  experts.  During the year  ended  December  31,  1997,  R-G  Mortgage
originated  28.4%  of  all  single-family  residential  loans  in  Puerto  Rico,
resulting in significant growth in its servicing portfolio.

In 1990 R-G began its banking operation with R-G Premier Bank. The Bank offers a
variety  of  financial  products  and  services,  including  residential  loans,
commercial  mortgage  loans,  leases on  commercial  properties  and  equipment,
consumer loans and credit cards.


At R-G
we  continuously
invest in leadership, encouraging
innovation and embracing change.

                                       7
<PAGE>
[GRAPHIC -- PHOTO of Victor J. Galan]



                             LETTER TO STOCKHOLDERS

                                      1997

                               The Year in Review


During 1997 we celebrated our 25th anniversary.  We commenced operations in 1972
with five employees and the minimum amount of capital ($100,000)  required to be
licensed as an FHA/VA Approved  Mortgagee at that time.  Since then, our capital
has grown  more than  1,300  times.  After a  quarter  of a century  of work and
dedication to mortgage  lending and banking,  our Company has become a financial
leader in Puerto Rico. We are ready to continue our  expansion  either within or
outside of the island.

We are currently  serving more than 125,000  customers  through our mortgage and
commercial  banking  operations.  The  retention  of this  clientele is the best
recognition of these 25 years of hard work and dedication.

The Company has grown  continuously  since its inception,  through both internal
and  external  expansion.  We  have  opened  new  branches,   acquired  mortgage
operations , (for  example  United  Mortgage in 1987) and  acquired  other banks
(such as  Guaynabo  Federal  Savings in 1990 and  Caribbean  Federal  Savings in
1993). In 1995 we added new locations by purchasing  seven branches from another
bank.  We now have a total of 18  branches,  counting  both our  banking and our
mortgage company locations.

                                       8
<PAGE>
Our  corporate  structure  also  has  been  expanded  and  revamped.  In a  1996
restructuring,  R-G Financial  Corporation  was organized as the holding company
for R-G  Premier  Bank,  which  had  previously  been  converted  from a  thrift
institution  into a commercial bank under the supervision of the FDIC and Puerto
Rico's  Commissioner of Financial  Institutions.  Also in 1996, R-G Mortgage was
made a subsidiary of R-G Financial, and R-G Financial became a public company.

In  1997  we  organized  Champion  Mortgage  as a  subsidiary  of R-G  Mortgage,
dedicated to the origination of residential  non-conforming  and subprime loans.
Champion  Mortgage  commenced  operations  in the last  quarter  of 1997 and has
already  originated a substantial number of new loans. These loans are presently
in portfolio,  and will be securitized  and sold in the secondary  market in the
near future.

These 25 years  have  shown us that the only  formula  for  achieving  growth in
banking is providing superior service to our clients.  This is the reason why we
have made customer  satisfaction the theme of our Annual Report. We believe that
without superior service, there is no reason for a banking operation of any size
to  survive.  We have  attained a  leadership  position  because we have the key
quality necessary for successful competition with larger local and multinational
operations established in Puerto Rico - "a passion for service."

Last year, our strategy of expansion  supported by superior service produced the
following accomplishments:

[GRAPHIC -- PHOTO of Victor J. Galan and Ramon Prats]

                                       9
<PAGE>
o    Earnings  rose to a  record  of $23.5  million,  increasing  78% from  1996
     earnings of $13.2 million. On a per share basis, R-G Financial earned $1.62
     in 1997,  compared to $1.19 the  previous  year,  an  increase of 36%.  Our
     compound annual growth rate for the period 1972-1997 was 1,380%.

o    The Board of  Directors  declared  an 80% stock  split in August 1997 which
     became effective in September of the same year. Total shares outstanding as
     of December 31, 1997 increased to 14,144,752.  During 1997 we completed the
     stock exchange with minority stockholders of Guaynabo Federal. Based on the
     closing  price of R-G  Financial's  stock at February  28,  1998,  Guaynabo
     shareholders who had invested $1,000 in 1987 would have achieved an average
     annual return of 19.4% after completion of the conversion.  The decision to
     split the Company's common stock was part of our ongoing effort to increase
     the liquidity of R-G's stock.

o    We increased dividends to $0.13 per share from $0.09 per share in 1996. For
     the quarter ended December 31, 1997, the dividend was increased to $0.20 on
     an annual basis,  a 9% increase from the  annualized  rate of 0.183% of the
     prior quarterly dividend. This was our fifth consecutive increase since the
     Company  went public in August  1996.  We plan to continue  increasing  our
     future dividend payments proportionately to our increases in profit.

o    Our stock price climbed from $8.05 (as adjusted for our stock split) at the
     time of our initial  public  offering on August 22, 1996,  to $27.25 at the
     close of operations on February 28, 1998, representing an increase of 238%.
     Our market capitalization increased proportionately to $385.4 million as of
     the latter date.

                                       10
<PAGE>
o    Total  revenues for our  operation  amounted to $71.3  million  compared to
     $53.9  million  for  1996.  Our  net  interest   income  of  $30.2  million
     represented a significant  portion of our total revenues.  The balance,  in
     the amount of $41.1 million,  consisted of fees  generated  mostly from the
     servicing of our mortgage portfolio,  the origination and sale of loans and
     banking services.

o    Net  interest  income  grew by 22% in 1997,  while total fee income grew by
     40%.

o    Loan production,  including  residential and commercial  mortgage  lending,
     plus consumer and commercial business lending,  reached an all time high of
     $906.3  million in 1997.  This  represented  a 45% increase from the $624.6
     million of 1996. We achieved this substantial  growth through a very strong
     advertising effort and investment in media.

o    Our  residential  and commercial  mortgage  originations  translated into a
     market share of 26.6%,  based on an estimated total mortgage market of $3.2
     billion in Puerto Rico last year.  Our 1997 market share  represented a 670
     basis point increase from 1996.

o    We increased our  servicing  portfolio to 56,400 loans with a total balance
     of $3.0 billion,  an increase of $451 million or 18%. We estimate the total
     value of our servicing portfolio at $54 million as of December 31, 1997, or
     $33  million  above the value  reflected  in our books under  Statement  of
     Financial  Accounting  Standards No. 125. Our servicing portfolio continues
     to be a strong  source of  revenue.  Servicing  income  increased  to $13.2
     million in 1997,  from $13.0 million in 1996.  Revenues from servicing were
     to some  extent  affected  by a decrease in  delinquencies,  which  reduced
     income from late charges.

                                       11
<PAGE>
o    Credit quality remained stable in our mortgage  portfolio.  Our delinquency
     rate  (loans  past due more than 30 days) was  reduced to 3.47% from 3.68%,
     mainly  through  the  use  of  new  credit  scoring  systems  in  the  loan
     application  process.  We achieved  this  decline in spite of a 45% rise in
     bankruptcy cases (to 15,636) in Puerto Rico last year.

o    Charge-offs  for the year increased to $5.4 million,  consisting  mostly of
     losses in the consumer loans portfolio.  Delinquencies in our Consumer Loan
     Division increased by 207 basis points to 4.15%; net charge-offs  increased
     11.1%.

o    We strengthened  our credit loss reserves  during the year,  increasing the
     provision  for loan losses to $8.4  million.  (This  amount  includes  $2.0
     million  received  from our  insurance  carrier as settlement of a claim we
     filed related to certain irregularities discovered in our insurance premium
     financing business during the third quarter of 1996.) Reserves  approximate
     to 60% of total non-performing loans as of December 31, 1997, excluding our
     residential loan portfolio, in which losses have historically been minimal.

o    Loans sold during 1997 were  substantial  totaling  $364.3  million.  These
     sales  consisted of $206.6  million of  residential  FHA mortgage loans and
     $157.7 million of residential  conventional loans. The Company was cited in
     1997,  by the Mortgage  Marketplace  magazine,  as the number one seller of
     mortgage loans in the secondary  market in Puerto Rico and number 72 in the
     nation.

o    Our  securities  portfolio  increased  by 141% in 1997,  growing  to $566.9
     million from $235.2 million in 1996. These  investments  represented 38% of
     total assets as of December 31, 1997,  and with a yield of 6.68%  generated
     revenues of $26.8  million.  Since most of these  securities  are  tax-free
     GNMAs,  the Company  was able to reduce its taxes for 1997 to an  effective
     tax rate of 27% from 31% in 1996.

                                       12
<PAGE>
o    Deposits  increased by 17% to $722.4 million in 1997 from $615.6 million in
     1996.  This  growth was mainly due to a very  strong  promotional  campaign
     designed  to  generate  core  deposits  and to expand our  Private  Banking
     business.  New deposits with our Private Banking Group rose  substantially,
     and these accounts will lead to additional  business in 1998 as the Private
     Banking Group provides other products and services to these customers.  The
     overall  increase  in  deposits  was  also due to the  introduction  of new
     accounts - the "Global" which provides  access to various  products such as
     credit cards and Automatic Teller Machines (ATMs); the "Esencial," which is
     a basic savings account with access to ATMs; and the  "Conveniente,"  which
     is designed for the customers who have a small volume of  transactions  and
     use a minimum  amount of  checks.  Early in 1998 we plan to  introduce  the
     "Dinoro," a special  account for children.  The average per branch  deposit
     size increased 17% to $48.1 million in 1997, versus $40.9 million in 1996.

o    During 1997 we completed the remodeling of the seven branches acquired from
     another  bank in a prior year.  We also  completed  our 13,000  square foot
     Operations Center in Bayamon, and expanded our main building in Hato Rey by
     about 10,000 square feet.  As part of the Hato Rey work,  we  constructed a
     parking facility for approximately 350 cars. In January 1998 we began a new
     expansion  of our central  offices to  increase  their total size to 68,000
     square feet.

                                       13
<PAGE>
o    Shareholders'  equity of $138.1 million as of December 31, 1997, was up 19%
     from $115.6 million in 1996.  Core capital  represented  9.16% of our total
     assets,   and  risk  based  capital  17.85%  (on  a  consolidated   basis),
     substantially exceeding the minimums required by our regulators.

We are pleased with the Company's  results for 1997. We significantly  increased
loan  originations  and added to our inventory $446.1 million of unsold loans on
our balance sheet to expand our earning-assets  base,  resulting in record total
assets of $1.5 billion.  These  accomplishments led to strong growth in revenues
and net income, and should also translate into future increased profitability.

We believe that the Company's dominant position in the mortgage sector, combined
with its  rapidly  expanding  banking  operation  and  subprime  business,  will
continue producing asset and earnings growth in the future.  This will boost the
value of our  shares . The  future is bright  for R-G.  Market  demand is strong
accross all our business lines, and we have the internal and external  financial
resources we need to continue our planned growth.

As always,  I am grateful  for the support of our  shareholders,  customers  and
employees,  and the guidance of our Board of Directors. R-G Financial intends to
remain a leader in banking and mortgage  banking in Puerto Rico, and a leader in
providing customer  satisfaction,  as has been during these initial 25 years. We
expect 1998 to be another very good year for R-G in 1998,  which will  translate
into long-term value for our stockholders.

Very truly yours,

/s/Victor J. Galan

Victor J. Galan

                                       14
<PAGE>
Providing Customer Satisfaction Through
Diverse Locations

A good branch network is critical for any institution which offers community and
mortgage banking in Puerto Rico. During 1997, R-G continued to expand the number
of its branches.

During 1998 we will extend our  existing  branch  structure  in three  important
markets within the metropolitan San Juan area- Guaynabo,  where we will open one
additional branch at Pinero and Martinez Nadal Avenues; Rio Piedras with another
branch at El Senorial;  and  Bayamon,  with one branch in Plaza del Sol Shopping
Center.  We will also open branch offices outside of  metropolitan  San Juan -in
Ponce, Caguas and Fajardo.

These six  additional  branches  will give us a market  presence in 21 different
locations after we consolidate  certain existing branches.  In addition,  we are
planning to remodel our present  branches in San Patricio and Bayamon  (Betances
Avenue  branch),  providing  additional  space and drive-in  facilities  for our
clients.  We are in the process of building new locations or acquiring  existing
facilities  to continue  expanding  at our current rate of five new branches per
year on average.

Home Office:                                 Mayaguez                           
Hato Rey                                     McKinley Street                    
280 Jesus T. Pinero                          Dr. Vady Corner                    
                                                                                
Branches:                                    Vega Baja                          
Hato Rey                                     Cabo Caribe Development            
280 Jesus T. Pinero                          Road #2 Marginal                   
                                                                                
San Patricio                                 Norte Shopping Center              
Gonzalez Giusti Ave.                         Baldorioty de Castro Ave.          
                                                                                
Guaynabo                                     Santurce #1077 Ponce de Leon Ave.  
Los Jardines Shopping Center                                                    
                                             Plaza Carolina                     
Bayamon                                      Plaza Carolina Mall                
#42-43 Betances Ave.                                                            
Hermanas Davila                              Caguas                             
                                             Degetau D-9                        
Trujillo Alto                                San Alfonso Development            
Trujillo Alto Plaza                                                             
                                             Fajardo                            
Carolina                                     #51 Celis Aguilera Street          
65 Infantry Ave.                                                                
San Marco                                    Ponce                              
                                             Las Americas Ave.                  
Manati                                       #25 Buena Vista Exit               
Puerta del Sol Plaza                                                    
Road #2, km. 49.7                            Bayamon II                         
                                             Aguas Buenas Ave.                  
Arecibo                                      Lot #40                            
Vista Azul Marginal                          Minillas Industrial Development    
San Daniel Ave. Corner                       

Laguna Gardens
Laguna Gardens Shopping Center

                                       15
<PAGE>
Providing Customer Satisfaction Through
Technological Advances

We want customers to have the most convenient  service  possible,  no matter how
and where  they bank with us.  As the world  speeds  up,  there is less time for
routine  tasks such as banking.  Technology  enables  customers to bank with R-G
virtually  any hour of the day,  from almost  anywhere.  Electronic  tools allow
funds to be managed nearly at the speed of thought.

R-G's  effective  management  of support  operations  depends  largely on how it
approaches   technology.   For  R-G,   therefore,   technology  creates  another
competitive advantage.

We believe that a sophisticated  technology platform is essential to support our
continued growth.  Our strong  technological  systems will enable us to increase
our  revenues,  run  our  operations  more  effectively  and  better  serve  our
customers.  Continually expanding and improving these systems,  therefore, is an
important priority for our Company.

For example,  we are  continuing  to expand the use of  technology in our credit
card, personal loan and  mortgage-refinancing  operations.  We have improved the
software supporting our inbound and outbound  telemarketing efforts. And we have
organized  an  Electronic   Branch   responsible  for  marketing   point-of-sale
terminals,  cash  management  systems  for  commercial  operations,  and  PC and
Internet banking services.

During 1997 we  installed  credit-scoring  systems in our  mortgage  and banking
subsidiaries.  One of these systems,  which we created,  consists of proprietary
scoring  cards that allow our  Underwriting  Department to approve or reject any
type of loan in a very short period of time.  Other  credit-scoring  systems are
the ones used by Fannie Mae and Freddie Mac. Additionally, all our branches have
been interconnected with our Consumer Department.

                                       16
<PAGE>
With these  technological  advances,  we have  improved  the  efficiency  of our
operations  and expedited the  processing  of new loan  applications.  Most loan
approvals,  for  example,  are now  extended in no more than one hour.  By using
technology, we have also expedited the sale of conforming loans in the secondary
market.

We provide full service  electronic  banking  support to all our customers.  Our
remote  banking  system  can  process  customer  transactions  (such as  account
inquiries  and  statement  downloads)  through a  telephone  automatic  response
system,  through  dedicated PC banking and through the Internet.  Last year, the
automatic voice response system was expanded to handle bill payments. And we are
also providing interactive banking services via Internet and PC Banking.

In 1997 we completed the installation of our Imaging system, which automatically
reads all transactions  that are processed in our Proof and Transit  Department.
We also  installed  special  touch-screen  terminals in all our branches to give
customers access to information about their bank accounts.  Since June 1997, all
clients  have  been  receiving  photocopies  of their  checks  in their  monthly
statements  or on a  diskette  from  which  they can copy  the  image of  checks
processed onto their personal computers.

                                       17
<PAGE>
Providing Customer Satisfaction Through
Electronic Banking

We live in a world of  ever-changing  technology,  which  directly  affects  the
banking business.  Opportunities arise rapidly, and we are constantly challenged
to  determine  which ones  offer the best  prospects  for  growth  and  customer
satisfaction.

We continuously search for new ways to provide superior service by staying ahead
of technology and staying ahead of market needs. For example, as a complement to
our  electronic  transfers  system,  in 1996 we introduced  Cash  Management,  a
state-of-the-art software package through which commercial customers can execute
certain  transactions  from their own premises  directly into their account.  In
1997 the Company also introduced a proprietary PC Banking software package which
has exceeded expectations.

The ATM card introduced in 1995 is now being used by 19,000 account holders. The
card gives  customers  the  flexibility  to have their  purchases  automatically
debited  to their  checking  accounts.  Over  960,000  purchases  have been made
through this method.

In 1997 we gave customers the added convenience of paying bills by phone ("Phono
Pago").  The number of such  transactions has grown to more than 3,000 per month
and continues to increase.

                                       18
<PAGE>
Providing Customer Satisfaction Through
Personal Service

With less  time  than  ever for  routine  tasks,  and  faced  with a barrage  of
competitive  messages,  consumers look for banking  companies they can trust and
with   whom   they  can  build   long-lasting   relationships.   They  want  the
highest-quality  service,  and  one-stop-shop  access to a full array of banking
services:  checking,  savings,  loans,  mortgages,  credit cards. Satisfying all
these needs is our mission and passion.  We provide not only convenience,  speed
and competitive prices - but personal attention as well.

Residential mortgage lending remains the bedrock of our business.  Over the last
25 years we have  provided  satisfaction  to 150,000  customers  by helping them
purchase their homes.  We have  constantly  applied the knowledge  gained during
those  years  to  make  our  service  even  better  -  through  extended  hours,
drive-through  branches,  deposit  slots for mortgage  payments  and  additional
locations. Through the use of technology, we have shortened the time it takes to
get a mortgage and close on a purchase. By continuously improving and innovating
in our mortgage programs and branch services,  we have remained at the forefront
of the mortgage business in Puerto Rico.

                                       19
<PAGE>
Providing Customer Satisfaction Through
New Housing

New  housing  was our initial  pillar.  In our early  years we arranged  interim
financing for builders with local and US banks or REITS (real estate  investment
trusts),  and provided the end loans after completion of construction.  Today we
offer the full gamut of services  to builders  and  developers  of new  housing,
including land and development loans, construction loans and permanent loans for
residential and commercial properties.

1.      Altamira
        Fajardo, PR
        58  units  o  Average   selling  price  of  $93,500   Provided   interim
        construction loan and permanent financing in the amount of $3,939,000.

2.      Ciudad Cristiana
        Humacao , PR
        158 units o Average selling price of $47,000.
        Providing  interim  construction  loan for the  rehabilitation  and site
        improvements  and  permanent  financing  in the  amount  of  $4,450,000.
        Obtained  affordable  Housing  Program  Grant from the Federal Home Loan
        Bank of New York in the amount of $455,000 for  downpayment  and closing
        cost assistance.

3.      Villas de Cambalache
        Rio Grande , PR
        254  units o  Average  selling  price of  $95,000  Participating  in the
        interim  financing  and providing  permanent  financing in the amount of
        $23,000,000

4.      Valle Costero
        Santa Isabel, PR
        281  units o  Average  selling  price  of  $65,000  Providing  permanent
        financing in the amount of $17,500,000

5.      Ciudad Real
        Vega Baja, PR
        320  units o  Average  selling  price of  $90,000.  Providing  permanent
        financing in the amount of $28,000,000.

6.      Alborada, El Condominio
        Bayamon , PR
        252  units o  Average  selling  price of  $110,000  Providing  permanent
        financing in the amount of $26,500,000.

7.      Villas de Buenaventura
        Yabucoa, PR
        500 units o Average selling price of $64,000
        Providing permanent  financing in the amount of $31,000,000.  Affordable
        housing units with  downpayment  and interest  subsidies from the Puerto
        Rico Housing Bank.

                                       20
<PAGE>
8.      Berwind Beach Resort
        Rio Grande, PR
        104 units o Average selling price of $150,000. Provided land acquisition
        loan and permanent financing in the amount of $14,000,000.

9.      Los Flamboyanes
        Gurabo, PR
        315  units o  Average  selling  price  of  $85,000
        Providing permanent financing in the amount of $28,000,000

10.     Borinquen Valley
        Caguas, PR

        188 units o Average selling price of $60,000
        Participating in the interim financing and providing permanent financing
        in the amount of $11,200,000.

11.     Montecasino Heights
        Toa Alta, PR
        497  units o  Average  selling  price of  $110,000  Providing  permanent
        financing
        in the amount of $50,000,000.

12.     Chalets de Cupey
        Rio Piedras, PR
        96  units o  Average  selling  price  of  $115,000  Providing  permanent
        financing in the amount of $11,000,000.


                                       21
<PAGE>







                                    [BLANK]






                                       22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA OF R&G FINANCIAL

The following table presents selected  consolidated  financial and other data of
R&G Financial for each of the five years in the period ended  December 31, 1997.
The selected consolidated  financial data should be read in conjunction with the
Consolidated  Financial Statements of R&G Financial,  including the accompanying
Notes,   presented  elsewhere  herein.  In  the  opinion  of  management,   this
information  reflects  all  adjustments,  consisting  only of  normal  recurring
accruals and adjustments, necessary for a fair presentation.
<TABLE>
<CAPTION>
                                                                                  At or For the Year Ended December 31,
                                                                      1997          1996           1995          1994         1993
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, except for per share data)
<S>                                                               <C>            <C>            <C>            <C>          <C>     
 Selected Balance Sheet Data:
   Total assets(1)                                                $1,510,746     $1,037,798     $  853,206     $622,499     $538,069
    Loans receivable, net                                            765,059        603,751        473,841      301,614      216,620
   Mortgage loans held for sale                                       46,885         54,450         21,318       22,021      174,221
   Mortgage-backed and investment securities held for trading        401,039        110,267        113,809      124,522         --
   Mortgage-backed securities available for sale                      46,004         50,841         61,008       13,300       10,241
   Mortgage-backed securities held to maturity                        33,326         37,900         41,731       84,122       39,122
   Investment securities available for sale                           75,863         30,973          3,280        1,878         --
   Investment securities held to maturity                             10,693          5,270          2,046        2,182        4,957
   Cash and cash equivalents(2)                                       68,366         98,856        104,195       45,622       66,958
   Deposits                                                          722,418        615,567        518,187      380,148      312,151
   Securities sold under agreements to repurchase                    382,283         97,444         98,483      108,922         --
   Notes payable                                                     159,304        126,842         81,130       45,815      133,913
   Other borrowings(3)                                                86,359         65,463         67,315       18,092       14,479
   Subordinated notes(4)                                               3,250          3,250          3,250        3,250        3,071
   Stockholders' equity                                              138,054        115,633         66,385       55,970       49,531
   Stockholders' equity per share(5)                              $     9.76     $     8.17     $     7.11     $   5.99     $   5.30

Selected Income Statement Data:
   Revenues:
           Net interest income after provision for loan losses    $   30,160     $   24,665     $   20,323     $ 19,137     $ 14,253
           Loan administration and servicing fees                     13,214         13,029         11,030       11,046        9,326
           Net gain on sale of investments available for sale            107            642           --           --            394
           Net gain on sale of loans and servicing rights             24,033         11,709          8,384        2,899       29,026
           Other(6)                                                    3,751          3,872          4,028        1,667        1,179
------------------------------------------------------------------------------------------------------------------------------------
                   Total revenue                                      71,265         53,917         43,765       28,951       54,178
------------------------------------------------------------------------------------------------------------------------------------
   Expenses:
           Employee compensation and benefits                         13,653         10,794          8,284        5,252        8,590
           Office occupancy and equipment                              7,131          5,531          4,711        4,488        3,395
           SAIF special assessment                                      --            2,508           --           --           --
           Other administrative and general                           18,252         15,424         13,731       13,269       14,561
------------------------------------------------------------------------------------------------------------------------------------
                   Total expenses                                     39,036         34,257         26,726       23,009       26,546
------------------------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
                                                                                  At or For the Year Ended December 31,
                                                                       1997         1996              1995        1994        1993
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>          <C>             <C>          <C>         <C>       
        Income before minority interest in the Bank and income
                taxes                                                  32,229      19,660            17,039       5,942      27,632
        Minority interest in the Bank's earnings                         --           538               743         500         812
        Income taxes                                                    8,732       5,922             5,847         856       9,633
        Cumulative effect of change in accounting principle              --          --                --           866         --
------------------------------------------------------------------------------------------------------------------------------------
        Net income                                                 $   23,497   $    13,200(7)  $    10,449  $    5,452   $  17,187
------------------------------------------------------------------------------------------------------------------------------------
        Diluted earnings per share(5)                              $     1.62   $      1.19(7)  $      1.12  $     0.58   $    1.84
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                
Selected Operating Data(8):                                                                     
Performance Ratios and Other Data:                                                              
     Mortgage loans originated(9)                                  $  545,960   $  426,874      $  306,775   $  488,071  $  834,680
     Loan servicing portfolio                                       3,000,888    2,550,169       2,298,200    2,114,743   2,000,530
     Return on average assets(8)                                         1.85%        1.38%           1.47%        0.91%       4.07%
     Return on average equity(8)                                        18.69        15.54           17.08        10.34       41.98
     Equity to assets at end of period                                   9.13        11.14            7.78         8.94        9.21
     Interest rate spread(10)                                            2.88         3.00            2.93         3.24        3.66
     Net interest margin(10)                                             3.12         3.24            3.26         3.48        3.92
     Average interest-earning assets to average                                                 
     interest-bearing liabilities                                      104.61       104.60          106.50       105.60      106.08
     Total other expenses to average total assets                        3.08         3.59            3.80         3.84        6.29
     Full-service Bank offices                                             15           15              14            8           8
     R&G Mortgage offices(11)                                              11           11              12           12          13
     Cash dividends declared per share                                    .13          .14(12)          --           --          --
                                                                                                
   Asset Quality Ratios(13):                                                                    
     Non-performing loans to total loans at end of period               3.89%        3.09%           2.18%        1.84%       2.24%
     Non-performing assets to total assets at end of period             2.12         1.90            1.32         1.04        1.07
     Allowance for loan losses to total loans at end of period          0.87         0.55            0.72         0.92        1.34
     Allowance for loan losses to total non-performing loans                                    
       at end of period                                                22.34        17.64           33.19        50.10       59.87
                                                                                                
    Bank Regulatory Capital Ratios(14):                                                         
      Tier 1 risk-based capital ratio                                  13.10%       13.91%          10.53%       11.03%       N/A
      Total risk-based capital ratio                                   14.00        14.79           11.66        13.59        N/A
      Tier 1 leverage capital ratio                                     7.34         8.45            6.25         5.95        N/A
</TABLE>

                                       24
<PAGE>
------------------
(1)  At December  1997,  R&G  Mortgage  and the Bank had total  assets of $489.3
     million and $996.3 million, respectively, before consolidation.

(2)  Comprised of cash and due from banks, securities purchased under agreements
     to resell,  time deposits  with other banks and federal funds sold,  all of
     which had original maturities of 90 days or less.

(3)  Comprised  of  long-term  debt,  advances  from the Federal  Home Loan Bank
     ("FHLB") of New York and other secured  borrowings.  See Notes 10 and 11 of
     R&G Financial's Notes to Consolidated Financial Statements.

(4)  Represents  a  seven-year  subordinated  capital note of the Bank issued in
     1991, which is subject to an annual sinking fund  requirement.  See Note 12
     of R&G Financial's Notes to Consolidated Financial Statements.

(5)  As adjusted  to reflect  stock  split  declared  by the  Company  effective
     September 25, 1997. See Note 14 of R&G  Financial's  Notes to  Consolidated
     Financial Statements.

(6)  Comprised  of change  in  provision  for cost in excess of market  value of
     loans  available  for  sale,  net  gain  on  trading  account,   and  other
     miscellaneous  revenue sources,  including Bank service  charges,  fees and
     other income.

(7)  Includes one time  special  Savings  Association  Insurance  Fund  ("SAIF")
     assessment  of  $2,508,380  or  $1,642,990  after tax ($0.15 per share on a
     diluted basis) incurred in the September 1996 quarter to  recapitalize  the
     SAIF of the Federal Deposit Insurance Corporation ("FDIC").  Without giving
     effect to this one-time special assessment, net income and diluted earnings
     per share would have been $14,842,507 and $1.34,  respectively,  and return
     on average  assets and return on average  equity  would have been 1.55% and
     17.48%, respectively.

(8)  With the exception of end of period ratios, all ratios for R&G Mortgage are
     based on the  average of month end  balances  while all ratios for the Bank
     are based on  average  daily  balances.  All ratios  are  annualized  where
     appropriate.

(9)  Represents total originations by R&G Mortgage for the Bank as well as loans
     originated and sold to third parties.

(10) Interest rate spread  represents  the  difference  between R&G  Financial's
     weighted average yield on interest-earning  assets and the weighted average
     rate on  interest-bearing  liabilities.  Net interest margin represents net
     interest  income as a  percent  of  average  interest-earning  assets.  See
     "Management's Discussion and Analysis of Financial Condition and Results of
     Operations of R&G Financial."

(11) R&G Mortgage  maintains a total of 11 offices  that are separate  from Bank
     branch  offices.  A total of seven of these offices are located in the same
     building  or  facility  as the Bank  branch.  The table does not include an
     additional  seven Mortgage  Banking Centers which are located in the Bank's
     offices.

(12) Includes  $500,000  or $0.05 per share paid on the Class A Common  Stock in
     March 1996 prior to the Company's initial public offering.  Amount is based
     on weighted  average number of shares of Common Stock (Class A and Class B)
     outstanding.

(13) Non-performing  loans  consist  of R&G  Financial's  non-accrual  loans and
     non-performing  assets consist of R&G Financial's  non-performing loans and
     real estate acquired by foreclosure or deed-in-lieu  thereof.  The increase
     in  non-performing  loans  during 1997 is a function of the increase in the
     size of the Bank's loan portfolio,  as well as to a significant increase in
     recent years in the level of  non-performing  residential real estate loans
     due to delays in the foreclosure  process.  Excluding the residential  loan
     portfolio,  the allowance for loan losses to total  non-performing loans at
     December 31, 1997 amounted to 60.5%.

(14) All of such ratios were in compliance  with the applicable  requirements of
     the  FDIC.  Prior  to  1994,  the  Bank  operated  as a  savings  and  loan
     association.  As such,  the Bank was subject to the  capital  ratios of the
     Office of Thrift Supervision and not those of the FDIC and was at all times
     in capital compliance therewith.

                                       25
<PAGE>
Management Discussion and Analysis of Financial Condition and
Results of Operations of R&G Financial

General

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 other  non-interest  income.  R&G  Financial  has sought to  implement  this
strategy by (i)  establishing and emphasizing the growth of its mortgage banking
activities,  including growing its loan servicing operation;  (ii) expanding its
retail  banking  franchise  (the Bank has  expanded  its branch  system from two
offices at February 1990 to 15 offices at December 31, 1997) and, without taking
into consideration possible branch acquisition opportunities, the Bank presently
anticipates  opening  approximately  three  branches  per year  during  the next
several years, all in order to achieve increased market presence and to increase
core deposits; (iii) enhancing R&G Financial's net interest income by increasing
R&G   Financial's   loans  held  for  investment,   particularly   single-family
residential  loans;  (iv)  developing  new  business  relationships  through  an
increased  emphasis on commercial real estate and commercial  business  lending;
(v)  diversifying  R&G Financial's  retail  products and services,  including an
increase in consumer loan originations (such as credit cards);  (vi) meeting the
banking needs of its  customers  through,  among other  things,  the offering of
trust and investment services;  and (vii) controlled growth and the pursuit of a
variety of acquisition opportunities when appropriate. R&G Financial attempts to
control its overall operating  expenses,  notwithstanding R&G Financial's recent
growth and expansion activities.

Asset and Liability Management
        General.

Changes in  interest  rates can have a variety  of  effects  on R&G  Financial's
business. In particular, changes in interest rates affect the volume of mortgage
loan  originations,  the interest rate spread on loans held for sale, the amount
of gain on the  sale of  loans,  the  value  of R&G  Mortgage's  loan  servicing
portfolio and the Bank's net interest income. A substantial increase in interest
rates could also affect the volume of R&G Mortgage's loan  originations for both
the Bank and third  parties  by  reducing  the  demand  for  mortgages  for home
purchases,  as  well as the  demand  for  refinancings  of  existing  mortgages.
Conversely, a substantial decrease in interest rates will generally increase the
demand for  mortgages.  To the extent that interest rates in future periods were
to increase  substantially,  R&G Financial would expect overall  originations to
decline. A decrease in the volume of R&G Financial's mortgage originations could
result in a decrease in the amount of R&G Mortgage's mortgage origination income
and portfolio generated net interest income to the Bank.

The  principal  objective  of R&G  Financial's  asset and  liability  management
function is to evaluate the interest-rate risk included in certain balance sheet
accounts, determine the appropriate level of risk given R&G Financial's business
focus, operating environment, capital and liquidity requirements and performance
objectives, establish prudent asset concentration guidelines and manage the risk
consistent  with  Board  approved  guidelines.   Through  such  management,  R&G

                                       26
<PAGE>
Financial  seeks to reduce the  vulnerability  of its  operations  to changes in
interest  rates and to manage the ratio of  interest  rate  sensitive  assets to
interest rate sensitive  liabilities  within  specified  maturities or repricing
dates.

The Bank's asset and liability  management function is under the guidance of the
Interest  Rate Risk,  Budget and  Investments  Committee  ("IRRBICO"),  which is
chaired by the Chief Executive  Officer and comprised  principally of members of
the  Bank's  senior  management  and at  least  three  members  of the  Board of
Directors.  The IRRBICO meets once a month to review,  among other  things,  the
sensitivity of the Bank's assets and  liabilities to interest rate changes,  the
book and market values of assets and  liabilities,  unrealized gains and losses,
purchase and sale activity and  maturities of  investments  and  borrowings.  In
connection therewith,  the IRRBICO generally reviews the Bank's liquidity,  cash
flow needs,  maturities  of  investments,  deposits and  borrowings  and current
market conditions and interest rates.

The Bank's primary IRRBICO monitoring tool is asset/liability simulation models,
which are  prepared on a monthly  basis and are designed to capture the dynamics
of balance sheet,  rate and spread  movements and to quantify  variations in net
interest  income  under  different  interest  rate  environments.  The Bank also
utilizes  market-value  analysis,  which  addresses  the change in equity  value
arising  from  movements  in  interest  rates.  The  market  value of  equity is
estimated  by valuing  the Bank's  assets and  liabilities.  The extent to which
assets  have  gained  or lost  value  in  relation  to the  gains or  losses  of
liabilities   determines  the  appreciation  or  depreciation  in  equity  on  a
market-value  basis. Market value analysis is intended to evaluate the impact of
immediate and sustained interest-rate shifts of the current yield curve upon the
market value of the current balance sheet.

A more conventional but limited IRRBICO  monitoring tool involves an analysis of
the extent to which assets and  liabilities  are "interest  rate  sensitive" and
measuring  an  institution's  interest  rate  sensitivity  "gap."  An  asset  or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
"gap"  is  defined  as  the  difference  between   interest-earning  assets  and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered  positive when the amount of interest  rate  sensitive  assets
exceeds the amount of interest rate sensitive  liabilities.  A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds interest
rate sensitive assets.  During a period of rising interest rates, a negative gap
would tend to adversely affect net interest  income,  while a positive gap would
tend to result in an increase in net interest income. During a period of falling
interest  rates,  a  negative  gap would  tend to result in an  increase  in net
interest  income,  while a positive gap would tend to affect net interest income
adversely.  At December 31, 1997, R&G Financial's  interest-bearing  liabilities
which   mature  or   reprice   within   one  year   exceeded   R&G   Financial's
interest-earning  assets with  similar  characteristics  by $202.2  million,  or
13.38% of total assets.  While a conventional  gap measure may be useful,  it is
limited  in its  ability  to  predict  trends  in future  earnings.  It makes no
presumptions  about changes in prepayment  tendencies,  deposit or loan maturity
preferences or repricing time lags that may occur in response to a change in the
interest rate environment.

        R&G Mortgage.

The profitability to R&G Mortgage of its mortgage loan originations is in part a
function of the difference  between long-term  interest rates, which is the rate
at  which  R&G  Mortgage  originates  mortgage  loans  for  third  parties,  and
short-term interest rates, which is the rate at which R&G Mortgage finances such
loans until they are sold.  Generally,  short-term interest rates are lower than
long-term  interest rates and R&G Mortgage benefits from the difference,  or the
spread,  during the time the  mortgage  loans are held by R&G  Mortgage  pending
sale. A decrease in this spread would have a negative  effect on R&G  Mortgage's
net interest  income and  profitability,  and there can be no assurance that the
spread will not decrease. R&G Mortgage generally attempts to reduce this risk by
attempting  to limit the amount of  mortgage  loans held  pending  sale and,  as
market conditions  permit,  entering into forward  commitments with respect to a
portion of its mortgage loan  originations.  As a general  matter,  R&G Mortgage
attempts to limit its  exposure to this  interest  rate risk through the sale of
substantially all loans within 180 days of origination.

A  mortgage-banking  company is generally exposed to interest rate risk from the
time  the  interest  rate  on  the  customer's   mortgage  loan  application  is
established  through the time the mortgage  loan closes,  and until the time the
company  commits to sell the  mortgage  loan.  In order to limit R&G  Mortgage's
exposure to interest  rate risk through the time the mortgage  loan closes,  R&G
Mortgage  generally  does not  lock-in  or  guarantee  the  customer  a specific
interest rate on such loans through the closing date but rather offers customers
an interest  rate that will be based on a  prevailing  market rate that  adjusts
weekly.  Moreover,  in order to limit R&G  Mortgage's  exposure to interest rate
risk  through the time the loan is sold or  committed  to be sold,  R&G Mortgage
may, depending upon market conditions,  enter into forward commitments to sell a
portion of its  mortgage  loans to investors  for delivery at a future time.  At
December 31, 1997, R&G Mortgage had $17.8 million of pre-existing commitments by
third-party  investors  to  purchase  mortgage  loans.  To the  extent  that R&G
Mortgage   originates  or  commits  to  originate  loans  without   pre-existing
commitments  by  investors  to purchase  such loans or is not  otherwise  hedged
against  changes in interest  rates  ("unhedged  loans"),  R&G Mortgage  will be
subject to the risk of gains or losses through adjustments to the carrying value
of  loans  held for  sale or on the  actual  sale of such  loans  (the  value of
unhedged loans fluctuates inversely with changes in interest rates).

Finally,  R&G  Mortgage  carries an  inventory  of  mortgage-backed  and related
securities  (primarily  fixed-rate GNMA certificates).  Generally,  the value of
fixed-rate  mortgage-backed  securities  declines when interest  rates rise and,
conversely,  increases  when  interest  rates fall.  At December 31,  1997,  R&G
Mortgage held $398.8 million of  mortgage-backed  and related securities (all of
which carried fixed  interest  rates) which were  classified as held for trading
and  reported  at fair  value,  with  unrealized  gains and losses  included  in
earnings.  Accordingly,  declines in the value of R&G Mortgage's securities held
for trading could have a negative impact on R&G Financial's  earnings regardless
of whether any securities were actually sold.

In order to  hedge  the  interest  rate  risk  with  respect  to R&G  Mortgage's
mortgage-backed  and related  securities  portfolio,  R&G Mortgage may utilize a
variety of interest rate contracts such as interest rate swaps,  collars,  caps,
options or  futures  (primarily  Eurodollar  certificates  of  deposit  and U.S.
Treasury note contracts).  R&G Mortgage will use such hedging  instruments based
upon market  conditions  as well as the level of market  rates of  interest.  In
determining the amount of its portfolio to hedge, R&G Mortgage will consider the
volatility of prices of its mortgage-backed and related securities (Puerto Rican
tax-exempt GNMAs are generally less volatile than their U.S. counterparts).  For
taxable GNMAs, R&G Mortgage enters into forward sales commitments for 30, 60 and
90 days to reduce its interest rate risk. At December 31, 1997, R&G Mortgage was
not a party to any  interest  rate  swaps,  collars,  caps,  floors,  options or
futures.

                                       27
<PAGE>
        The Bank.

The results of  operations  of the Bank are  substantially  dependent on its net
interest income,  which is the difference  between the interest income earned on
its   interest-earning   assets   and   the   interest   expense   paid  on  its
interest-bearing  liabilities. At December 31, 1997, the Bank's interest-earning
assets  included a portfolio of loans  receivable,  net (not including  mortgage
loans held for sale) of $733.1 million and a portfolio of investment  securities
and mortgage-backed securities (including held to maturity, held for trading and
available  for sale) of $167.5  million.  Because  the  Bank's  interest-earning
assets have longer effective maturities than its  interest-bearing  liabilities,
the yield on the Bank's  interest-earning  assets  generally  will  adjust  more
slowly than the cost of its  interest-bearing  liabilities and, as a result, the
Bank's net interest income generally would be adversely affected by increases in
interest rates and positively affected by comparable declines in interest rates.
In addition to affecting net interest income, changes in interest rates also can
affect the value of the Bank's  interest-earning  assets, which are comprised of
fixed and  adjustable-rate  instruments.  At December 31, 1997,  $1.6 million or
1.0% of the Bank's  mortgage-backed and investment securities were classified as
held  for  trading  (which  consisted  solely  of  mortgage-backed  and  related
securities),  and are reported at fair value,  with unrealized  gains and losses
included in earnings. In addition, at December 31, 1997, $121.9 million or 72.7%
of the Bank's  mortgage-backed  and  investment  securities  were  classified as
available  for sale and are reported at fair value,  with  unrealized  gains and
losses excluded from earnings and reported net of taxes as a separate  component
of stockholders' equity.

The Bank has sought to limit its exposure to interest rate risk both  internally
through the  management of the  composition  of its assets and  liabilities  and
externally through the use of a variety of hedging instruments. Internal hedging
through  balance  sheet  restructuring  generally  involves  the  attraction  of
longer-term funds (i.e.,  certificates of deposit,  FHLB advances or 936 Notes),
the origination of adjustable-rate and/or shorter-term loans (such as commercial
real  estate,  commercial  business  and consumer  loans) or the  investment  in
certain  types  of  mortgage-backed  derivative  securities  such  as  CMOs  and
mortgage-backed   residuals  (which  often  exhibit   elasticity  and  convexity
characteristics  which the Bank can  utilize to hedge  other  components  of its
portfolio).

External hedging involves the use of interest rate swaps, collars, caps, options
and  futures  to reduce  interest  rate risk on all  mortgage-backed  securities
(excluding   CMOs)  which  are   available  for  sale.  At  December  31,  1997,
mortgage-backed securities available for sale had a fair value of $46.0 million.

The Bank generally uses interest rate swaps, collars,  caps, options and futures
to  effectively  fix the cost of  short-term  funding  sources which are used to
purchase  interest-earning  assets with  longer  effective  maturities,  such as
mortgage-backed  securities and fixed-rate  residential  mortgage loans which do
not meet the criteria for sale to the FNMA or the FHLMC in the secondary market.
Such  agreements  thus  reduce  the impact of  increases  in  interest  rates by
preventing  the Bank from  having to replace  funding  sources at a higher  cost
prior to the time that the  interest-earning  asset which was acquired with such
source  matures or  reprices  and thus can be  replaced  with a  higher-yielding
asset.

At  December  31,  1997,  the  Bank  was a party to  three  interest  rate  swap
agreements. An interest rate swap is an agreement where one party (generally the
Bank) agrees to pay a fixed-rate of interest on a notional principal amount to a
second  party  (generally a broker) in exchange  for  receiving  from the second
party  a   variable-rate   of  interest  on  the  same  notional  amount  for  a
predetermined  period of time.  No actual assets are exchanged in a swap of this
type and interest  payments are generally  netted.  The Bank's existing interest
rate swap agreements have an aggregate  notional amount of  approximately  $50.0
million and expire from  September 17, 1999 to October 9, 2001.  With respect to
such  agreements,  the Bank makes fixed interest  payments ranging from 5.06% to
5.79% and receives  payments based upon the three-month  London  Interbank Offer
Rate  ("LIBOR")  and Libid.  The net  expense  (income)  relating  to the Bank's
fixed-pay  interest rate swaps amounted to approximately  $293,000,  $61,000 and
$(187,000)   during  the  years  ended   December  31,  1997,   1996  and  1995,
respectively.  Such interest rate contracts  have reduced the imbalance  between
the Bank's  interest-earning  assets  and  interest-bearing  liabilities  within
shorter maturities,  thus, reducing the Bank's exposure to increases in interest
rates that may occur in the future.

As discussed  above,  the Bank may also enter into interest rate collars,  caps,
options and futures.  However, at December 31, 1997, the Bank was not a party to
any such interest rate  contracts.  An interest rate cap consists of a guarantee
given by one party,  referred  to as the  issuer  (i.e.,  a broker),  to another
party,  referred to as the  purchaser  (i.e.,  the Bank),  in  exchange  for the
payment of a premium,  that if interest  rates rise above a specified  rate on a
specified  interest  rate  index,  the  issuer  will  pay to the  purchaser  the
difference  between the then  current  market rate and the  specified  rate on a
notional  principal  amount  for a  predetermined  period of time.  No funds are
actually borrowed or repaid. Similarly, an interest rate collar is a combination
of a purchased  cap and a written  floor at  different  rates.  Accordingly,  an
interest  rate collar  requires no payments if interest  rates  remain  within a
specified  range,  but will  require the Bank to be paid if interest  rates rise
above the cap rate or require the Bank to pay if  interest  rates fall below the
floor rate.  Interest rate futures are  commitments  to either  purchase or sell
designated  instruments  (such as  Eurodollar  certificates  of deposit and U.S.
Treasury  note  contracts)  at a future  date  for a  specified  price.  Futures
contracts  are generally  traded on an exchange,  are marked to market daily and
subject to initial and maintenance  margin  requirements.  Options are contracts
which grant the  purchaser  the right to buy or sell the  underlying  asset by a
certain date for a specified price.

                                       28
<PAGE>
The following table  summarizes the  anticipated  maturities or repricing of R&G
Financial's  interest-earning  assets  and  interest-bearing  liabilities  as of
December 31, 1997,  based on the  information  and  assumptions set forth in the
notes below.
<TABLE>
<CAPTION>
                                                                  Four to      More Than     More Than
                                               Within Three       Twelve      One Year to   Three Years     Over Five
                                                  Months          Months      Three Years  to Five Years      Years         Total

                                                                               (Dollars in Thousands)
<S>                                             <C>            <C>            <C>            <C>            <C>           <C>       
Interest-earning assets(1):
Loans receivable:
  Residential real estate loans                 $   34,807     $   67,276     $  109,729     $   81,473     $  200,416    $  493,701
  Construction loans                                 1,567          5,582           --             --             --           7,149
  Commercial real estate loans                      84,522             72            219            271          2,428        87,512
  Consumer loans                                    21,873         43,179         53,351         18,852          7,104       144,359
  Commercial business loans                         38,481            117           --             --             --          38,598
Mortgage loans held for sale                         7,272         21,707         17,693           --             --          46,672
Mortgage-backed securities(2)(3)                    63,013        179,139        130,547         51,478         44,405       468,582
Investment securities(3)                            27,785         54,062          1,477          1,660          2,137        87,121
Other interest-earning assets(4)                    35,759           --             --             --             --          35,759
------------------------------------------------------------------------------------------------------------------------------------
  Total                                         $  315,079     $  371,134     $  313,016     $  153,734     $  256,490    $1,409,453
====================================================================================================================================
Interest-bearing liabilities:
Deposits(5):
  NOW and Super NOW accounts(6)                 $    4,764     $   13,340     $   14,666     $   11,880     $   50,644    $   95,294
  Passbook savings accounts(6)                       2,073          5,917         13,611         11,025         47,003        79,629
  Checking and commercial checking(6)                4,575         12,809         14,082         11,407         48,631        91,504
  Certificates of deposit                          129,485        218,321         69,994         27,539          9,054       454,393
FHLB advances                                       42,000           --             --             --             --          42,000
Reverse repurchase agreements(7)                   392,283           --             --             --             --         392,283
Other borrowings(8)                                 92,214         20,599         84,100           --             --         196,913
------------------------------------------------------------------------------------------------------------------------------------
  Total                                            667,394        270,986        196,453         61,851        155,332     1,352,016
------------------------------------------------------------------------------------------------------------------------------------

Effect of hedging instruments                      (50,000)          --           10,000         40,000           --            --
------------------------------------------------------------------------------------------------------------------------------------
                                                $  617,394     $  270,986     $  206,453     $  101,851     $  155,332    $1,352,016
====================================================================================================================================
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities        $ (302,315)    $  100,148     $  106,563     $   51,883     $  101,158          --
====================================================================================================================================
Cumulative excess (deficiency) of
   interest-earning assets over
   interest-bearing liabilities                 $ (302,315)    $ (202,167)    $  (95,604)    $  (43,721)    $   57,437          --
====================================================================================================================================
Cumulative excess (deficiency) of
   interest-earning assets over
   interest-bearing liabilities as a
   percent of total assets                          (20.01)%       (13.38)%        (6.33)%        (2.89)%         3.80%         --
====================================================================================================================================
</TABLE>

                                       29
<PAGE>

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

(1)  Adjustable-rate  loans are included in the period in which  interest  rates
     are next  scheduled  to adjust  rather than in the period in which they are
     due,  and  fixed-rate  loans are  included in the periods in which they are
     scheduled to be repaid,  based on scheduled  amortization,  in each case as
     adjusted to take into account estimated prepayments based on forecasts used
     by the OTS in their model for market  value of  portfolio  equity  ("MVPE")
     discussed below.

(2) Reflects estimated prepayments in the current interest rate environment.

(3)  Includes  securities  held  for  trading,  available  for  sale and held to
     maturity.

(4)  Includes securities purchased under agreement to resell, time deposits with
     other banks and federal funds sold.

(5)  Does not include non-interest-bearing deposit accounts.

(6)  Although the Bank's  negotiable  order of withdrawal  ("NOW") and Super NOW
     accounts,  passbook savings  accounts and checking  accounts are subject to
     immediate  withdrawal,  management  considers a substantial  amount of such
     accounts  to  be  core  deposits  having   significantly  longer  effective
     maturities  based on the Bank's  retention  of such  deposits  in  changing
     interest  rate  environments.  The above table  assumes  that funds will be
     withdrawn  from the Bank at annual  rates for NOW accounts and for checking
     and commercial checking accounts, ranging from 10% for 0-12 months, 19% for
     1-5 years,  41% for 5-10 years,  65% for 10-20  years and 100%  thereafter;
     and, for passbook savings  accounts,  ranging from 5% for 0-12 months,  19%
     for 1-5 years, 40% for 5-10 years, 65% for 10-20 years and 100% thereafter.

(7)  Includes $10,000,000 federal funds purchased.

(8)  Comprised of warehousing  lines and notes payable,  subordinated  notes and
     other secured borrowings.

Although "gap" analysis is a useful  measurement  device available to management
in determining the existence of interest rate exposure, its static focus as of a
particular  date makes it necessary  to utilize  other  techniques  in measuring
exposure to changes in interest rates.  For example,  gap analysis is limited in
its ability to predict trends in future earnings and makes no presumptions about
changes in  prepayment  tendencies,  deposit  or loan  maturity  preferences  or
repricing  time lags that may occur in response to a change in the interest rate
environment.  As a  result,  R&G  Financial,  through  simulation  models,  also
analyzes on a monthly  basis the  estimated  effects on net interest  income and
equity under  multiple  rate  scenarios,  including  increases  and decreases in
interest  rates  amounting to 400,  300, 200 and 100 basis  points.  The IRRBICO
regularly  review  interest rate risk by  forecasting  the impact of alternative
interest  rate  scenarios on net interest  income and on R&G  Financial's  MVPE,
which is defined as the net present value of an  institution's  existing assets,
liabilities and  off-balance  sheet  instruments,  and by evaluating such impact
against the maximum potential changes in net interest income and MVPE.
<PAGE>
The  following  table sets forth at December 31, 1997 the  estimated  percentage
change in R&G Financial's MVPE based on the indicated changes in interest rates.
<TABLE>
<CAPTION>
                                     MVPE(2)
--------------------------------------------------------------------------------
     Change in                                                     Change as a
   Interest Rates                               Percentage          Percentage
(in Basis Points)(1)      Amount of Change        Change            of Assets
--------------------------------------------------------------------------------
                             (Dollars in Thousands)
<S>                           <C>                  <C>               <C>    
      +400                    $(33,853)            (25.8)%           (2.24)%
      +300                     (24,997)            (19.1)            (1.65)
      +200                     (16,371)            (12.5)            (1.08)
      +100                      (8,127)             (6.2)             (.54)
      --                           --               --                --
      -100                      15,367              11.7              1.02
      -200                      30,577              23.3              2.02
      -300                      47,891              36.5              3.17
      -400                      88,716              67.7              5.87
</TABLE>
                               
--------------

(1)  Assumes  an   instantaneous   uniform  change  in  interest  rates  at  all
     maturities.

(2)  Based on R&G  Financial's  pre-tax  MVPE of $131.1  million at December 31,
     1997,   which  is   approximately   $7.0  million  below  R&G   Financial's
     stockholders'  equity  calculated in  accordance  with  generally  accepted
     accounting principles as of such date.


Management of R&G Financial  believes  that all of the  assumptions  used in the
foregoing analysis to evaluate the vulnerability of its operations to changes in
interest rates  approximate  actual  experience  and considers them  reasonable;
however, the interest rate sensitivity of R&G Financial's assets and liabilities
and the estimated  effects of changes in interest rates on R&G  Financial's  net
interest  income and MVPE indicated in the above table could vary  substantially
if  different  assumptions  were used or if actual  experience  differs from the
projections on which they are based.

Changes in Financial Condition

        General.

At December 31, 1997, R&G Financial's total assets amounted to $1.5 billion,  as
compared  to $1.0  billion  at  December  31,  1996.  The $473  million or 45.6%
increase in total assets  during the year ended  December 31, 1997 was primarily
the result of a $161.3 million or 26.7% increase in loans receivable, net, and a
$291.5  million  or  267.7%  increase  in  mortgage-backed  securities  held for
trading,  which are  attributable to the origination of $906.3 million of loans,
primarily  single-family  residential loans, before reduction for repayments and
sales, and a $40.1 million  increase in securities  available for sale, which is
primarily the result of purchases during the year of approximately $42.0 million
of such securities, net of maturities and sales.

                                       30
<PAGE>
        Cash and Money Market Investments.

Cash and  money  market  investments  (consisting  of cash  and due from  banks,
securities  purchased  under  agreements  to resell,  time  deposits  with other
financial  institutions  and federal  funds sold)  amounted to $68.4 million and
$98.9 million as of December 31, 1997 and 1996, respectively.

        Loans Receivable and Mortgage Loans Held for Sale.

At December 31, 1997, R&G Financial's loans  receivable,  net amounted to $765.1
million or 50.6% of total assets,  as compared to $603.8  million or 58.2% as of
December 31, 1996. The growth in R&G Financial's loans receivable,  net reflects
R&G Financial's strategy of increasing its loans held for investment,  including
residential  mortgage,  construction,  commercial  real  estate  and  commercial
business loans.  During the years ended December 31, 1997, 1996 and 1995,  total
loans  originated and purchased by the Bank (including  loans  originated by R&G
Mortgage on behalf of the Bank) amounted to $435.4  million,  $342.2 million and
$281.7 million, respectively.

At December 31, 1997, R&G Financial's allowance for loan losses (all of which is
maintained  in  the  Bank's  loan  portfolio)   totalled  $6.8  million,   which
represented  a $3.4  million or 103.2%  increase  from the level  maintained  at
December 31, 1996. At December 31, 1997, R&G Financial's  allowance  represented
approximately   0.87%  of  the  total  loan   portfolio   and  22.34%  of  total
non-performing  loans, as compared to 0.55% and 17.64% at December 31, 1996. The
increase in the  allowance for loan losses is  attributable  to the provision of
$6.4 million for loan losses during the year,  which was primarily  attributable
to the overall growth in the loan portfolio, and to a lesser extent, an increase
in consumer loan delinquencies  during the year, offset by net write-offs during
the year totalling  approximately  $2.9 million.  Net write-offs are net of $2.0
million  received as  settlement  of an insurance  claim filed by the Company in
1996 accounted for as a recovery of loans  previously  charged off. See "Results
of Operations - Provision for Loan Losses."

Management  of R&G  Financial  believes  that its  allowance  for loan losses at
December 31, 1997 was adequate,  based upon, among other things, the significant
level of single-family  residential  loans within R&G Financial's  portfolio (as
compared to  commercial  real estate,  commercial  business and consumer  loans,
which are  considered by management to carry a higher degree of credit risk) and
the low level of loan  charge-offs  normally  experienced  by the  Company  with
respect  to  its  loan  portfolio.  However,  there  can be no  assurances  that
additions to such allowance will not be necessary in future periods, which could
adversely affect R&G Financial's results of operations.

At December 31, 1997 and 1996,  mortgage  loans held for sale  amounted to $46.9
million and $54.5 million, respectively.  Mortgage loans held for sale primarily
reflects loans which are in the process of being securitized and sold. The level
of mortgage  banking  activities  is highly  dependent  upon market and economic
factors.

        Securities Held for Trading, Available for Sale and Held for Investment.

R&G Financial  maintains a substantial  portion of its assets in mortgage-backed
and  investment  securities  which are  classified  as either held for  trading,
available  for sale or held to  maturity  in  accordance  with SFAS No.  115. At
December 31, 1997,  R&G  Financial's  aggregate  mortgage-backed  and investment
securities  totalled  $566.9  million or 37.5% of total  assets,  as compared to
$235.3 million or 22.7% at December 31, 1996, respectively.

Securities  held for trading  consist  primarily  of FHA and VA loans which have
been  securitized  as  GNMA  pools  and  are  being  held  for  sale  either  to
institutions  in the secondary  market or private  investors  through the Bank's
Trust  Department.  At December 31, 1997 and 1996,  securities  held for trading
amounted to $400.4  million and $108.9  million,  respectively.  At December 31,
1997,  all but  $1.6  million  of such  securities  were  held by R&G  Mortgage.
Pursuant to SFAS No. 115, securities held for trading are reported at fair value
with unrealized gains and losses included in earnings.

Securities  available for sale consist of mortgage-backed and related securities
(FNMA  and  FHLMC  certificates  as well as CMOs  and CMO  residuals)  and  U.S.
Government  agency  securities,  all of which were held by the Bank. At December
31, 1997 and 1996,  securities  available for sale totalled  $121.9  million and
$81.8 million, respectively.  Pursuant to SFAS No. 115, securities available for
sale are reported at fair value with  unrealized  gains and losses excluded from
earnings, and reported as a separate component of stockholders' equity.

Securities held to maturity consist of  mortgage-backed  securities  (GNMA, FNMA
and FHLMC  certificates),  Puerto Rico  Government  obligations and other Puerto
Rico  securities,  all of which were held by the Bank.  At December 31, 1997 and
1996,  securities  held to maturity  totalled  $44.0 million and $43.2  million,
respectively.  Securities  held to maturity are accounted for at amortized cost.
At December 31, 1997 and 1996, R&G Financial's securities held to maturity had a
market value of $43.8 million and $42.3 million, respectively.

        Mortgage Servicing Asset.

As of December 31, 1997 and 1996, R&G Financial reported $21.2 million and $12.6
million of mortgage servicing rights,  respectively.  Effective January 1, 1995,
R&G Financial adopted SFAS No. 122,  "Accounting for Mortgage Servicing Rights,"
and, in  connection  therewith,  R&G  Financial  is required to  recognize  both
purchased and originated mortgage servicing rights as assets in its Consolidated
Financial  Statements.  However,  R&G  Financial  is not  permitted to recognize
retroactively  mortgage  servicing  rights  originated  prior to the date of its
adoption  of SFAS No. 122 until the  related  loans are sold.  SFAS No. 122 also
requires R&G Financial to assess the fair value of its mortgage servicing rights
on a quarterly  basis and to  determine  any  potential  impairment.  Any future
decline in interest  rates which  results in an  acceleration  in mortgage  loan
prepayments could have an adverse effect on R&G Financial's  mortgage  servicing
rights,  the value of which is dependent upon the cash flows from the underlying
mortgage loans.

        Deposits.

At December 31, 1997,  deposits  totalled $722.4 million,  as compared to $615.6
million at December 31, 1996.  The $106.8  million or 17.4% increase in deposits
during the year ended  December  31, 1997 was  primarily  due to  promotions  in
connection  with  new  accounts  and  competitive  pricing.  One of  the  Bank's
strategies  is to  increase  its core  deposits,  which  provide a source of fee
income and the ability to cross-sell  other products and services.  As a result,
core  deposits  (consisting  of  passbook,  NOW and Super NOW and  checking  and
commercial  checking  accounts)  increased from $210.4 million or 34.2% of total
deposits at December  31, 1996 to $266.4  million or 36.9% of total  deposits at
December 31, 1997.

                                       31
<PAGE>
        Borrowings.

Other  than  deposits,  R&G  Financial's  primary  sources  of funds  consist of
securities  sold under  agreements  to repurchase  (consisting  of agreements to
purchase  on  a  specified  later  date  the  same  or  substantially  identical
securities)  ("repurchase  agreements").  At December 31, 1997 and 1996, reverse
repurchase agreements totalled $382.3 million and $97.4 million, respectively.

Notes payable consist  primarily of warehouse lines of credit (which are used to
fund loan  commitments of R&G Mortgage) and Section 936 promissory  notes (which
represents a low cost source of short and intermediate-term funds for the Bank).
At December 31, 1997, notes payable  amounted to $159.3 million,  as compared to
$126.8  million at December 31,  1996.  The $32.5  million or 25.6%  increase in
notes payable during the year ended December 31, 1997 reflected $34.9 million of
increased  warehouse  lines,  which  was  partially  offset  by a  $2.4  million
reduction in 936 Notes.

Advances  from the FHLB of New York  amounted to $42.0 million and $15.0 million
at December 31, 1997 and 1996,  respectively.  At December  31,  1996,  all FHLB
advances were scheduled to mature within 30 days, with an average  interest rate
of 6.03%.

In December 1995, the Bank sold single-family residential mortgage loans with an
aggregate  outstanding  balance of  approximately  $55 million to two commercial
banks.  In connection with these  transactions  and in  consideration  of higher
servicing fees, R&G Mortgage assumed certain recourse obligations.  In addition,
the  purchasers  of the loans have the right,  at their  option,  to require R&G
Mortgage to purchase the mortgage loans beginning on specified dates in December
2000.  Management  has  estimated  its  liability,  if any,  under the foregoing
recourse provisions to be immaterial as of December 31, 1997. In R&G Financial's
Consolidated  Financial  Statements,  R&G Financial has recognized the foregoing
transaction as a transfer of loans with recourse. Accordingly, the proceeds from
such  transaction  (amounting to $34.4 million and $50.5 million at December 31,
1997 and 1996,  respectively)  have been reported as other secured borrowings in
R&G Financial's Consolidated Financial Statements.

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

        Stockholders' Equity.

Stockholders'  equity  increased  from $115.6  million at  December  31, 1996 to
$138.1  million at December 31,  1997.  The $22.5  million or 19.5%  increase in
stockholders'  equity  during 1997 was  primarily  due to the $23.5  million net
income for the year and an increase in unrealized gains on securities  available
for sale from a $102,000 loss at December 31, 1996 to an unrealized gain of $1.2
million at  December  31,  1997.  The  increases  in  stockholders'  equity were
slightly offset by dividends paid during the year of $2.4 million.

        Results of Operations

General.  R&G Financial's results of operations depend  substantially on its net
interest   income,   which  is  the  difference   between   interest  income  on
interest-earning   assets,  which  consist  primarily  of  loans,  money  market
investments and mortgage-backed and investment securities,  and interest expense
on interest-bearing  liabilities,  which consist primarily of deposits and short
and  long-term  borrowings.  R&G  Financial's  results  of  operations  are also
significantly  affected by its  provisions  for loan losses,  resulting from R&G
Financial's  assessment of the adequacy of its  allowance  for loan losses;  the
level  of its  other  income,  including  net  gain  (loss)  on sale  of  loans,
unrealized  gain  (loss)  on  trading  securities  and loan  administration  and
servicing  fees;  the  level  of  its  operating  expenses,   such  as  employee
compensation and benefits and office occupancy and equipment expense; and income
tax expense.

R&G Financial's major business activities consist of: (i) the origination by R&G
Mortgage  of real  estate  mortgage  loans  for  sale and the  servicing  by R&G
Mortgage of real estate mortgage loans for the Bank and other third parties; and
(ii)  attracting  deposits  from the  general  public and using  such  deposits,
together with other borrowings,  for investment principally by the Bank in loans
(single-family  residential mortgage loans,  construction loans, commercial real
estate  loans,   commercial   business  loans  and  consumer   loans),   and  in
mortgage-backed  and investment  securities.  To a much more limited extent, R&G
Financial also provides trust and investment  services to the public through the
Bank's Trust Department.

                                       32
<PAGE>
The following  table reflects the principal  revenue sources of the Bank and R&G
Mortgage  and the  percentage  contribution  of each  component  for the periods
presented.
<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                 1997                    1996                     1995
                                                         Amount      Percent     Amount       Percent      Amount      Percent
------------------------------------------------------------------------------------------------------------------------------------
                                                                                (Dollars in Thousands)
<S>                                                     <C>             <C>      <C>           <C>        <C>          <C>    
The Bank:
   Net interest income after
           provision for loan losses                    $25,544       35.84%     $20,884       38.73%     $17,944       41.00%
   Net gain on sale of loans                              5,436        7.63        1,355        2.51        1,250        2.85
   Net gain on sale of                                                                                   
            investment securities                           107        0.15          642        1.19         --           --   
   Market valuation allowance                                                                      
           on loans held for sale                          --            --           --          --          856        1.96
   Other income(1)                                        2,915        4.09        3,664        6.80        2,368        5.41
------------------------------------------------------------------------------------------------------------------------------------
                                                         34,002       47.71       26,545       49.23       22,418       51.22
------------------------------------------------------------------------------------------------------------------------------------
R&G Mortgage:                                                                                            
   Net interest income                                    4,616        6.48        3,781        7.01        2,379        5.44
   Loan administration and servicing fees                13,214       18.54       13,029       24.17       11,030       25.20
   Net gain on origination and sale of loans             18,597       26.10       10,354       19.20        7,134       16.30
   Other income(1)                                          836        1.17          208        0.39          804        1.84
------------------------------------------------------------------------------------------------------------------------------------
                                                         37,263       52.29       27,372       50.77       21,347       48.78
------------------------------------------------------------------------------------------------------------------------------------
                                                        $71,265      100.00%     $53,917      100.00%     $43,765      100.00%
</TABLE>
----------------                                                             

(1)  Comprised  of  service  charges,  fees and  other  for the  Bank and  other
     miscellaneous revenue sources for the Bank and R&G Mortgage.


R&G  Financial  reported net income of $23.5  million,  $13.2  million and $10.4
million during the years ended December 31, 1997,  1996 and 1995,  respectively.
Net income  increased by $10.3 million or 78.01% during the year ended  December
31, 1997,  as compared to 1996,  due to a $7.6 million  increase in net interest
income and a $11.9 million increase in total other income,  which were partially
offset by a $7.3 million  increase in total operating  expenses,  (excluding the
one-time SAIF special assessment of $2.5 million in 1996), and a $2.1 million or
49.6% increase in the provision for loan losses.

Net income increased by $2.8 million or 26.3% during the year ended December 31,
1996,  as  compared to 1995,  due to a $7.6  million  increase in net  interest
income and a $5.8 million  increase in total other income,  which were partially
offset by a $7.5 million increase in total operating expenses,  ($5.0 million if
the one-time SAIF special  assessment  were  excluded),  and a $3.3 million or a
348% increase in the provision for loan losses.

Net  Interest  Income.  Net interest  income is  determined  by R&G  Financial's
interest  rate spread  (i.e.,  the  difference  between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing  liabilities)
and  the  relative  amounts  of  interest-earning  assets  and  interest-bearing
liabilities.

Net interest  income  totalled  $36.5  million,  $28.9 million and $21.3 million
during the years ended  December  31,  1997,  1996 and 1995,  respectively.  Net
interest  income  increased  by $7.6  million  or 26.3%  during  the year  ended
December 31, 1997,  as compared to the year ended  December 31, 1996,  due to an
increase in R&G Financial's average net interest earning assets of $12.3 million
during the year, offset by a decrease in the Company's interest rate spread from
3.00% in 1996 to 2.88% in 1997. Net interest income increased by $7.7 million or
36.0%  during 1996 due to an increase in R&G  Financial's  interest  rate-spread
from 2.93% for 1995 to 3.00% for 1996,  which was partially offset by a decrease
in the ratio of  average  interest-earning  assets to  average  interest-bearing
liabilities from 106.5% for 1995 to 104.6% for 1996.

                                       33
<PAGE>
        The following table presents for R&G Financial for the periods indicated
the total dollar amount of interest from average interest-earning assets and the
resultant  yields,  as well as the interest expense on average  interest-bearing
liabilities  expressed both in dollars and rates,  and the net interest  margin.
The table does not reflect any effect of income taxes.  All average balances are
based on the average of month-end  balances  for R&G Mortgage and average  daily
balances R&G Mortgage and the average daily  balances for the Banm+pin each case
during the periods presented.
<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                     1997                                      1996                 
                                                       Average                     Yield/        Average                    Yield/  
                                                       Balance     Interest       Rate (1)       Balance     Interest       Rate (1)
------------------------------------------------------------------------------------------------------------------------------------
                                                                                  (Dollars in Thousands)
<S>                                                  <C>          <C>            <C>         <C>            <C>            <C>   
Interest-Earning Assets:
   Cash and cash equivalents(2)                        $30,967      $1,674         5.41%       $43,072        $2,322         5.39%  
   Investment securities held for trading                5,466         328         6.00          2,271           116         5.11   
   Investment securities available for sale             51,105       3,205         6.27         19,102         1,193         6.25   
   Investment securities held to maturity               15,095         777         5.15         10,069           515         5.11   
   Mortgage-backed securities held for trading         249,930      17,174         6.87        136,618         9,258         6.78   
   Mortgage-backed securities available for sale        44,693       3,200         7.16         50,633         3,602         7.11   
   Mortgage-backed securities held to maturity          35,642       2,152         6.04         40,403         2,478         6.13   
   Loans receivable, net(3)(4)                         732,064      68,514         9.36        587,730        54,044         9.20   
   FHLB of New York stock                                4,710         311         6.60          3,999           258         6.45   
------------------------------------------------------------------------------------------------------------------------------------
       Total interest-earning assets                 1,169,672     $97,335         8.32%       893,897       $73,786         8.25%  
====================================================================================================================================
    Non-interest-earning assets                         98,880                                  61,480                              
------------------------------------------------------------------------------------------------------------------------------------
    Total assets                                    $1,268,552                                $955,377                              
====================================================================================================================================
   Interest-Bearing Liabilities:
     Deposits                                         $668,704     $32,434         4.85%      $561,548       $27,518         4.90%  
     Securities sold under agreements to
       repurchase                                      226,771      13,483         5.95        100,607         5,024         4.99   
     Notes payable                                     151,440       9,616         6.35        126,171         7,284         5.77   
     Subordinated debt(5)                                3,250         324         9.97          3,250           332        10.21   
     Other borrowings(6)                                67,973       4,948         7.28         63,118         4,705         7.45   
------------------------------------------------------------------------------------------------------------------------------------
       Total interest-bearing liabilities            1,118,138     $60,805         5.44%       854,694       $44,863         5.25%  
====================================================================================================================================
     Non-interest-bearing liabilities                   24,680                                  15,766                              
------------------------------------------------------------------------------------------------------------------------------------
       Total liabilities                             1,142,818                                 870,460                              
     Stockholders' equity                              125,734                                  84,917                              
------------------------------------------------------------------------------------------------------------------------------------
       Total liabilities and 
             stockholders' equity                   $1,268,552                                $955,377                              
====================================================================================================================================
     Net interest income; interest 
            rate spread(7)                                         $36,530         2.88%                     $28,923         3.00%  
====================================================================================================================================
     Net interest margin(7)                                                        3.12%                                     3.24%  
====================================================================================================================================
     Average interest-earning assets to 
       average interest-bearing liabilities                                      104.61%                                   104.60%  
====================================================================================================================================
<PAGE>
<CAPTION>
                                                              Year Ended December 31,
                                                                        1995
                                                         Average                    Yield/
                                                         Balance      Interest     Rate (1)
-------------------------------------------------------------------------------------------
                                                               (Dollars in Thousands)
<C>                                                     <C>          <C>          <C>
Interest-Earning Assets:
   Cash and cash equivalents(2)                          $10,000        $605        6.05%
   Investment securities held for trading                     --          --          --
   Investment securities available for sale                   --          --          --
   Investment securities held to maturity                 16,211         972        6.00
   Mortgage-backed securities held for trading           130,184       8,595        6.60
   Mortgage-backed securities available for sale          16,006       1,193        7.45
     Mortgage-backed securities held to maturity          72,173       4,841        6.71
     Loans receivable, net(3)(4)                         405,784      37,078        9.14
     FHLB of New York stock                                2,976         227        7.63
-------------------------------------------------------------------------------------------
       Total interest-earning assets                     653,334     $53,511        8.19%
===========================================================================================
    Non-interest-earning assets                           50,365
-------------------------------------------------------------------------------------------
    Total assets                                        $703,699
===========================================================================================
   Interest-Bearing Liabilities:
     Deposits                                           $431,833     $21,829        5.05%
     Securities sold under agreements to
       repurchase                                        107,026       6,437        6.01
     Notes payable                                        55,118       3,025        5.49
     Subordinated debt(5)                                  3,250         339       10.43
     Other borrowings(6)                                  16,201         609        3.76
-------------------------------------------------------------------------------------------
       Total interest-bearing liabilities                613,428    $ 32,239        5.26%
===========================================================================================
     Non-interest-bearing liabilities                     29,093
-------------------------------------------------------------------------------------------
       Total liabilities                                 642,521
     Stockholders' equity                                 61,178
-------------------------------------------------------------------------------------------
       Total liabilities and 
             stockholders' equity                       $703,699
===========================================================================================
     Net interest income; interest 
            rate spread(7)                                          $ 21,272        2.93%
===========================================================================================
     Net interest margin(7)                                                         3.26%
===========================================================================================
     Average interest-earning assets to 
       average interest-bearing liabilities                                       106.50%
===========================================================================================
</TABLE>
(Footnotes on following page)


                                            34
<PAGE>
-----------------

(1)  At December  31,  1997,  the yields  earned and rates paid were as follows:
     cash and cash equivalents,  5.54%;  investment securities held to maturity,
     5.67%;  investment  securities  available for sale, 6.01%;  mortgage-backed
     securities held for trading,  6.77%;  mortgage loans held for sale,  8.39%;
     loans  receivable,  net,  9.31%;  FHLB  of New  York  stock,  7.05%;  total
     interest-earning  assets,  8.09%;  deposits,  4.82%;  securities sold under
     agreements to repurchase,  5.81%;  notes payable,  6.45%; other borrowings,
     6.89%; subordinated debt, 9.46%; total interest-bearing liabilities, 5.43%;
     interest rate spread, 2.66%.

(2)  Comprised of cash and due from banks, securities purchased under agreements
     to resell, time deposits with other banks and federal funds sold.

(3)  Includes mortgage loans held for sale and non-accrual loans.

(4)  Interest income on loans include loan fees amounting to $334,000,  $277,000
     and  $578,000  during the years ended  December  31,  1997,  1996 and 1995,
     respectively  or .49%,  .51% and 1.56% of interest  income on loans  during
     such respective periods.

(5)  Represents  a  seven-year  subordinated  capital note of the Bank issued in
     1991, which is subject to an annual sinking fund requirement.

(6)  Comprised of long-term  debt,  advances from the FHLB of New York and other
     secured borrowings.

(7)  Interest rate spread  represents  the  difference  between R&G  Financial's
     weighted average yield on interest-earning  assets and the weighted average
     rate on  interest-bearing  liabilities.  Net interest margin represents net
     interest income as a percent of average interest-earning assets.

The following  table describes the extent to which changes in interest rates and
changes in volume of  interest-related  assets and liabilities have affected R&G
Financial's  interest income and interest expense during the periods  indicated.
For each category of interest-earning  assets and interest-bearing  liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume  multiplied by prior year rate),  (ii) changes in rate (change in rate
multiplied by prior year volume), and (iii) total change in rate and volume. The
combined  effect  of  changes  in both rate and  volume  has been  allocated  in
proportion to the absolute dollar amounts of the changes due to rate and volume.
<PAGE>
<TABLE>
<CAPTION>
                                                                                         Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                                             1997 vs. 1996                      1996 vs. 1995
------------------------------------------------------------------------------------------------------------------------------------
                                                                      Increase          Total            Increase           Total
                                                                     (Decrease)        Increase         (Decrease)         Increase
                                                                       Due to         (Decrease)          Due to          (Decrease)
------------------------------------------------------------------------------------------------------------------------------------
                                                                 Rate       Volume                   Rate       Volume
------------------------------------------------------------------------------------------------------------------------------------
                                                                                        (Dollars in Thousands)
<S>                                                            <C>         <C>         <C>         <C>         <C>         <C>     
Interest-Earning Assets:
  Cash and cash equivalents(1)                                 $      5    $   (653)   $   (648)   $   (284)   $  2,001    $  1,717
  Investment securities held for trading                             49         163         212        --           116         116
  Investment securities available for sale                           12       2,000       2,012        --         1,193       1,193
  Investment securities held to maturity                              5         257         262         (89)       (368)       (457)
  Mortgage-backed securities held for trading                       131       7,785       7,916         244         419         663
  Mortgage-backed securities held to maturity                       (34)       (292)       (326)       (261)     (2,102)     (2,363)
  Mortgage-backed securities available for sale                      26        (428)       (402)       (135)      2,544       2,409
  Loans receivable, net(4)                                        1,191      13,279      14,470         564      16,402      16,966
  FHLB of New York stock                                              7          46          53         (47)         78          31
------------------------------------------------------------------------------------------------------------------------------------
          Total interest-earning assets                        $  1,392    $ 22,157    $ 23,549    $     (8)   $ 20,283    $ 20,275
====================================================================================================================================
Interest-Bearing Liabilities:
  Deposits                                                     $   (335)   $  5,251    $  4,916    $   (868)   $  6,557    $  5,689
  Securities sold under agreements to repurchase                  2,163       6,296       8,459      (1,027)       (386)     (1,413)
  Notes payable                                                     853       1,479       2,332         359       3,900       4,259
  Subordinated debt(2)                                               (8)       --            (8)         (7)       --            (7)
  Other borrowings(3)                                              (124)        367         243       2,332       1,764       4,096
------------------------------------------------------------------------------------------------------------------------------------
          Total interest-bearing liabilities                   $  2,549    $ 13,393      15,942    $    789    $ 11,835      12,624
====================================================================================================================================
  Increase (decrease) in net interest income                                           $  7,607                            $  7,651
====================================================================================================================================
</TABLE>
 (Footnotes on following page)

                                                                 35
<PAGE>

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

(1)  Comprised of cash and due from banks, securities purchased under agreements
     to resell, time deposits with other banks and federal funds sold.

(2)  Represents  a  seven-year  subordinated  capital note of the Bank issued in
     1991, which is subject to an annual sinking fund requirement.

(3)  Comprised of long-term  debt,  advances from the FHLB of New York and other
     secured borrowings.

(4)  Includes mortgage loans held for sale.


        Interest Income.

Total interest income  increased by $23.5 million or 31.9% during the year ended
December 31, 1997,  as compared to December  31,  1996,  and  increased by $20.3
million or 37.9%  during the year ended  December  31,  1996 over the year ended
December  31,  1995.  Interest  income on loans,  the largest  component  of R&G
Financial's  interest-earning assets, increased by $14.4 million or 26.7% during
the year ended  December  31, 1997,  as compared to the year ended  December 31,
1996,  and  increased by $17.0  million or 46.0% during 1996 over the year ended
December 31, 1995.  Such increases were  primarily  the result  of  increases in
the average  balance of loans  receivable of  $144.3 million and  $181.9 million
during  the  years ended  December 31,  1997 and 1996, respectively. One of  R&G
Financial's  strategies in recent years has been to grow R&G  Financial's  loans
held for investment.

Interest  income  on  mortgage-backed  and  investment  securities  (which,  for
purposes of this discussion, includes securities held for trading, available for
sale and held to  maturity)  increased  by $9.7 million or 56.4% during the year
ended  December 31, 1997, as compared to the year ended  December 31, 1996,  and
increased by $1.6 million or 10.0% during the year ended  December 31, 1996 over
the  year  ended  December  31,  1995.  The  increase  in  interest   income  on
mortgage-backed  and  investment  securities  during the year ended December 31,
1997 was due  primarily  to an  increase in the  average  balance of  investment
securities  of $40.2  million,  together with a $102.6  million  increase in the
average balance of mortgage-backed securities during the period. The increase in
investment  securities  reflects purchases of approximately $50.2 million during
the year, net of maturities and sales,  with excess  liquidity  during the year;
the increase in mortgage backed securities is primarily  associated with a 63.9%
increase in FHA/VA mortgage loan originations (which are subsequently  converted
into GNMA  mortgage  backed  securities)  during 1997.  The increase in interest
income on  mortgage-backed  and investment  securities during 1996 was primarily
due to a $15.2 million increase in the average balance of investment  securities
together   with  an  increase  of  $9.3  million  in  the  average   balance  of
mortgage-backed securities during the period.

Interest  income on cash and cash  equivalents  (consisting of cash and due from
banks, securities purchased under agreements to resell,  certificates of deposit
with other financial  institutions and federal funds sold) decreased by $648,000
or 27.9% during the year ended  December 31, 1997, as compared to the year ended
December 31, 1996, and increased by $1.7 million or 283.8% during the year ended
December 31, 1996. The decrease  during the year ended December 31, 1997 was due
primarily  to a decrease  in the  average  balance of cash and cash  equivalents
during the period of $12.1  million.  The  increase in interest  earned on money
market  investments during 1996 reflected the increase in the average balance of
$33.1 million,  which was partially offset by a decrease in the yield from 6.05%
to 5.39%. The fluctuations in yields earned by R&G Financial on its money market
investments  reflect the general  fluctuations  in  short-term  market  rates of
interest during the periods presented.

        Interest Expense.

Total interest expense increased by $15.9 million or 35.5% during the year ended
December  31,  1997,  as  compared  to the year ended  December  31,  1996,  and
increased  by $12.6  million or 39.2%  during the year ended  December 31, 1996.
Interest  expense  on  deposits,   the  largest  component  of  R&G  Financial's
interest-bearing liabilities, increased by $4.9 million or 17.9% during the year
ended  December 31, 1997, as compared to the year ended  December 31, 1996,  and
increased by $5.7 million or 26.1% during the year ended  December 31, 1996. The
increases in interest  expense on deposits  during the years ended  December 31,
1997 and 1996 were primarily due to increases in the average balance of deposits
of $107.2  million and $129.7  million during such  respective  periods.  During
1997, the average rate paid on deposits  decreased by 5 basis points as a result
of a general  decrease in market  rates of interest.  In 1996,  the average rate
paid on deposits decreased by 15 basis points as a result of general decrease in
market rates of interest.

Interest  expense  on  repurchase  agreements  increased  significantly  by $8.5
million or 168.4%  during the year ended  December 31, 1997,  as compared to the
year ended  December 31, 1996, and decreased by $1.4 million or 21.9% during the
year ended  December 31, 1996.  The increase in interest  expense on  repurchase
agreements  during 1997 was due primarily to an increase in the average  balance
of  repurchase  agreements  outstanding  of  $126.2  million,  together  with an
increase in the average  rate paid  thereon of 96 basis  points.  R&G  Financial
generally uses  repurchase  agreements to repay  warehouse lines of credit which
are used to fund loan originations. The repurchase agreements are collateralized
by mortgage-backed  securities held for trading. The fluctuations in the average
balance of  repurchase  agreements  during the periods  presented is therefore a
function  both of the amount of  originations  by R&G  Financial  as well as the
level of  mortgage-backed  securities  held for trading  which are  available to
collateralize  such  agreements.  The decrease in interest expense on repurchase
agreements  during 1996 was primarily due to a decrease in the average rate paid
thereon of 102 basis points.

Interest  expense on notes payable  (consisting of warehouse lines of credit and
promissory  notes)  increased  by $2.3  million  or 32.0%  during the year ended
December  31,  1997,  as  compared  to the year ended  December  31,  1996,  and
increased by $3.9 million or 116.5% during the year ended December 31, 1996. The
increase  during the year ended  December 31, 1997 was primarily due to an $25.6
million  increase in the average  balance of  warehousing  lines as R&G Mortgage
made  increased use of such lines due to increased  mortgage loan  originations.
The increase  during the year ended December 31, 1996 was due to a $71.1 million
increase in the average  balance of notes payable,  as the Bank converted  short
term 936  funds  to  medium  term  936  Notes  to fund  increased  consumer  and
commercial lending.

Interest expense on other borrowings (consisting of subordinated notes, advances
from the FHLB of New York and other secured borrowings) increased by $234,000 or
4.6%  during the year ended  December  31,  1997,  as compared to the year ended
December 31, 1996, and increased by $4.4 million or 727.2% during the year

                                       36
<PAGE>
ended  December 31, 1996. The increase in interest  expense on other  borrowings
during 1997 was due  primarily  to an  increase  in the average  balance of such
borrowings  due to increased use of FHLB advances for short term funding  needs.
The  increase  during the year ended  December 31, 1996 was  primarily  due to a
$46.9 million increase in the average balance of such borrowings together with a
369 basis point  increase in the average rate paid thereon.  The increases  were
primarily due to a $56.0 million transfer of loans with recourse  transaction in
December 1995 which is reported as other secured  borrowings in R&G  Financial's
Consolidated Financial Statements.

        Provision for Loan Losses.

The  provision  for loan  losses  is  charged  to  earnings  to bring  the total
allowance  to  a  level  considered  appropriate  by  management  based  on  R&G
Financial's loss experience,  current delinquency data, known and inherent risks
in the  portfolio,  the  estimated  value of any  underlying  collateral  and an
assessment of current economic conditions. While management endeavors to use the
best  information   available  in  making  its  evaluations,   future  allowance
adjustments may be necessary if economic  conditions change  substantially  from
the assumptions used in making the initial evaluations.

R&G Financial made  provisions to its allowance for loan losses of $6.4 million,
$4.3 million and  $950,000  during the years ended  December 31, 1997,  1996 and
1995, respectively.

The increase in the provision  for loan losses taken by the Company  during 1997
was primarily  based on the increase of the Company's loan portfolio  during the
period,  as the  Company  experienced  a 45%  increase  in the  volume  of  loan
originations  during 1997 as well as to  increased  net  charge-offs  associated
primarily with consumer loans. Puerto Rico financial institutions, including the
Company, experienced increased bankruptcies and resulting delinquencies over the
past  year.  During  the  year,   management  adopted  more  stringent  consumer
underwriting  procedures to address problems experienced generally in the market
for personal  loans,  and has  determined to emphasize  collateralized  consumer
lending instead of personal loans.

The increase in the provision for loans losses  during 1996  primarily  reflects
action  taken with  respect  to certain  potential  loan  losses  related to the
operation of the Bank's insurance  premiums  financing  business.  As previously
reported,  the Bank believes that there were  irregularities with respect to the
Bank's former  insurance  premium  financing  business.  Management,  based on a
review of the collectibility of the loans in question,  established  reserves of
approximately  $2.5 million in 1996 to cover estimated losses expected to result
from this matter at the time.  On January  15,  1998,  the  Company  received $2
million as part of a  settlement  of a claim  filed by the  Company in late 1996
with its fidelity insurance  carrier.  The settlement was recorded as a recovery
of loans  previously  charged-off  and reflected as an addition to the Company's
allowance for loan losses as of December 31, 1997.

The $950,000 provision during 1995 reflected R&G Financial's  increased consumer
loan  originations  and  an  increase  in  loan  charge-offs   related  thereto.
Management believes that its allowance for loan losses at December 31, 1997, was
adequate based upon, among other things,  the significant level of single-family
residential  loans within R&G  Financial's  portfolio (as compared to commercial
real estate,  commercial  business and consumer  loans,  which are considered by
management  to carry a higher  degree of credit  risk) and the low level of loan
charge-offs  normally  experienced  by the  Company  with  respect  to its  loan
portfolio.  Nevertheless,  there can be no  assurances  that  additions  to such
allowance will not be necessary in future periods, particularly if the growth in
R&G Financial's real estate lending,  including  commercial  lending, as well as
the increased bankruptcies and resulting delinquencies, continue.
<PAGE>
        Other Income.

The  following  table  sets forth  information  regarding  other  income for the
periods shown.
<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                                  1997        1996       1995
-----------------------------------------------------------------------------------------------
                                                                        (In Thousands)
<S>                                                            <C>         <C>         <C>     
Net gain on origination and sale of loans                      $ 24,033    $ 11,709    $  8,384
Change in allowance for cost in excess of market value
 of loans held fmasale                                             --          --           856
Net gain on sale of investment securities available for sale        107         642        --
Net loss on trading account                                        (854)        (66)       --
Loan administration and servicing fees                           13,214      13,029      11,030
Service charges, fees and other                                   4,605       3,938       3,172
-----------------------------------------------------------------------------------------------
  Total other income                                           $ 41,105    $ 29,252    $ 23,442
===============================================================================================
</TABLE>

                                              37
<PAGE>
Total other  income  increased  by $11.9  million or 40.5% during the year ended
December 31, 1997,  as compared to the prior year and  increased by $5.8 million
or 24.8%  during the year ended  December  31,  1996.  Net gain on sale of loans
amounted to $24.0 million, $11.7 million and $8.4 million during the years ended
December  31,  1997,  1996  and  1995,  respectively.  Net gain on sale of loans
reflects the income  generated from R&G Financial's  origination and purchase of
single-family  residential  real estate loans and the subsequent  securitization
and sale of such loans. During the years ended December 31, 1997, 1996 and 1995,
R&G Mortgage originated and purchased $470.9 million,  $282.4 million and $185.9
million,  respectively,  and sold  $246.1  million,  $244.8  million  and $195.6
million of  mortgage  loans,  respectively.  In  addition,  the Bank sold $118.2
million, $49.7 million and $75.1 million of loans from its portfolio during such
respective  periods.  R&G  Financial's  mortgage  banking  operations are highly
dependent upon market and economic conditions.

During  the  years  ended  December  31,  1997,  1996 and  1995,  R&G  Financial
recognized  net profit (loss) on trading  securities of $9.7 million,  $(96,000)
and $2.1  million,  respectively,  which are  included  in net gains on sales of
loans.  Such  gains and  losses  reflect  fluctuations  in the  market  value of
primarily FHA and VA loans which have been securitized into GNMA mortgage-backed
securities and are being held for sale either to  institutions  in the secondary
market or private investors through the Bank's Trust Department. The increase in
net  profits  in trading  securities  in 1997 is  primarily  related to a $170.9
million or 63.9%  increase in the  origination  and purchase of FHA and VA loans
during the year. In addition, during the years ended December 31, 1997 and 1996,
R&G Financial  recognized $854,000 and $66,000,  respectively,  of net losses on
trading  activities and from hedge  positions on certain  investment  securities
available for sale. The loss experienced  during 1997 is primarily related to an
increase  in  hedging  activities  as well as  increased  volatility  in  market
interest rates during the period.

In 1994, R&G Financial established an $856,000 provision to reflect a decline in
the market  value of loans held for sale as a result of the  increase  in market
rates of interest which occurred during the second half of the year.  During the
year ended December 31, 1995, market rates of interest subsequently declined and
R&G  Financial  was able to sell such mortgage  loans  without  recognizing  any
losses. As a result,  R&G Financial reversed the prior $856,000 provision during
the year ended December 31, 1995. No provision was required in 1997 or 1996.

During  the  years  ended  December  31,  1997,  1996 and  1995,  R&G  Financial
recognized loan  administration and servicing fees (consisting of loan servicing
fees) of $13.2  million,  $13.0  million and $11.0  million,  respectively.  The
increase in loan administration and servicing fees over the periods reflects the
increase in R&G Financial's  loan servicing  portfolio from 43,572 loans with an
aggregate  principal  balance of $2.1 billion at January 1, 1995 to 56,442 loans
with an aggregate principal balance of $3.0 billion at December 31, 1997.

Service charges,  fees and other amounted to $4.6 million, $3.9 million and $3.2
million during the years ended December 31, 1997,  1996 and 1995,  respectively.
The  $667,000 or 16.9%  increase  during  1997 was  primarily  due to  increased
service charges  associated with new deposit products and an increasing  deposit
base, as well as increases in the loan portfolio. The $766,000 or 24.1% increase
during  the year  ended  December  31,  1996 over the prior  year was  primarily
attributable  to increased  service  charges from  deposit  accounts,  primarily
associated with certain branch acquisitions during 1995.

         Operating Expenses.

The following table sets forth certain information  regarding operating expenses
for the periods shown.
<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                                 1997         1996         1995
--------------------------------------------------------------------------------
                                                         (In Thousands)
<S>                                            <C>          <C>          <C>    
Employee compensation and benefits             $13,653      $10,793      $ 8,284
Office occupancy and equipment                   7,131        5,531        4,711
SAIF special assessment                           --          2,508         --
Other administrative and general                18,252       15,424       13,731
--------------------------------------------------------------------------------
          Total operating expenses             $39,036      $34,257      $26,726
================================================================================
</TABLE>

Total  operating  expenses  increased  by $4.8  million or 13.9% during the year
ended  December  31, 1997,  as compared to the year ended  December 31, 1996 and
increased by $7.5 million or 28.2% during the year ended  December 31, 1996 over
1995.  Without taking into consideration the one-time $2.5 million assessment to
recapitalize  the SAIF,  total  operating  expenses would have increased by $7.3
million or 23.0% in 1997 and by $5.0  million or 18.8% in 1996.  The increase in
total operating  expenses during the year ended December 31, 1997 reflects a 45%
increase in total loan  production  during the year as well as  increased  costs
associated  with the opening of a new branch  office in Bayamon in June 1997 and
the remodeling work at six branch  locations  acquired in June 1995 from another
financial  institution in Puerto Rico. The increase in total operating  expenses
during the year ended  December 31, 1996 was  primarily due to increases in each
major  category.  The 1995 branch  acquisition  was the  primary  reason for the
increases  in  compensation  and  benefits,  occupancy  and other  miscellaneous
expenses during 1996.

Employee  compensation  and benefits  expense  amounted to $13.6 million,  $10.8
million and $8.3 million  during the years ended  December  31,  1997,  1996 and
1995,  respectively.  The $2.9 million or 26.5%  increase in such expense during
the year ended December 31, 1997 is primarily  associated  with increased  bonus
payments due to greater  loan  production  during the year.  The $2.5 million or
30.3%  increase in such expense  during the year ended December 31, 1996 was due
to an  increase  in  employees  as a  result  of the  Bank's  June  1995  branch
acquisition.

Office occupancy and equipment  expense  amounted to $7.1 million,  $5.5 million
and $4.7  million  during the years  ended  December  31,  1997,  1996 and 1995,
respectively.  The $1.6  million  or 28.9%  increase  in  office  occupancy  and
equipment  expenses during 1997 were related to the opening of the new branch in
Bayamon and to the completion of remodeling work at the six branches acquired in
1995. The $820,000 or 17.4% increase in such expense recognized by R&G Financial
during the year  ended  December  31,  1996  reflects  the  Bank's  1995  branch
acquisition.

The Company incurred a special  assessment in 1996 of $2.5 million ($1.5 million
net  of  taxes)  as  the  result  of  federal  legislation  signed  into  law to
recapitalize the federal deposit insurance fund. The legislation  enacted by the
U.S. Congress


                                       38
<PAGE>
recapitalized  the SAIF by a one-time charge of  approximately  $0.657 for every
$100 of  assessable  deposits  held at March 31, 1995.  As a result,  the Bank's
insurance  premiums,  which had  amounted to $0.23 for every $100 of  assessable
deposits,  was reduced to $0.064 for every $100 of assessable deposits beginning
January 1, 1997.

Other   administrative   and  general  expenses,   which  consist  primarily  of
advertising,  license and  property  taxes,  amortization  of  servicing  asset,
insurance,  telephone,  printing and supplies and other miscellaneous  expenses,
amounted to $18.3  million,  $15.4  million and $13.7  million  during the years
ended December 31, 1997, 1996 and 1995, respectively.  The $2.8 million or 18.3%
increase  in such  expenses  during the year  ended  December  31,  1997 is also
primarily  associated with increased loan  production  during the year. The $1.7
million or 12.3% increase in such expenses  during 1996 was primarily the result
of general  growth in the  operations  of R&G  Financial and the addition of new
products and services offered.

        Income Taxes.

R&G  Financial's  income tax provision  amounted to $8.7 million during the year
ended  December 31, 1997,  as compared to income tax expense of $5.9 million and
$5.8 million  during the years ended  December 31, 1996 and 1995,  respectively.
During 1996,  R&G Mortgage and the Puerto Rico Treasury  Department  settled all
taxes due for the years 1989 through and including  1992 which were under audit.
The settlement  reached was for $1.6 million.  The effect of this settlement was
to record additional  income tax expense during 1996 of $400,000.  The remainder
of the  settlement  was  reserved  for during  prior  periods.  R&G  Financial's
effective  tax rate  amounted to 27.1%,  31.0% and 35.9%  during the years ended
December 31, 1997, 1996 and 1995, respectively.  The decrease in R&G Financial's
effective tax rate during the last several years is due primarily to an increase
in the Company's exempt interest income.

Liquidity and Capital Resources

        Liquidity.

Liquidity refers to R&G Financial's  ability to generate sufficient cash to meet
the funding needs of current loan demand, savings deposit withdrawals, principal
and  interest  payments  with  respect  to  outstanding  borrowings  and  to pay
operating expenses. It is management's policy to maintain greater liquidity than
required in order to be in a position to fund loan  purchases and  originations,
to meet  withdrawals  from  deposit  accounts,  to make  principal  and interest
payments with respect to  outstanding  borrowings and to make  investments  that
take advantage of interest rate spreads. R&G Financial monitors its liquidity in
accordance  with   guidelines   established  by  R&G  Financial  and  applicable
regulatory requirements.  R&G Financial's need for liquidity is affected by loan
demand,  net  changes in  deposit  levels and the  scheduled  maturities  of its
borrowings.  R&G Financial  can minimize the cash  required  during the times of
heavy loan demand by modifying  its credit  policies or reducing  its  marketing
efforts.  Liquidity  demand  caused by net  reductions  in deposits  are usually
caused by factors over which R&G  Financial has limited  control.  R&G Financial
derives its liquidity from both its assets and liabilities. Liquidity is derived
from assets by receipt of interest and principal  payments and  prepayments,  by
the ability to sell assets at market prices and by utilizing unpledged assets as
collateral for borrowings.  Liquidity is derived from liabilities by maintaining
a variety of funding sources, including deposits,  advances from the FHLB of New
York and  other  short  and  long-term  borrowings.  R&G  Financial's  liquidity
management is both a daily and long-term  function of funds  management.  Liquid
assets are  generally  invested in  short-term  investments  such as  securities
purchased  under  agreements to resell,  federal funds sold and  certificates of
deposit in other financial institutions.  If R&G Financial requires funds beyond
its  ability  to  generate  them  internally,  various  forms of both  short and
long-term  borrowings  provide an  additional  source of funds.  At December 31,
1997,  R&G  Financial  had $63.2  million in  borrowing  capacity  under  unused
warehouse lines of credit and $223.4 million in borrowing  capacity under a line
of credit with the FHLB of New York. R&G Financial has generally not relied upon
brokered deposits as a source of liquidity,  and does not anticipate a change in
this practice in the foreseeable future.

At December 31, 1997,  R&G  Financial  had  outstanding  commitments  (including
unused lines of credit) to originate  and/or purchase  mortgage and non-mortgage
loans of $443.6  million.  Certificates of deposit which are scheduled to mature
within one year totalled  $368.6  million at December 31, 1997,  and  borrowings
that are scheduled to mature within the same period  amounted to $512.7 million.
R&G Financial  anticipates  that it will have sufficient funds available to meet
its current loan commitments.

        Capital Resources.

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

The FDIC also  requires  that  banks meet a  risk-based  capital  standard.  The
risk-based  capital standard for banks requires the maintenance of total capital
(which is defined as Tier I capital and supplementary  (Tier 2) capital) to risk
weighted assets of 8%. In determining the amount of  risk-weighted  assets,  all
assets,  plus certain off balance sheet assets,  are multiplied by a risk-weight
of 0% to 100%,  based on the risks the FDIC believes are inherent in the type of
asset  or  item.  The  components  of Tier I  capital  are  equivalent  to those
discussed  above under the 3%  leverage  capital  standard.  The  components  of
supplementary   capital  include  certain  perpetual  preferred  stock,  certain
mandatory  convertible  securities,  certain  subordinated debt and intermediate
preferred stock and general allowances for loan and lease losses.  Allowance for
loan and lease  losses  includable  in  supplementary  capital  is  limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted
toward supplementary capital cannot exceed 100% of core capital. At December 31,
1997,  the Bank met  each of its  capital  requirements,  with  Tier I  leverage
capital, Tier I risk-based capital and total risk-based capital ratios of 7.34%,
13.10% and 14.00%, respectively.

                                       39
<PAGE>
In  addition,  the  Federal  Reserve  Board  has  promulgated  capital  adequacy
guidelines for bank holding companies which are  substantially  similar to those
adopted  by FDIC  regarding  state-chartered  banks,  as  described  above.  R&G
Financial is currently in compliance with such regulatory capital requirements.

        Inflation and Changing Prices

R&G Financial's  Consolidated Financial Statements and related data presented in
this Annual  Report have been  prepared in accordance  with  generally  accepted
accounting  principles,  which require the measurement of financial position and
operating  results  in terms of  historical  dollars  (except  with  respect  to
securities which are carried at market value),  without  considering  changes in
the relative  purchasing power of money over time due to inflation.  Unlike most
industrial  companies,  substantially  all of the assets and  liabilities of R&G
Financial  are  monetary  in  nature.  As a result,  interest  rates have a more
significant  impact on R&G Financial's  performance  than the effects of general
levels  of  inflation.  Interest  rates  do not  necessarily  move  in the  same
direction or in the same magnitude as the prices of goods and services.

Year 2000 Issue

The  Company  has  already  reviewed  all  computer-based  applications  and has
developed a  company-wide  action plan for the century change for the year 2000.
The Company's  goal is to have all systems and  applications  compliant with the
century  change by late 1998.  The Company  has  completed  a  preliminary  cost
estimate totaling  $300,000 related to the year 2000 project.  Costs incurred in
1997  related  to  updating  the  Company's  computer   application  systems  in
preparation  for the year  2000  were  insignificant.  The  Company  expects  to
continue to incur costs related to this project through the year 1999,  however,
none of these costs are expected to have a significant  impact in the results of
operations of the Company in any single period. The Company estimates that costs
associated  with upgrading or modifying  existing  internal use software for the
year 2000  should  be  minimal.  In the  Company's  case,  most of the costs are
related to purchases of hardware (mostly desktop  computers) to replace existing
equipment,  and  such  equipment  is  almost  fully  depreciated  at this  time.
Accordingly,  based on presently available information, the Company expects that
costs  associated with the year 2000 issue should not have a significant  effect
in the results of operations of the Company.

Recent Accounting Pronouncements

Set forth  below are recent  accounting  pronouncements  which may have a future
effect on R&G Financial's  operations.  These  pronouncements  should be read in
conjunction  with the  significant  accounting  policies which R&G Financial has
adopted that are set forth in R&G Financial's  Notes to  Consolidated  Financial
Statements.

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income."
This Statement requires (1) the  classification of items of other  comprehensive
income  by  their  nature  in a  financial  statement;  (2) the  display  of the
accumulated balance of other comprehensive income by their nature in a financial
statement; and (3) the display of the accumulated balance of other comprehensive
income separately from retained  earnings and additional  paid-in capital in the
equity  section  of the  statement  of  financial  position.  For  the  Company,
unrealized  gains and losses on certain  investments in debt  securities will be
the only other comprehensive income item to be included in comprehensive income.

This Statement is effective for fiscal years  beginning after December 15, 1997.
Reclassification  of  financial  statements  for earlier  periods  provided  for
comparative  purposes  is  required.   This  Statement  affects  only  financial
statement  presentation and,  therefore,  management  believes that its adoption
will not have  material  effect if any, on the Company's  financial  position or
results of operations.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise  and Related  Information."  This  Statement  requires  that a public
business  enterprise  report  financial and  descriptive  information  about its
reportable  segments.  Operating  segments are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating  decision maker in deciding how to allocate resources and in
assessing performance.  It also requires reporting descriptive information about
the way that the  operating  segments  were  determined,  the  products  and the
services   provided  by  the  operating   segments,   differences   between  the
measurements  used  in  reporting  segment  information  and  those  used in the
enterprise's  general  purpose  financial  statements,  and the  changes  in the
measurement of the segment amount from period to period.  Management has not yet
made a  determination  on the  business  lines of the Company  that  fulfill the
segment definition described above.

This Statement is effective for fiscal years  beginning after December 15, 1997.
Reclassification  of  financial  statements  for earlier  periods  provided  for
comparative  purposes  is  required.   This  Statement  affects  only  financial
statement  presentation and disclosure and therefore management believes it will
not have a material  effect,  if any,  on the  Company's  financial  position or
results of operations.

                                       40
<PAGE>
Report OF INDEPENDENT
ACCOUNTANTS

To the Board of Directors and Stockholders of
R&G Financial Corporation


In our opinion, the accompanying  consolidated statements of financial condition
and the related  consolidated  statements of income, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of R&G Financial  Corporation  (the Company) and its subsidiaries as of
December 31, 1997 and 1996,  and the results of their  operations and their cash
flows for each of the three years in the period  ended  December  31,  1997,  in
conformity  with  generally  accepted  accounting  principles.  These  financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable  assurance about whether the financial statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audits  provide a reasonable  basis for the opinion  expressed
above.

/s/Price Waterhouse

Price Waterhouse
San Juan, Puerto Rico

February 2, 1998

Certified Public Accountants
(of Puerto Rico)
License No. 10 Expires on December 1, 1998
Stamp 1457911 of the P.R. Society
of Certified Public Accountants has been affixed
to the file copy of this report

                                       41
<PAGE>
<TABLE>
<CAPTION>
R&G Financial Corporation
Consolidated Statements of Financial Condition
December 31, 1997 and 1996

                                                                                     1997                1996
---------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>               <C>            
                                                    Assets
Cash and due from banks                                                       $    32,607,001   $    31,989,944
Money market investments:
  Securities purchased under agreements to resell                                  16,000,000        19,633,178
  Time deposits with other banks                                                   16,758,722        33,232,809
  Federal funds sold                                                                3,000,000        14,000,000
Mortgage loans held for sale, at lower of cost or market                           46,885,323        54,450,159
Mortgage - backed securities held for trading, at fair value                      400,457,456       108,916,528
Mortgage - backed securities available for sale, at fair value                     46,003,849        50,841,165
Mortgage - backed securities held to maturity, at amortized cost
 (estimated market value: 1997 - $33,185,672; 1996 - $37,104,391)                  33,326,472        37,899,847
Investment securities held for trading, at fair value                                 581,332         1,350,827
Investment securities available for sale, at fair value                            75,863,353        30,973,260
Investment securities held to maturity, at amortized cost
 (estimated market value: 1997 - $10,655,981; 1996 - $5,241,146)                   10,692,802         5,269,850
Loans receivable, net                                                             765,059,419       603,750,621
Accounts receivable, including advances to investors, net                           7,358,663         5,764,331
Accrued interest receivable                                                        10,345,722         6,632,250
Servicing asset                                                                    21,212,998        12,595,020
Premises and equipment                                                              9,527,559         7,767,680
Other assets                                                                       15,064,845        12,730,060
---------------------------------------------------------------------------------------------------------------
                                                                              $ 1,510,745,516   $ 1,037,797,529
===============================================================================================================
                                     Liabilities and Stockholders' Equity
Liabilities:
  Deposits                                                                    $   722,418,494   $   615,567,481
  Federal funds purchased                                                          10,000,000              --
  Securities sold under agreements to repurchase                                  382,282,810        97,444,448
  Notes payable                                                                   159,304,315       126,842,099
  Advances from FHLB                                                               42,000,000        15,000,000
  Other secured borrowings                                                         34,359,168        50,462,619
  Accounts payable and accrued liabilities                                         15,871,770         9,998,768
  Other liabilities                                                                 3,205,043         3,599,222
---------------------------------------------------------------------------------------------------------------
                                                                                1,369,441,600       918,914,637
---------------------------------------------------------------------------------------------------------------
Subordinated notes                                                                  3,250,000         3,250,000
---------------------------------------------------------------------------------------------------------------
Commitments and contingencies                                                            --                --
---------------------------------------------------------------------------------------------------------------
Stockholders' equity:
 Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued              --                --
   Common stock:
           Class A - $.01 par value, 10,000,000 shares authorized,
            9,220,278 issued and outstanding in 1997 (1996 - 5,122,377)                92,203            51,223
           Class B - $.01 par value, 15,000,000 shares authorized,
            4,924,474 issued and outstanding in 1997 (1996 - 2,735,839)                49,245            27,360
   Additional paid-in capital                                                      38,347,818        38,410,683
   Retained earnings                                                               96,129,140        75,784,804
   Capital reserves of the Bank                                                     2,215,172         1,460,707
   Unrealized gain (loss) on securities available for sale, net                     1,220,338          (101,885)
---------------------------------------------------------------------------------------------------------------
                                                                                  138,053,916       115,632,892
---------------------------------------------------------------------------------------------------------------
                                                                              $ 1,510,745,516   $ 1,037,797,529
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.

                                                      42
<PAGE>
<TABLE>
<CAPTION>
R&G Financial Corporation
Consolidated Statements of Income
Years Ended December 31, 1997, 1996 and 1995

                                                                                 1997                  1996                 1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                   <C>                   <C>         
Interest income:
  Loans                                                                     $ 68,513,571          $ 54,081,908          $ 37,039,388
  Money market and other investments                                           6,295,443             4,364,861             1,805,345
  Mortgage-backed securities                                                  22,525,876            15,338,950            14,666,922
------------------------------------------------------------------------------------------------------------------------------------
          Total interest income                                               97,334,890            73,785,719            53,511,655
------------------------------------------------------------------------------------------------------------------------------------
Less - interest expense:
  Deposits                                                                    32,434,559            27,517,852            21,829,433
  Securities sold under agreements to repurchase                              13,483,500             5,023,794             6,436,327
  Notes payable                                                                9,615,560             7,283,593             3,363,930
  Secured borrowings                                                           3,583,471             4,189,845                  --
  Other                                                                        1,688,034               847,607               608,984
------------------------------------------------------------------------------------------------------------------------------------
                                                                              60,805,124            44,862,691            32,238,674
------------------------------------------------------------------------------------------------------------------------------------
Net interest income                                                           36,529,766            28,923,028            21,272,981
Provision for loan losses                                                      6,370,000             4,258,047               950,000
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses                           30,159,766            24,664,981            20,322,981
------------------------------------------------------------------------------------------------------------------------------------
Other income:
  Net gain on origination and sale of loans                                   24,032,714            11,708,974             8,384,071
  Change in allowance for cost in excess of
          market value of loans held for sale                                       --                    --                 855,834
  Net profit (loss) on trading account                                          (853,700)              (65,656)                 --
  Net gain on sales of investment securities
    available for sale                                                           107,430               641,798                  --
  Loan administration and servicing fees                                      13,213,948            13,029,053            11,029,995
  Service charges, fees and other                                              4,604,670             3,937,878             3,171,949
------------------------------------------------------------------------------------------------------------------------------------
                                                                              41,105,062            29,252,047            23,441,849
------------------------------------------------------------------------------------------------------------------------------------
          Total revenues                                                      71,264,828            53,917,028            43,764,830
------------------------------------------------------------------------------------------------------------------------------------
Operating expenses:
  Employee compensation and benefits                                          13,652,754            10,793,301             8,283,809
  Office occupancy and equipment                                               7,131,497             5,531,129             4,711,312
  SAIF special assessment                                                           --               2,508,380                  --
  Other administrative and general                                            18,251,497            15,424,117            13,730,724
------------------------------------------------------------------------------------------------------------------------------------
                                                                              39,035,748            34,256,927            26,725,845
------------------------------------------------------------------------------------------------------------------------------------
          Income before minority interest and
                income taxes                                                  32,229,080            19,660,101            17,038,985

Minority interest in the Bank                                                       --                 538,168               742,527
------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes                                                    32,229,080            19,121,933            16,296,458
------------------------------------------------------------------------------------------------------------------------------------
Income tax expense:
  Current                                                                      6,263,549             5,687,865             3,555,868
  Deferred                                                                     2,468,319               234,552             2,291,478
------------------------------------------------------------------------------------------------------------------------------------
                                                                               8,731,868             5,922,417             5,847,346
------------------------------------------------------------------------------------------------------------------------------------
          Net income                                                        $ 23,497,212          $ 13,199,516          $ 10,449,112
====================================================================================================================================
Earnings per common share:

  Basic                                                                     $       1.66          $       1.21          $       1.12
====================================================================================================================================
  Diluted                                                                   $       1.62          $       1.19          $       1.12
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.

                                       43
<PAGE>
<TABLE>
<CAPTION>
R&G Financial Corporation
Consolidated  Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995

                                                        Common Stock                  Common Stock               Additional         
                                                           Class A                      Class B                Paid-in Capital      
                                                    Shares         Amount         Shares      Amount        Class A       Class B   
------------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>           <C>           <C>           <C>         <C>
Balance at December 31, 1994                      5,189,044       $51,890                                   $362,710                

Transfer to capital reserves                                                                                                        
Net income                                                                                                                          
Net change in unrealized gain (loss) on
 securities available for sale, net of tax                                                                                          
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995                      5,189,044        51,890                                    362,710                

Issuance of common stock (including
 66,667 Class B shares exchanged for
Class A shares in August):
        August                                      (66,667)         (667)      2,435,000    $ 24,350       (5,333)    $ 31,344,398 
        December                                                                  300,839       3,010                     6,708,908 
Transfer to capital reserves                                                                                                        
Cash dividends declared on common stock                                                                                             
Net income                                                                                                                          
Net change in unrealized gain (loss) on
 securities available for sale, net of tax                                                                                          
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996                      5,122,377        51,223       2,735,839      27,360        357,377     38,053,306 

Transfer to capital reserves                                                                                                        
Common stock split on September 25, 1997:
        Stock split                               4,097,901        40,980       2,188,635      21,885        (40,980)       (21,885)
        Cash paid in lieu of fractional shares                                                                                      
Cash dividends declared on common stock                                                                                             
Net income                                                                                                                          
Net change in unrealized gain on
 securities available for sale, net of tax                                                                                          
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997                      9,220,278       $92,203       4,294,474     $49,245       $316,397    $38,031,421 
====================================================================================================================================
<PAGE>
<CAPTION>
R&G Financial Corporation
Consolidated  Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995

                                                                    Unrealized gain
                                                      Capital    (loss) on securities  Retained
                                                      reserves    available for sale   earnings            Total
-------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>              <C>              <C>              <C>         
Balance at December 31, 1994                                          $ 986,180      $ 54,569,219       $55,969,999

Transfer to capital reserves                          $666,767                           (666,767)
Net income                                                                             10,449,112        10,449,112
Net change in unrealized gain (loss) on
 securities available for sale, net of tax                              (33,931)                            (33,931)
-------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995                           666,767          952,249        64,351,564        66,385,180

Issuance of common stock (including
 66,667 Class B shares exchanged for
Class A shares in August):
        August                                                                                           31,362,748
        December                                                                                          6,711,918
Transfer to capital reserves                           793,940                           (793,940)
Cash dividends declared on common stock                                                  (972,336)         (972,336)
Net income                                                                             13,199,516        13,199,516
Net change in unrealized gain (loss) on
 securities available for sale, net of tax                           (1,054,134)                         (1,054,134)
-------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996                         1,460,707         (101,885)       75,784,804       115,632,892

Transfer to capital reserves                           754,465                           (754,465)
Common stock split on September 25, 1997:
        Stock split                               
        Cash paid in lieu of fractional shares                                            (12,659)          (12,659)
Cash dividends declared on common stock                                                (2,385,752)       (2,385,752)
Net income                                                                             23,497,212        23,497,212
Net change in unrealized gain on
 securities available for sale, net of tax                            1,322,223                           1,322,223
-------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997                        $2,215,172       $1,220,338       $96,129,140      $138,053,916
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.

                                       44
<PAGE>
<TABLE>
<CAPTION>
R&G Financial Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995

                                                                                 1997                 1996                1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                  <C>                  <C>          
Cash flows from operating activities:
  Net income                                                                $  23,497,212        $  13,199,516        $  10,449,112
------------------------------------------------------------------------------------------------------------------------------------
  Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:
     Depreciation and amortization                                              2,659,888            2,142,275            1,794,454
     Amortization of premium (accretion of discount) on
      investments and mortgage - backed securities, net                          (371,816)             199,955               89,111
     Amortization of deferred loan origination fees
      and accretion of discount on loans purchased                               (258,324)            (411,219)            (366,332)
     Amortization of excess servicing receivable                                     --                 77,530              131,067
     Amortization of servicing rights                                           1,837,414            1,213,606            1,497,803
     Compensation cost on common shares granted                                      --                290,000                 --
     Change in allowance for cost in excess of
      market value of loans held for sale                                            --                   --               (855,834)
     Provision for loan losses                                                  6,370,000            4,258,047              950,000
     Provision for bad debts in accounts receivable                               300,000              300,000              572,092
     Gain on sales of mortgage loans                                           (2,721,154)            (599,935)            (264,953)
     Gain on sales of investment securities
       available for sale                                                        (107,430)            (641,798)                --
     Minority interest in earnings of the Bank                                       --                538,168              742,527
     Decrease (increase) in mortgage loans held for sale                        7,564,836          (33,131,819)           1,558,060
     Net (increase) decrease in mortgage-backed
      securities held for trading                                            (291,540,928)           5,662,504           14,914,098
     Net decrease (increase) in investment securities
      held for trading                                                            769,495           (1,350,827)                --
     (Increase) decrease in interest and
      accounts receivable                                                      (5,607,804)          (3,065,914)           1,148,109
     Other increases in other assets                                           (1,986,644)          (3,606,714)          (1,812,808)
     Increase in notes payable                                                 34,862,216           10,212,067            7,915,435
     Increase (decrease) in accounts payable
      and accrued liabilities                                                   5,128,545           (1,542,763)           6,442,758
     (Decrease) increase in other liabilities                                    (394,179)           1,167,645              934,566
------------------------------------------------------------------------------------------------------------------------------------
             Total adjustments                                               (243,495,885)         (18,289,192)          35,390,153

             Net Cash (used in) provided by
              operating activities                                           (219,998,673)          (5,089,676)          45,839,265
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Purchases of investment securities available for
   sale and held to maturity                                                  (83,021,527)         (47,623,969)            (377,000)
  Proceeds from sales and maturities of investment
   securities available for sale                                               36,265,089           63,127,623                 --
  Proceeds from maturities of investment securities
    held to maturity                                                                 --                377,000                 --
  Principal repayments on mortgage-backed securities                            9,475,202           10,554,678            8,636,250
  Proceeds from sale of loans                                                 120,955,837           50,326,054           20,201,648
  Net originations of loans                                                  (285,970,693)        (227,155,954)        (210,377,522)
  Purchases of FHLB stock, net                                                   (658,757)            (967,700)          (1,401,700)
  Acquisition of premises and equipment                                        (3,914,192)          (2,592,494)          (2,926,306)
  Net (increase) decrease in foreclosed real estate                              (853,716)            (572,814)              83,488
  Acquisition of servicing rights                                             (10,455,392)          (5,598,965)          (5,289,651)
------------------------------------------------------------------------------------------------------------------------------------
                  Net cash used in investing activities                      (218,178,149)        (160,126,541)        (191,450,793)
------------------------------------------------------------------------------------------------------------------------------------


                                                                 45
<PAGE>

R&G Financial Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995  (continued)

                                                                                 1997                 1996                1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                  <C>                  <C>          
Cash flows from financing activities:
  Proceeds from issuance of notes payable                                             $--        $  60,500,000        $  27,400,000
  Payments on notes payable                                                    (2,400,000)         (25,000,000)                --
  Proceeds from issuance of long-term debt                                           --                   --              2,000,000
  Payments of long-term debt                                                         --             (5,323,899)          (1,200,274)
  Increase in deposits - net                                                  106,750,114           97,160,090          137,928,057
  Increase (decrease) in securities sold
   under agreements to repurchase - net                                       284,838,362           (1,038,740)         (10,437,272)
  Increase in federal funds purchased                                          10,000,000                 --                   --
  Proceeds from secured borrowings                                                   --                   --             55,983,501
  Payments on secured borrowings                                              (16,103,451)          (5,520,882)                --
  Advances from FHLB                                                          161,700,000           16,000,000                 --
  Repayment of advances from FHLB                                            (134,700,000)          (7,000,000)          (7,500,000)
  Proceeds from issuance of common
   stock to minority shareholders                                                    --                   --                 10,321
  Proceeds from issuance of common stock on
   initial public offering                                                           --             31,072,748                 --
  Cash dividends on common stock                                               (2,385,752)            (972,336)                --
  Payment of cash in lieu of fractional shares
   on stock split                                                                 (12,659)                --                   --
------------------------------------------------------------------------------------------------------------------------------------
          Net cash provided by financing activities                           407,686,614          159,876,981          204,184,333
------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents                          (30,490,208)          (5,339,236)          58,572,805

Cash and cash equivalents at beginning of year                                 98,855,931          104,195,167           45,622,362
------------------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents at end of year                                    $  68,365,723        $  98,855,931        $ 104,195,167
====================================================================================================================================

Cash and cash equivalents include:
  Cash and due from banks                                                   $  32,607,001        $  31,989,944        $  32,559,429
  Securities purchased under agreements to resell                              16,000,000           19,633,178           21,694,675
  Time deposits with other banks                                               16,758,722           33,232,809           44,930,015
  Federal funds sold                                                            3,000,000           14,000,000            5,011,048
------------------------------------------------------------------------------------------------------------------------------------

                                                                            $  68,365,723        $  98,855,931        $ 104,195,167
====================================================================================================================================
</TABLE>

The accompanying notes are an integral part of these financial statements.

                                       46
<PAGE>
R&G FINANCIAL CORPORATION

Notes to Consolidated Financial Statements
December 31, 1997 and 1996

1.      Reporting Entity and Summary of Significant Accounting Policies

        Reporting entity

The accompanying  consolidated financial statements of R&G Financial Corporation
(the "Company")  include the accounts of R&G Mortgage Corp. ("R&G Mortgage"),  a
Puerto Rico  corporation,  and R-G Premier Bank of Puerto Rico (the  "Bank"),  a
commercial bank chartered under the laws of the Commonwealth of Puerto Rico. The
Company  was formed in March 1996 for the sole  purpose of  becoming  the parent
corporation and sole  stockholder of R&G Mortgage and the Bank. On July 19, 1996
the  Company  acquired  the 88%  ownership  interest  of the  Bank  and the 100%
ownership  interest of R&G Mortgage held by the Company's  Chairman of the Board
and Chief Executive  Officer (CEO). In  consideration of the acquisition of such
interests,  the Company issued the CEO 5,189,044  shares of its Class A $.01 par
value newly issued  common stock (the Class A shares),  in exchange for his 100%
ownership  interests.  The transaction was accounted for at historical cost in a
manner similar to pooling of interests accounting.

On  December  2, 1996 the Company  also  acquired  the  remaining  12%  minority
ownership  interest  in the Bank  which  was  held by  approximately  200  other
stockholders  (the Minority Bank  Stockholders)  through the issuance of 300,839
Class B $.01 par value  common  stock (the Class B shares) of the  Company.  The
Minority  Bank  Stockholders  received,  in  exchange  for their  aggregate  12%
interest in the Bank's  common  stock,  an aggregate of 300,839 of shares of the
Company's Class B shares which was determined based on an independent  valuation
of the Bank.  This  transaction  was accounted for under the purchase  method of
accounting  resulting  in the  recognition  of goodwill  totaling  approximately
$2,578,000 which is being amortized over a 15 year period.

On August 27,  1996,  the Company  sold  2,348,333  Class B shares of its common
stock to the general public in an underwritten  offering. The Company's CEO also
converted  66,667 of his Class A shares into Class B shares and sold such shares
in the  public  offering.  As a result  of such  transaction,  an  aggregate  of
2,415,000 Class B shares were publicly issued and are now traded on NASDAQ.  The
Company  received  gross  proceeds of $35.0  million in the  transaction,  which
resulted  in  estimated  net  proceeds  of $31.1  million  after  payment of the
underwriting discount and expenses.  Immediately following the Company's initial
public offering,  the Company issued an additional  20,000 Class B shares to the
Company's Vice Chairman of the Board in  consideration  for his past and ongoing
services, which shares were not registered in such offering.

R&G Mortgage is engaged primarily in the business of originating FHA insured, VA
guaranteed, and privately insured first and second mortgage loans on residential
real estate (1 to 4  families).  R&G  Mortgage  pools FHA and VA loans into GNMA
(Government  National  Mortgage  Association)   mortgage-backed  securities  and
collateralized  mortgage  obligation  (CMO)  certificates  for sale to permanent
investors.  Upon selling the loans,  it retains the rights to service the loans.
R&G Mortgage is also a Federal National Mortgage  Association (FNMA) and Federal
Home Loan Mortgage  Corporation  (FHLMC)  Seller-Servicer of conventional loans.
R&G  Mortgage is licensed by the  Secretary  of the Treasury of Puerto Rico as a
mortgage  company and is duly  authorized to do business in the  Commonwealth of
Puerto Rico.

                                       47
<PAGE>
The Bank  provides a full range of banking  services  through  fifteen  branches
located  mainly in the northern  part of the  Commonwealth  of Puerto  Rico.  As
discussed  in Note 17 to the  consolidated  financial  statements,  the  Bank is
subject to the regulations of certain federal and local agencies,  and undergoes
periodic examinations by those regulatory agencies.

The  accounting  and reporting  policies of the Company  conform with  generally
accepted  accounting   principles.   The  following  is  a  description  of  the
significant accounting policies:

        Basis of consolidation

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

        Use of estimates in the preparation of financial statements

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the reported  amounts of assets and liabilities and the reported  amounts
of revenues and expenses  during the  reporting  period,  and the  disclosure of
contingent  assets and  liabilities  at the date of the  consolidated  financial
statements. Actual results could differ from those estimates.

        Securities purchased under agreements to resell

The Company purchases securities under agreements to resell the same securities.
Amounts  advanced  under these  agreements  represent  short-term  loans and are
reflected as assets in the consolidated statement of financial condition.

        Investment securities

Investments in debt and equity securities are classified at the time of purchase
into one of three categories:

Held to maturity- debt  securities  which the Company has a positive  intent and
ability to hold to maturity. These securities are carried at amortized cost.

Trading-  debt and equity  securities  that are bought by the  Company  and held
principally for the purpose of selling them in the near term.  These  securities
are  carried  at fair  value,  with  unrealized  gains and  losses  included  in
earnings.  Mortgage-backed securities that are held for sale in conjunction with
mortgage banking activities are classified as trading securities.

Available  for  sale-  debt and  equity  securities  not  classified  as  either
held-to-maturity  or trading.  These securities are reported at fair value, with
unrealized  gains and losses excluded from earnings and reported net of taxes in
a separate component of stockholders' equity.

Premiums and discounts  are  amortized as an adjustment to interest  income over
the life of the related securities using a method that approximates the interest
method.  Realized gains or losses for securities  classified as either available
for sale or held to maturity are reported in earnings.  Cost of securities  sold
is determined on the specific identification method.

        Loans and allowance for loan losses

Loans are stated at their outstanding  principal balance, less unearned interest
and allowance for loan losses.  Loan  origination  and commitment fees and costs
incurred in the  origination  of new loans are deferred and amortized  using the
interest  method over the life of the loans as an adjustment of interest  yield.
Unearned  interest on  installment  loans is recognized as income under a method
which  approximates  the  interest  method.  Interest  on  loans  not  made on a
discounted  basis is credited to income based on the loan principal  outstanding
at stated interest rates.

Management  believes that the  allowance for loan losses is adequate.  It is the
policy of the Bank to increase its valuation  allowances for estimated losses on
loans when, based on management's  evaluation,  a loss becomes both probable and
estimable.  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  estimated  value of any
underlying  collateral and assessment of current economic conditions.  Additions
to  allowances  are  charged to  income.  Any  recoveries  are  credited  to the
allowance.

The Company measures  impairment of individual loans,  except for loans that are
valued at fair value or at the lower of cost or fair value, based on the present
value of expected future cash flows discounted at the loan's effective  interest
rate, or, as a practical  method, at the observable market price of the loan, or
the  fair  value of the  collateral  if the loan is  collateral  dependent.  The
Company considers loans over $500,000 for individual impairment evaluations. The
Company collectively performs impairment evaluations for large groups of small -
balance  homogeneous  loans.  Loans  are  considered  impaired  when,  based  on
management's  evaluation,  a borrower will not be able to fulfill its obligation
under the original terms of the loan.

        Interest income

Recognition  of interest on mortgage,  consumer and other loans is  discontinued
when loans are 90 days or more in arrears on payment of principal or interest or
earlier when other factors  indicate that collection of interest or principal is
doubtful.   Loans  for  which  the  recognition  of  interest  income  has  been
discontinued  are designated as  non-accruing.  Such loans are not reinstated to
accrual  status  until  interest  is  received  currently  and no other  factors
indicative of doubtful collection exist.

Discounts and premiums on purchased  mortgage loans are accreted  (amortized) to
income over the remaining life of the loans.

        Mortgage loans held for sale

Mortgage  loans  intended  for sale in the  secondary  market are carried at the
lower of cost or  estimated  market,  computed in the  aggregate.  The amount by
which cost  exceeds  market  value is  accounted  for as a valuation  allowance.
Changes in the valuation  allowance are included in the  determination of income
in the period in which the change occurs.

                                       48
<PAGE>
        Loan servicing fees

Loan servicing fees, which are based on a percentage of the principal balance of
the mortgage  loans  serviced,  are credited to income as mortgage  payments are
collected.  Late charges and miscellaneous  other fees collected from mortgagors
are credited to income when earned,  adjusted for estimated amounts not expected
to be collected. Loan servicing costs are charged to expense when incurred.

        Allowance for doubtful accounts

The  allowance  for doubtful  accounts is  determined  based on  experience  and
results  mainly from  expenses  incurred  in the  foreclosure  of  property  not
reimbursed by insurers on loans serviced for others.

        Servicing rights

During 1995, the Company  adopted  Statement of Financial  Accounting  Standards
(SFAS) No. 122 -  "Accounting  for Mortgage  Servicing  Rights - an amendment of
FASB  Statement  No.  65,"  which  permits  the  prospective  capitalization  of
servicing rights acquired through loan origination  activities and requires that
a  portion  of the cost of  originating  a  mortgage  loan be  allocated  to the
mortgage  servicing  right.  Previously,  only servicing rights acquired through
purchases were capitalized. To determine the fair value of the servicing rights,
the Company uses the market prices of comparable servicing sale contracts.  SFAS
122 prohibits  retroactive  application,  therefore,  mortgage  servicing rights
related to loans  originated  prior to the  adoption  of the  Statement  are not
recognized in the Company's  consolidated financial statements until the related
loans are sold.

The cost of acquiring the rights to service  mortgage loans is  capitalized  and
amortized in proportion to and over the period of net servicing income. SFAS 122
also requires that all mortgage servicing rights be evaluated for impairment. In
determining  impairment,  servicing rights were  disaggregated by interest rate,
the latter considered their predominant risk characteristic.

For purposes of measuring  impairment,  mortgage servicing rights are stratified
by loan on the basis of interest rates. An impairment is recognized whenever the
prepayment  pattern of the mortgage  loan  indicates  that the fair value of the
related  mortgage  servicing  rights  is  less  than  its  carrying  amount.  An
impairment  is  recognized  by  charging  such  excess to  income.  The  Company
determined  that no reserve for  impairment was required as of December 31, 1997
or 1996. As of December 31, 1997 and 1996 the fair value of capitalized mortgage
servicing rights was approximately $24,566,000 and $15,984,000, respectively. In
determining fair value, the Company considers the fair value of servicing rights
with similar risk characteristics.

        Accounting for transfers and servicing of financial assets
        and extinguishment of liabilities

In June  1996 the FASB  issued  SFAS No.  125,  "Accounting  for  Transfers  and
Servicing of Financial Assets and Extinguishments of Liabilities," amending SFAS
122. SFAS 125 requires the recognition of financial  assets and servicing assets
controlled by the reporting  entity,  the derecognition of financial assets when
control is  surrendered,  and the  derecognition  of  liabilities  when they are
extinguished. Specific criteria are established for determining when control has
been surrendered in the transfer of financial assets.


This Statement requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial  assets be initially  measured at
fair value,  if  practicable.  It also requires that servicing  assets and other
retained  interests  in the  transferred  assets be measured by  allocating  the
previous carrying amount between the assets sold, if any, and retained interest,
if any,  based on  their  relative  fair  values  at the  date of the  transfer.
Servicing  assets  and  liabilities   must  be  subsequently   adjusted  by  (a)
amortization  in  proportion  to and over the period of estimated  net servicing
income and loss and (b) assessment for asset impairment or increased  obligation
based on their fair values.

SFAS 125 modifies the  accounting for  interest-only  strips ("IOs") or retained
interests in securitizations, such as excess servicing fees receivable, that can
be  contractually  prepaid  or  otherwise  settled in such a way that the holder
would not recover  substantially  all of its recorded  investment,  and requires
that they be classified as available for sale or as trading securities.

Management has determined that excess servicing fees receivable  retained by the
Company as a result of securitization transactions or bulk sales will be held as
trading  securities  IOs  if  made  in  connection  with  its  mortgage  banking
activities,  and  available  for  sale  if not  made  in  connection  with  such
activities.  In addition, all residual interests and mortgage-backed  securities
previously  retained by the Company as part of its mortgage  banking  activities
securitization transactions will also be held as trading securities.

The provisions of this Statement,  except as indicated below, were effective for
transfers and servicing of financial  assets and  extinguishment  of liabilities
occurring  on or after  January  1,  1997,  and must be  applied  prospectively.
Earlier or  retroactive  application is not  permitted.  In connection  with the
adoption of SFAS 125 effective  January 1, 1997,  the Company  reclassified  the
asset previously shown on the Company's  Consolidated Balance Sheet as "Mortgage
Servicing Rights" to "Servicing Asset." In addition,  the asset previously shown
as "Excess Servicing Fees Receivable" was reclassified as "Interest Only Strips"
and is now included in the Company's  Consolidated  Balance Sheet as a component
of "Mortgage-Backed Securities held for trading."

In December  1996,  the FASB issued SFAS No. 127 to defer until  January 1, 1998
the  effective  date  applicable  to the  provisions  of SFAS 125 that deal with
secured borrowings and collateral.  Additionally,  the deferment provision would
apply to transfers of financial assets for repurchase  agreements,  dollar rolls
and securities  lending.  Based on presently  available  information  management
believes  the  application  of those  provisions  of SFAS 125  effective in 1998
should not have a material adverse effect on the Company's  financial  condition
or results of operations.

        Sale of servicing rights

The sale of servicing rights is recognized upon executing the contract and title
and all risks and rewards have irrevocably passed to the buyer. Gains and losses
realized  on such sales are  recognized  based upon the  difference  between the
selling price and the carrying value of the related servicing rights sold.

                                       49
<PAGE>
        Foreclosed real estate held for sale

Other real estate owned comprises properties acquired in settlement of loans and
recorded at fair value less estimated  costs to sell at the date of acquisition.
Costs  relating  to  the   development  and  improvement  of  the  property  are
capitalized,  whereas  those  relating to holding the  property  are expensed as
incurred.

Valuations are periodically performed by management, and an allowance for losses
is  established  by a charge to operations  if the carrying  value of a property
exceeds its estimated net realizable value. In providing  allowances for losses,
the cost of holding real estate, including interest costs, are considered. Gains
or losses resulting from the sale of these properties are credited or charged to
income.

        Premises and equipment

Premises and equipment are stated at cost,  less  accumulated  depreciation  and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful life of each type of asset. Major additions and
improvements which extend the life of the assets are capitalized,  while repairs
and maintenance are charged to expense.

Effective January 1, 1996 the Company adopted SFAS No. 121 - "Accounting for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of."
Under this Statement,  long-lived assets and certain identifiable intangibles to
be held and used must be reviewed for impairment  whenever  events or changes in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  In performing  the review for  recoverability,  an estimate of the
future cash flows  expected to result from the use of the asset and its eventual
disposition must be made. If the sum of the future cash flows  (undiscounted and
without  interest  charges) is less than the  carrying  amount of the asset,  an
impairment loss is recognized for the difference, if any, between the discounted
future cash flows and the carrying value of the asset.  The  application of this
Statement  had no effect on the  Company's  financial  condition  or  results of
operations for 1996.

        Goodwill and other intangibles

Goodwill  results  from the  acquisition  in December  1996 of the 12%  minority
interest  in the  Bank  as  described  in Note 1 to the  consolidated  financial
statements,  and from the acquisition of a mortgage banking  institution and the
Bank in prior  years,  which is being  amortized  over a  fifteen  year  period.
Accumulated  amortization  amounted to $1,363,045  and $1,059,636 as of December
31, 1997 and 1996, respectively.

In addition,  the Company has recorded as a deposit  intangible the premium paid
by the Bank over the value of deposits  acquired  resulting from the purchase of
certain  branches  from a  commercial  bank in 1995.  The  premium  paid,  which
approximated  $1,351,000,  was  determined  based on  negotiations  between  the
parties  to the  agreement  and  is  being  amortized  over  a 10  year  period.
Accumulated  amortization  amounted to  approximately  $342,000  and $204,000 at
December 31, 1997 and 1996, respectively.

        Securities sold under agreements to repurchase

The Company sells  securities under agreements to repurchase the same or similar
securities.   Amounts  received  under  these  agreements  represent  short-term
borrowings  and the securities  underlying  the  agreements  remain in the asset
accounts.

        Transfers of receivables with recourse

Transfers of  receivables  with recourse are recognized as a sale if the Company
surrenders  control of the future economic benefits embodied in the receivables,
its obligation under the recourse provisions can be reasonably estimated and the
transferee  cannot  require the Company to  repurchase  the  receivables  except
pursuant to the recourse provisions.  Any transfers of receivables with recourse
not  meeting  all of these  conditions  are  recognized  as a  liability  in the
consolidated financial statements.

Gains and losses realized on the sale of loans are recognized at the time of the
sale of the loans or pools to investors,  based upon the difference  between the
selling  price and the carrying  value of the related loans sold as adjusted for
any estimated liability under recourse  provisions.  In most sales, the right to
service the loans sold is retained by the Company.

        Interest rate risk management

The Company  enters into  interest  rate caps,  swaps,  options  and/or  futures
contracts  (primarily  based on  Eurodollar  certificates  of deposits  and U.S.
Treasury  Notes) to manage its interest  rate  exposure.  Such  instruments  are
designated  as hedges  against  future  fluctuations  in the  interest  rates of
specifically identified assets or liabilities.  Options and futures are reported
at fair value within investments in the accompanying  consolidated  statement of
financial  condition;  related  gains or losses are reported in the statement of
income.  Interest rate swaps are not recognized in the consolidated statement of
financial  condition and are not marked to market.  Net interest  settlements on
interest rate swaps are recorded as adjustments to interest income or expense.

        Employee benefits

The Company and its subsidiaries  have no post retirement  benefit plans for its
employees as of December 31, 1997.

        Income taxes

The  Company  follows an asset and  liability  approach  in the  recognition  of
deferred tax liabilities and assets for the expected future tax  consequences of
temporary  differences  between the carrying amounts and the tax bases of assets
and liabilities.  A valuation allowance is recognized for any deferred tax asset
for which,  based on  management's  evaluation,  it is more  likely  than not (a
likelihood  of more than 50%) that some portion or all of the deferred tax asset
will not be realized.

                                       50
<PAGE>
        Capital reserve

The Banking Act of the Commonwealth of Puerto Rico, as amended,  requires that a
minimum of 10% of net income of the Bank be transferred to capital surplus until
such surplus  equals the sum of the Bank's  paid-in  common and preferred  stock
capital.

        Stock option plans

As discussed in Note 18 to the consolidated  financial  statements,  the Company
adopted a Stock  Option Plan in June 1996 and granted  stock  options to certain
employees  thereunder in conjunction with the Company's initial public offering.
Compensation  cost on employee stock option plans is measured and recognized for
any excess of the quoted market price of the  Company's  stock at the grant date
over the amount an employee must pay to acquire the stock (intrinsic value-based
method of  accounting).  Generally,  stock  options are granted with an exercise
price  equal to the  face  value of the  stock  at the  date of the  grant  and,
accordingly, no compensation cost is recognized. The Company adopted in 1996 the
disclosure   provisions   of  SFAS  No.   123,   "Accounting   for   Stock-Based
Compensation."

        Fair value of financial instruments

The  reported  fair values of  financial  instruments  are based on a variety of
factors.  For a  substantial  portion  of  financial  instruments,  fair  values
represent quoted market prices for identical or comparable instruments. In a few
other cases, fair values have been estimated based on assumptions concerning the
amount and timing of  estimated  future  cash flows and assumed  discount  rates
reflecting  varying  degrees  of  risk.  Accordingly,  the fair  values  may not
represent  actual  values of the  financial  instruments  that  could  have been
realized as of year end or that will be realized in the future.

        Earnings per share

Basic  earnings per common share is computed by dividing net income for the year
by the  weighted  average  number  of  shares  outstanding  during  the  period.
Outstanding  stock options  granted  under the  Company's  Stock Option Plan are
included in the  weighted  average  number of shares for purposes of the diluted
earnings per share computation  pursuant to SFAS No. 128 - "Earnings per Share."
SFAS 128 replaces the  presentation  of primary EPS with a presentation of basic
EPS. It also requires dual  presentation of basic and diluted EPS computation on
the  face  of the  income  statement  for  all  entities  with  complex  capital
structures and requires  reconciliation  of the numerator and denominator of the
diluted EPS computation.  SFAS 128, which also applies to interim  periods,  was
adopted by the  Company in  December  31,  1997.  This  Statement  requires  the
restatement of all  prior-period  EPS data  presented.  Prior to the adoption of
SFAS 128 the Company's  capital  structure was such that the presentation of the
fully diluted EPS data was not necessary,  and the prior period  presentation of
primary EPS data excluded  outstanding stock options granted under the Company's
stock option plan from the weighted average number of shares outstanding because
their  dilutive  effect  was  insignificant.  Accordingly,  the  basic  EPS data
presented  under  SFAS 128 is  equivalent  to the  primary  EPS data  previously
presented.

        Statement of cash flows

For purposes of reporting cash flows, cash and cash equivalents  include cash on
hand and  amounts  due from banks and other  highly  liquid  securities  with an
original maturity of three months or less.

        Changes in accounting standards

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income."
This Statement requires (1) the  classification of items of other  comprehensive
income  by  their  nature  in a  financial  statement;  (2) the  display  of the
accumulated balance of other comprehensive income by their nature in a financial
statement; and (3) the display of the accumulated balance of other comprehensive
income separately from retained  earnings and additional  paid-in capital in the
equity  section  of the  statement  of  financial  position.  For  the  Company,
unrealized  gains and losses on certain  investments in debt  securities will be
the only other comprehensive income item to be included in comprehensive income.
This Statement is effective for fiscal years  beginning after December 15, 1997.
This Statement affects only financial  statement  presentation  and,  therefore,
management  believes that its adoption will not have a material effect,  if any,
on the Company's financial position or results of operations.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise  and Related  Information."  This  Statement  requires  that a public
business  enterprise  report  financial and  descriptive  information  about its
reportable  segments.  Operating  segments are components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating  decision maker in deciding how to allocate resources and in
assessing  performance.  Management  has not  yet  made a  determination  on the
business  lines of the Company  that  fulfill the segment  definition  described
above.

This Statement is effective for fiscal years  beginning after December 15, 1997.
Reclassification  of  financial  statements  for earlier  periods  provided  for
comparative  purposes  is  required.   This  Statement  affects  only  financial
statement  presentation and disclosure and,  therefore,  management  believes it
will not have a material effect, if any, on the Company's  financial position or
results of operations.

        Reclassifications

Certain  reclassifications  have  been  made  to the  1996  and  1995  financial
statements to conform to the 1997 financial statement presentation.


                                       51
<PAGE>
2.      Mortgage Loans Held for Sale

        Mortgage loans held for sale consist of:
<TABLE>
<CAPTION>
                                                           December 31,
                                                    1997                 1996
--------------------------------------------------------------------------------
<S>                                             <C>                  <C>        
Conventional loans                              $25,003,291          $ 9,254,440
FHA/VA loans                                     21,882,032           44,863,833
Construction loans                                     --                331,886
--------------------------------------------------------------------------------
                                                $46,885,323          $54,450,159
================================================================================
</TABLE>

The aggregate amortized cost and approximate market value of loans held for sale
as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
      Amortized      Gross unrealized       Grosss unrealized    Approximate
        cost           holding gains          holding losses     market value
--------------------------------------------------------------------------------
<S>                     <C>                      <C>             <C>        
    $46,885,323         $1,465,427               $(5,498)        $48,345,252
================================================================================
</TABLE>

Substantially  all of the loans are pledged to secure  various  borrowings  from
lenders under mortgage warehousing lines of credit (see Note 9).

The following table  summarizes the components of gain on sale of mortgage loans
held-for-sale and mortgage-backed securities held-for-trading:
<TABLE>
<CAPTION>
                                                     Year ended December 31,
                                             1997             1996             1995
---------------------------------------------------------------------------------------
<S>                                     <C>              <C>              <C>          
Proceeds from sales of mortgage loans
and mortgage-backed securities          $ 370,121,097    $ 297,606,773    $ 218,738,872

Mortgage loans and mortgage-
backed securities sold                   (359,001,427)    (290,777,907)    (215,176,557)
---------------------------------------------------------------------------------------
Gain on sales, net                         11,119,670        6,828,866        3,562,315

Deferred fees earned, net of loan
origination costs and commitment
fees paid                                   3,235,381        4,976,079        2,700,145
---------------------------------------------------------------------------------------
                                           14,355,051       11,804,945        6,262,460

Net unrealized profit (loss) on
trading securities                          9,677,663          (95,971)       2,121,611
---------------------------------------------------------------------------------------

Net gain on origination and
sale of mortgage loans                  $  24,032,714    $  11,708,974    $   8,384,071
=======================================================================================
</TABLE>

Total gross loan origination fees totaled approximately $13,614,000, $13,041,000
and  $9,488,000  during  the  years  ended  December  31,  1997,  1996 and 1995,
respectively.

Gross gains of  $11,532,566,  $7,479,507  and  $4,057,352,  and gross  losses of
$412,896,  $650,641  and  $496,037  were  realized on the above sales during the
years ended December 31, 1997, 1996 and 1995, respectively.

                                          52
<PAGE>
3.      Investment Securities

The carrying value and estimated fair value of investment securities by category
and  contractual  maturities  are  shown  below.  The fair  value of  investment
securities  is based on quoted  market  prices and dealer  quotes except for the
investment  in  Federal  Home  Loan  Bank  (FHLB)  stock  which is valued at its
redemption value.
<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                             1997                                    1996
                                                               Amortized              Fair            Amortized              Fair
                                                                 cost                 value              cost                value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                 <C>                 <C>                 <C>      
Investment securities held to
 maturity
U.S. Treasury securities:
        Due within one year                                  $   309,839         $   310,775         $      --           $      --
        Due from one to five years                                  --                  --               309,575             310,871
------------------------------------------------------------------------------------------------------------------------------------
                                                                 309,839             310,775             309,575             310,871
------------------------------------------------------------------------------------------------------------------------------------
Puerto Rico Government and Agencies
 obligations:
        Due within one year                                    4,433,177           4,439,474                --                  --
        Due from one to five years                                  --                  --             1,034,998           1,012,500
        Due from five to ten years                             5,920,000           5,910,000                --                  --
        Due over ten years                                        29,786              29,786             574,453             566,951
------------------------------------------------------------------------------------------------------------------------------------
                                                              10,382,963          10,379,260           1,609,451           1,579,451
------------------------------------------------------------------------------------------------------------------------------------
Corporate  securities -
        Due within one year                                         --                  --             3,350,824           3,350,824
------------------------------------------------------------------------------------------------------------------------------------
                                                             $10,692,802         $10,690,035         $ 5,269,850         $ 5,241,146
====================================================================================================================================
Mortgage-backed securities held
  to maturity
GNMA certificates:
        Due from one to five years                           $    49,347         $    50,128         $      --           $      --
        Due from five to ten years                                  --                  --                96,696              99,828
        Due over ten years                                    18,321,595          17,704,769          21,590,649          20,571,360
------------------------------------------------------------------------------------------------------------------------------------
                                                              18,370,942          17,754,897          21,687,345          20,671,188
------------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage
 Association (FNMA) certificates-
        Due over ten years                                    14,674,783          15,164,453          15,895,067          16,124,357
------------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage
 Corporation (FHLMC) certificates-
        Due over ten years                                       280,747             266,322             317,435             308,846
------------------------------------------------------------------------------------------------------------------------------------
                                                             $33,326,472         $33,185,672         $37,899,847         $37,104,391
====================================================================================================================================
</TABLE>

                                       53
<PAGE>

Expected  maturities on debt securities will differ from contractual  maturities
because  borrowers  may have the  right to call or  prepay  obligations  with or
without call or  prepayment  penalties.
<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                               1997                                1996
                                                                   Amortized           Fair            Amortized            Fair
                                                                     cost              value              cost              value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                <C>                <C>                <C>        
Mortgage-backed securities available
 for sale
CMO residuals and other
 mortgage-backed securities                                     $ 7,006,610        $ 8,381,982        $ 7,066,610        $ 8,195,379
------------------------------------------------------------------------------------------------------------------------------------
FNMA certificates -
        Due over ten years                                        9,468,141          9,670,108         10,562,799         10,293,218
------------------------------------------------------------------------------------------------------------------------------------
FHLMC  certificates:
        Due from one to five years                                   70,584             70,452               --                 --
        Due from five to ten years                                  359,980            368,203            529,902            547,027
        Due over ten years                                       27,104,346         27,513,104         32,547,150         31,805,541
------------------------------------------------------------------------------------------------------------------------------------
                                                                 27,534,910         27,951,759         33,077,052         32,352,568
------------------------------------------------------------------------------------------------------------------------------------
                                                                $44,009,661        $46,003,849        $50,706,461        $50,841,165
====================================================================================================================================
Investment securities available for sale
   US Treasury securities:
        Due within one year                                     $   773,156        $   771,593        $      --          $      --
        Due from one to five years                               30,009,771         30,100,000               --                 --
------------------------------------------------------------------------------------------------------------------------------------
                                                                 30,782,927         30,871,593               --                 --
------------------------------------------------------------------------------------------------------------------------------------
U.S. Government and Agencies
 securities:
        Due within one year                                            --                 --            1,500,000          1,500,000
        Due from one to five years                               35,145,089         35,104,828         25,527,679         25,225,950
        Due from five to ten years                                5,022,904          4,980,865               --                 --
------------------------------------------------------------------------------------------------------------------------------------
                                                                 40,167,993         40,085,693         27,027,679         26,725,950
------------------------------------------------------------------------------------------------------------------------------------
                                                                 70,950,920         70,957,286         27,027,679         26,725,950
FHLB stock                                                        4,906,067          4,906,067          4,247,310          4,247,310
------------------------------------------------------------------------------------------------------------------------------------
                                                                $75,856,987        $75,863,353        $31,274,989        $30,973,260
====================================================================================================================================
</TABLE>

Mortgage backed  securities  available for sale include interest only securities
with an amortized cost of $2,363,942 as of December 31, 1997 and 1996, which are
associated with the sale in prior years of collateralized  mortgage  obligations
not related to the Company's mortgage banking activities.

                                       54
<PAGE>
Mortgage - backed securities held for trading:
<TABLE>
<CAPTION>
                                                            December 31,
                                                     1997               1996
--------------------------------------------------------------------------------
<S>                                              <C>                <C>         
CMO Certificates                                 $ 15,228,000       $ 15,147,000
CMO Residuals (interest only)                       7,867,662          9,309,548
GNMA Certificates                                 377,361,794         84,459,980
--------------------------------------------------------------------------------
                                                 $400,457,456       $108,916,528
================================================================================
</TABLE>

Unrealized  gains and losses on  securities  held to maturity and  available for
sale follows:
<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                            1997                                 1996
                                                                      Gross unrealized                     Gross unrealized
                                                                Gains               Losses             Gains                Losses
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                    <C>              <C>                 <C>         
Securities held to maturity:
        Puerto Rico and United States
         Government obligations                             $       936         $   (37,757)        $    13,795         $   (42,499)
        Mortgage-backed securities                              504,349            (645,149)            338,941          (1,134,397)
------------------------------------------------------------------------------------------------------------------------------------
                                                            $   505,285            (682,906)        $   352,736         $(1,176,896)
====================================================================================================================================
Securities available for sale:
        US Government obligations                           $   113,223         $  (106,857)        $      --           $  (301,729)
        Mortgage-backed securities                            2,043,941             (49,753)          1,003,887            (869,183)
------------------------------------------------------------------------------------------------------------------------------------
                                                            $ 2,157,164         $  (156,610)        $ 1,003,887         $(1,170,912)
====================================================================================================================================
</TABLE>

During  1997 and 1996  the  Company  had  proceeds  from the sale of  investment
securities  held for  trading  of  approximately  $10,083,000  and  $11,440,000,
respectively;  gains  realized on such sales totaled  approximately  $31,000 and
$44,000,  respectively;  no losses were realized.  No investment securities held
for trading were sold in 1995. During the years ended December 31, 1997 and 1996
proceeds  from the sale of securities  available for sale totaled  approximately
$7,915,000 and $48,950,000,  respectively; gains realized in those sales totaled
approximately  $107,000 and  $642,000,  respectively;  no losses were  realized.
There were no sales of securities available for sale during 1995.

During 1997 the Company  reclassified  $773,000  investment  securities held for
trading to available for sale. During 1995, the Company reclassified  investment
securities from its available for sale to its held for trading  portfolio with a
carrying  value  of  approximately  $4,671,000  at the  time  of  the  transfer,
resulting in an increase in net income of $470,092 at such time.

As  discussed  in  Notes 7, 8, 9, 10,  11 and 12 to the  consolidated  financial
statements,  investment and  mortgage-backed  securities,  mortgage  loans,  and
deposits at interest with banks amounting to approximately  $696.0 million as of
December 31, 1997 were pledged to secure certain  deposits and  securities  sold
under  agreements  to  repurchase,   advances  from  the  FHLB,  notes  payable,
subordinated notes and irrevocable standby letters of credit issued by the FHLB.

                                       55
<PAGE>
4.              Loans and Allowance for Loan Losses

Loans consist of the following:
<TABLE>
<CAPTION>
                                                            December 31,
                                                      1997              1996
--------------------------------------------------------------------------------
<S>                                              <C>              <C>          
Real estate loans:
        Residential - first mortgage             $ 476,652,596    $ 370,875,512
        Residential - second mortgage               17,831,079       15,757,050
        Land                                            76,400             --
        Construction                                13,367,513        5,351,115
        Commercial                                  87,506,802       75,214,109
--------------------------------------------------------------------------------
                                                   595,434,390      467,197,786
Undisbursed portion of loans in process             (6,218,039)      (2,429,714)
Net deferred loan fees                                 172,019           40,555
--------------------------------------------------------------------------------
                                                   589,388,370      464,808,627
--------------------------------------------------------------------------------
Other loans:
        Commercial                                  38,598,227       31,062,947
        Consumer:
                Loans secured by deposits           12,471,772        9,408,892
                Loans secured by real estate        81,251,989       42,893,213
                Other                               50,632,418       59,864,037
        Unamortized discount                          (151,460)        (278,320)
        Unearned interest                             (360,195)        (677,130)
--------------------------------------------------------------------------------
                                                   182,442,751      142,273,639
--------------------------------------------------------------------------------
                Total loans                        771,831,121      607,082,266
Allowance for loan losses                           (6,771,702)      (3,331,645)
--------------------------------------------------------------------------------
                                                 $ 765,059,419    $ 603,750,621
================================================================================
</TABLE>

The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>
                                                 Year ended December 31,
                                        1997             1996            1995
--------------------------------------------------------------------------------
<S>                                 <C>             <C>             <C>        
Balance, beginning of year          $ 3,331,645     $ 3,510,251     $ 2,887,099
Provision for loan losses             6,370,000       4,258,047         950,000
Loans charged-off                    (5,376,573)     (4,662,407)       (508,946)
Recoveries                            2,446,630         225,754         182,098
--------------------------------------------------------------------------------
Balance, end of year                $ 6,771,702     $ 3,331,645     $ 3,510,251
================================================================================
</TABLE>
As of December 31, 1997 the Company had three  commercial  loans  classified  as
impaired  totaling  $1,570,642  in  aggregate.   Based  on  presently  available
information,  the Company has determined  that no reserves for  impairment  were
necessary as of such date since the fair value of the collaterals  securing such
loans exceed their outstanding balances. No individual loans were impaired as of
December 31, 1996.

As of December 31, 1997,  1996 and 1995,  loans on which the accrual of interest
income had been discontinued amounted to approximately $29,968,000,  $18,730,000
and $10,032,000,  respectively.  The additional  interest income that would have
been  recognized  during  1997,  1996 and 1995 had  these  loans  been  accruing
interest   amounted  to   approximately   $1,095,000,   $864,000  and  $261,000,
respectively.  The Company has no material  commitments to lend additional funds
to borrowers whose loans were in non-accruing status at December 31, 1997.

                                       56
<PAGE>
5.              Mortgage Loan Servicing

The Company's  fees for servicing  mortgage loans  generally  range from .25% to
 .50% on the  declining  outstanding  principal  balances of the  mortgage  loans
serviced.  Servicing  fees are collected on a monthly basis out of payments from
mortgagors.  The servicing  agreements are terminable by permanent investors for
cause without  penalty or after payment of a termination fee ranging from .5% to
1% of the outstanding  principal  balance of the loans. At December 31, 1997 and
1996,  the  mortgage  loans  servicing   portfolio   amounted  to  approximately
$2,552,030,000  and  $2,226,406,000,   respectively,   excluding   approximately
$448,858,000 and $323,763,000, respectively, serviced for the Bank.

The changes in the servicing asset of the Company follows:
<TABLE>
<CAPTION>
                                              Year ended December 31,
                                       1997            1996            1995
--------------------------------------------------------------------------------
<S>                                <C>             <C>             <C>         
Balance at beginning of period     $ 12,595,020    $  8,209,661    $  4,417,813
Rights originated                     8,057,574       4,172,868       2,285,331
Rights purchased                      2,397,818       1,426,097       3,004,320
Scheduled  amortization              (1,837,414)     (1,213,606)     (1,497,803)
--------------------------------------------------------------------------------
Balance at end of period           $ 21,212,998    $ 12,595,020    $  8,209,661
================================================================================
</TABLE>

Among the  conditions  established  in its  various  servicing  agreements,  the
Company  is  committed  to  advance  from its own funds any  shortage  of moneys
required  to  complete  timely  payments to  investors  in GNMA  mortgage-backed
securities issued and in its FNMA and FHLMC portfolio. At December 31, 1997, the
mortgage  loan  portfolio  serviced for GNMA,  FNMA and FHLMC and subject to the
timely payment commitment amounted to approximately $1,779,252,000,  $53,760,000
and  $474,079,000,   respectively  (1996  -  $1,543,242,000,   $61,565,000,  and
$377,252,000).

Total funds  advanced as of  December  31, 1997 in relation to such  commitments
amount to $782,000,  $1,688,000 and $530,000 for escrow advances,  principal and
interest  advances  and  foreclosure  advances,  respectively  (1996 - $787,000,
$1,313,000 and $344,000).

In connection  with mortgage  servicing  activities,  the Company holds funds in
trust for investors  representing amounts collected primarily for the payment of
principal,  interest,  real estate taxes and insurance premiums.  Such funds are
deposited in separate  custodial bank  accounts,  some of which are deposited in
the Bank.  At December  31,  1997 and 1996,  the related  escrow  funds  include
approximately $50,163,000 and $10,555,000,  respectively, deposited in the Bank;
these funds are included in the  Company's  consolidated  financial  statements.
Escrow funds also include  approximately  $8,654,000 and $28,422,000 at December
31, 1997 and 1996,  respectively,  deposited  with other banks and excluded from
the Company's assets and liabilities.

                                       57
<PAGE>
6.      Premises and Equipment

        Premises and equipment consist of:
<TABLE>
<CAPTION>
                                                         December 31,
                                                   1997                1996
--------------------------------------------------------------------------------
<S>                                            <C>                 <C>         
Furniture and fixtures                         $ 13,026,459        $ 10,135,761
Leasehold improvements                            6,073,038           5,186,573
Autos                                               375,826             205,962
--------------------------------------------------------------------------------
                                                 19,475,323          15,528,296
Less - Accumulated
depreciation and amortization                    (9,947,764)         (7,760,616)
--------------------------------------------------------------------------------
                                               $  9,527,559        $  7,767,680
================================================================================
</TABLE>

7.      Deposits

        Deposits are summarized as follows:
<TABLE>
<CAPTION>
                                                           December 31,
                                                     1997               1996
--------------------------------------------------------------------------------
<S>                                              <C>                <C>         
Passbook savings                                 $ 79,628,833       $ 73,965,054

NOW accounts                                       27,644,104         24,555,925
Super NOW accounts                                 67,650,384         57,629,203
Regular checking accounts
(non-interest bearing)                             32,720,996         23,236,975
Commercial checking accounts
(non-interest bearing)                             58,783,328         31,007,473
--------------------------------------------------------------------------------
                                                  186,798,812        136,429,576
--------------------------------------------------------------------------------
Certificates of deposit:
        Under $100,000                            257,431,730        235,061,722
        $100,000 and over                         196,961,831        168,614,740
--------------------------------------------------------------------------------
                                                  454,393,561        403,676,462
--------------------------------------------------------------------------------
Accrued interest payable                            1,597,288          1,496,389
--------------------------------------------------------------------------------
                                                 $722,418,494       $615,567,481
================================================================================
</TABLE>

The weighted  average stated  interest rate on all deposits at December 31, 1997
and 1996 was 4.82% and 5.07%, respectively.

As of December 31, 1997, the Company had delivered investment securities with an
amortized cost of  approximately  $1,500,000  and market value of  approximately
$1,490,000 as collateral for public funds' deposits of approximately $852,000.

                                       58
<PAGE>
8.      Securities Sold Under Agreements to Repurchase

At December 31, 1997 and 1996, the Company had repurchase agreements outstanding
with  interest  ranging  from 5.10% to 6.00% in 1997 and 5.48% to 5.75% in 1996.
These agreements mature within thirty days.

Information on these agreements follows:
<TABLE>
<CAPTION>
                                                                                December 31,
                                                        1997                                      1996
                                                               Approximate market                        Approximate market
                                            Repurchase       and carrying value of     Repurchase      and carrying value of
                                            liability        underlying securities     liability       underlying securities
------------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>                   <C>                   <C>                   <C>          
Type of security
U.S. Treasury securities                  $ 30,095,287          $ 30,326,667          $       --            $       --   
U.S. Government and
  Agencies securities                        5,580,000             5,995,405                  --                    --   
GNMA                                       312,463,863           321,440,226            75,710,383            79,627,257
CMO Tranches                                13,576,380            15,228,000            13,576,384            15,147,000
CMO Residuals                                8,162,280             7,264,420             8,157,681             8,593,151
FHLMC                                       12,405,000            12,954,146                  --                    --
------------------------------------------------------------------------------------------------------------------------------------
                                          $382,282,810          $393,208,864          $ 97,444,448          $103,367,408
====================================================================================================================================
</TABLE>

Maximum amount of borrowings  outstanding at any month-end  during 1997 and 1996
under  the  agreements  to  repurchase  were   $382,309,000  and   $127,240,000,
respectively.  The approximate  average aggregate balance outstanding during the
periods were $226,771,000 and $100,607,000,  respectively.  The weighted average
interest  rate of such  agreements  was 5.81% and 3.99% at December 31, 1997 and
1996, respectively; the weighted average rate during 1997 and 1996 was 5.95% and
4.99%, respectively.

Since repurchase agreements are short-term commitments to borrow funds, they can
be assumed to reprice at least quarterly.  Therefore, the outstanding balance of
repurchase agreements is estimated to be its fair value.

Securities  sold under  agreements  to  repurchase  are  classified by dealer as
follows:
<TABLE>
<CAPTION>
                                                                                December 31,
                                                        1997                                      1996
                                                               Approximate market                        Approximate market
                                            Repurchase       and carrying value of     Repurchase      and carrying value of
                                            liability        underlying securities     liability       underlying securities
------------------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                   <C>                   <C>                   <C>         
Citibank, N.A                               $197,112,165          $203,113,664          $ 56,330,448          $ 62,150,725
Merrill Lynch of
 Puerto Rico Inc.                            152,493,000           156,861,232            11,200,000            11,742,604
Smith Barney
 Puerto Rico, Inc.                            12,512,358            12,927,611                  --                    --
Paine Webber, Inc. of
 Puerto Rico                                        --                    --              29,914,000            29,474,079
Popular Securities, Inc.                      10,215,287            10,293,857                  --                    --
Prudential Securities, Inc.                    9,950,000            10,012,500                  --                    --
------------------------------------------------------------------------------------------------------------------------------------
                                            $382,282,810          $393,208,864          $ 97,444,448          $103,367,408
====================================================================================================================================
</TABLE>

The securities  underlying such agreements were delivered to, and are being held
by, the dealers with whom the  securities  sold under  agreements  to repurchase
were transacted.  The dealers may have sold, lent, or otherwise disposed of such
securities to other parties in the normal course of their  operations,  but have
agreed to resell the Company the same or similar securities at the maturities of
the agreements. All agreements mature within thirty days.

                                       59
<PAGE>
9.      Notes Payable

        Notes payable consist of:
<TABLE>
<CAPTION>
                                                                                                             December 31,
                                                                                                       1997                1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                               <C>                   <C>         
Warehousing lines, bearing interest at a floating rate of 1.50%
  over the counterparty's cost of funds (5.85% in 1997 and 4.97% in 1996)                         $ 75,204,315          $ 40,342,099
Promissory notes maturing in 1999 paying semiannual interest at
  fixed annual rates ranging from 6.20% to 7.15%                                                    23,600,000            23,600,000
Promissory notes maturing in 2000 paying semiannual interest at
  fixed annual rates ranging from 5.55% to 5.67%                                                    15,000,000            15,000,000
Promissory note maturing in 2000 paying quarterly interest at a
  floating rate of 84% of the three month Libid rate less .125%
  (4.73% at December 31, 1997 and  4.62% at December 31, 1996)                                      10,000,000            10,000,000
Promissory note maturing in 2003 paying semiannual interest at a
  fixed annual rate of 5.50% (prepaid in 1997)                                                            --               2,400,000
Promissory note maturing in 2001 paying quarterly interest at a
  floating rate of  96% of the three month Libid  rate (5.34% at
  December 31, 1997 and 5.28% at December 31, 1996)                                                 25,000,000            25,000,000
Promissory note maturing in 2001 paying semiannual interest at a
  fixed annual rate of 6.52%                                                                        10,500,000            10,500,000
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  $159,304,315          $126,842,099
====================================================================================================================================
</TABLE>

As of  December  31,  1997,  the Company  had  various  credit  line  agreements
permitting the Company to borrow up to  $138,425,000  in warehousing  lines with
banks;  the unused  portion of  warehousing  lines totaled  approximately  $63.2
million.   Warehousing  lines  at  December  31,  1997  are   collateralized  by
approximately $111,727,000 in mortgage loans, an assignment of key man insurance
policies on the Company's Chairman of the Board and Chief Executive Officer, and
a general  assignment of mortgage  payments  receivable.  These  borrowings bear
interest at rates related to the respective  counterparty's cost of funds or the
Puerto Rico 936 funds market when available.  Some of these  borrowings are also
guaranteed  by the  Chairman  of the Board and Chief  Executive  Officer  of the
Company.  Several  credit line  agreements  impose certain  restrictions  on the
Company  of which  the most  important  include  maintaining  net worth and debt
service over certain  defined  minimums,  and  limitations on  indebtedness  and
declaration  of  dividends.  Management  believes  that at December 31, 1997 the
Company was in compliance with the loan agreements.

The following  information relates to borrowings of the Company under the credit
line agreements:
<TABLE>
<CAPTION>
                                                         December 31,
                                                     1997            1996
--------------------------------------------------------------------------------
<S>                                            <C>               <C>           
Maximum aggregate borrowings
  outstanding at any month end                 $   93,523,091    $   85,134,732
================================================================================
Approximate average aggregate borrowings
  outstanding during the year                  $   68,159,621    $   40,805,743
================================================================================
Weighted average interest rate during
  the year computed on a monthly basis                   5.92%             5.32%
--------------------------------------------------------------------------------
Weighted average interest rate
        at end of year                                   5.85%             4.97%
--------------------------------------------------------------------------------
</TABLE>


                                       60
<PAGE>
Certain  promissory  notes  totaling  $38,600,000  at December  31, 1997 include
pledge agreements where the Company has pledged certain negotiable securities as
a guarantee for payment of some of the notes. The pledge agreements provide that
the value of the pledged  securities  must not fall below 105% of the  principal
balance of the  promissory  note plus accrued  interest on such  amount.  In the
event that the securities' value falls below the stated percentage,  the Company
must deliver additional negotiable  securities.  At December 31, 1997 securities
pledged  in  compliance  with  this   requirement   consist  of  investment  and
mortgage-backed  securities with an amortized cost of approximately  $38,950,000
and approximate market value of $39,010,000.  At December 31, 1997 floating rate
notes in the aggregate amount of $35,000,000 and fixed rate notes of $10,500,000
are guaranteed by letters of credit issued by the FHLB -NY.

Promissory notes by maturity as of December 31, 1997 follows:

                1999    $ 23,600,000
                2000      25,000,000
                2001      35,500,000
--------------------------------------------------------------------------------
                        $ 84,100,000
================================================================================

10.     Advances from The Federal Home Loan Bank of New York

        Advances from the FHLB are as follows:
<TABLE>
<CAPTION>
                                                            December 31,
                                              Interest
Maturity                                        Rate          1997            1996
------------------------------------------------------------------------------------
<S>                                            <C>        <C>            <C>
January 7, 1998                                6.15%      $10,000,000    $      --
January 15, 1998                               6.00%       32,000,000           --
February 28, 1997                              5.78%             --        5,000,000
March 31, 1997                                 5.73%             --        5,000,000
June 27, 1997                                  5.74%             --        5,000,000
------------------------------------------------------------------------------------
                                                          $42,000,000    $15,000,000
------------------------------------------------------------------------------------
Weighted average stated interest rate                            6.03%          5.75%
====================================================================================
</TABLE>

The Bank receives  advances from the FHLB under an Advances,  Collateral  Pledge
and Security Agreement (the "Agreement"),  which allows the Company to borrow up
to $223.4 million. As of December 31, 1997 the unused portion under such line of
credit  was  approximately  $181.4  million.  Under the  Agreement,  the Bank is
required to maintain a minimum  amount of  qualifying  collateral  with a market
value  of at least  110% of the  outstanding  advances.  In  addition,  the Bank
maintains  standby  letters of credit with the FHLB  amounting to  approximately
$51,300,000  at December 31, 1997. At December 31, 1997 the specific  collateral
(in the form of first mortgage notes)  amounting to  approximately  $112,866,000
were pledged to the FHLB as part of the Agreement and to secure standby  letters
of credit.  At December 31, 1997, the market value of the  collateral  indicated
above was sufficient to comply with the provisions of the Agreement.

                                       61
<PAGE>
11.             Other Secured Borrowings

In December 1995,  the Bank sold mortgage loans with an approximate  outstanding
balance of $55 million to two commercial banks (buyers). In connection with this
transaction,  R&G Mortgage  assumed  certain  limited  recourse  provisions  and
guaranteed a specific yield of 7.75% to the buyers. In addition, the buyers have
the right (put option) at their option,  to require R&G Mortgage to purchase the
mortgage  loans in December 2000 or  thereafter.  Liability,  if any,  under the
recourse  provisions  at December  31, 1997 is  estimated  by  management  to be
insignificant.  As  part  of the  agreement,  R&G  Mortgage  has  the  right  to
repurchase   after  December  1996  any  group  of  loans  sold.  For  any  loan
repurchases,  R&G  Mortgage is  obligated to pay the buyers 50 basis points over
the outstanding balance of the mortgage loans repurchased.

The Company  recognized the transaction as a transfer of loans with recourse not
qualifying  as a sale.  Accordingly,  the  proceeds  from the  transaction  were
reported  as a secured  borrowing  in the  accompanying  consolidated  financial
statements,  with a balance of  approximately  $34,359,000  and  $50,463,000  at
December  31, 1997 and 1996,  respectively.  The  outstanding  principal  of the
related loans  totaling  approximately  $33,868,000  and  $49,740,000  have been
included as assets at December 31, 1997 and 1996, respectively.

12.             Subordinated Notes

On June 14,  1991 the Bank  issued  $3,250,000  in  subordinated  capital  notes
bearing  interest at 8% payable  quarterly.  These notes are  guaranteed  by R&G
Mortgage and by the Company's Chairman of the Board and Chief Executive Officer,
and by an irrevocable transferable letter of credit issued by a commercial bank.
The Bank shall  deposit in seven equal annual  installments  (the first of which
was made in September 1992 and the last deposit is scheduled for June 1998) with
a  trustee  for  credit  to an  established  sinking  fund,  cash  or  permitted
investments in an amount sufficient to retire one-seventh (1/7) or $464,286,  of
the aggregate  principal  amount.  Likewise,  the letter of credit is reduced in
equal proportion to the deposits in such sinking fund.

Investments  deposited in the Trust as of December 31, 1997 in  compliance  with
this requirement consist of FHLMC  Participation  Certificates with an amortized
cost of approximately $1,205,000 and approximate market value of $1,230,000, and
$2,633,000 in special deposit accounts.

                                       62
<PAGE>
13.             Income Taxes

Under the Puerto Rico tax law R&G  Mortgage's  and the Bank's tax liability will
be the  greater  of the  tax  computed  under  the  regular  tax  system  or the
alternative minimum tax (AMT) system. The AMT is imposed based on 22% of regular
taxable income after certain adjustments for preference items. An AMT credit may
be claimed in future years for tax paid on an AMT basis in excess of the regular
tax basis.  R&G Mortgage and the Bank are separate  taxable  entities  under the
Puerto  Rico  Income  Tax  Law and are not  entitled  to file  consolidated  tax
returns.

The Bank is subject to Puerto  Rico  income tax on its income  derived  from all
sources  within and  outside  Puerto  Rico.  The Bank is also  subject to United
States  income taxes on certain types of income from such source.  However,  any
United States income tax paid by the Bank is, subject to certain  conditions and
limitations,  creditable as a foreign tax credit  against its Puerto Rico income
tax liability.

A portion of the  Company's  interest  income  arises  from  mortgage  loans and
mortgage-backed securities which are exempt for Puerto Rico income tax purposes.
The  elimination  of  exempt  income,   net  of  related   expenses,   from  the
determination  of  taxable  income  results  in a  reduction  of its  income tax
liability.

Deferred tax (assets) liabilities are as follows:
<TABLE>
<CAPTION>
                                                                   December 31,
                                                              1997            1996
-------------------------------------------------------------------------------------
<S>                                                        <C>            <C>        
Deferred tax liabilities:
        Deferred net loan origination costs                $   346,286    $   385,019
        Unrealized gain on securities held for trading       3,696,685           --
        Reserve for bad debts                                   45,885           --
        CMO residuals (IOs)                                  1,096,090      1,313,501
        Servicing assets                                     1,424,600      1,504,670
        Unrealized gain on securities available for sale       780,216           --
-------------------------------------------------------------------------------------
                                                             7,389,762      3,203,190
-------------------------------------------------------------------------------------
Deferred tax assets:
        Unrealized loss on securities available for sale          --          (65,140)
        Allowance for loan losses                           (1,176,463)      (272,593)
        Reserve for bad debts                                     --          (11,483)
        Unrealized loss on securities held for trading            --         (124,991)
        Other foreclosed property reserve                      (11,232)       (22,805)
        Recourse contingency                                   (61,653)          --
        Discount on tax credits purchased                     (247,960)          --
        Deferred gains on sale of loans and
          investment securities                               (378,600)      (505,999)
-------------------------------------------------------------------------------------
                                                            (1,875,908)    (1,003,011)
-------------------------------------------------------------------------------------
Net deferred tax liability                                 $ 5,513,854    $ 2,200,179
=====================================================================================
</TABLE>

                                       63
<PAGE>
The  provision for income taxes of the Company  varies from amounts  computed by
applying the applicable Puerto Rico statutory tax rate to income before taxes as
follows:
<TABLE>
<CAPTION>
                                                                                  ($ in thousands)
                                                                                Year ended December 31,
                                                           1997                         1996                        1995
                                                               % of pretax                   % of pretax                % of pretax
                                                 Amount          income        Amount           income       Amount         income
------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>                  <C>      <C>                  <C>      <C>                  <C>
Computed income tax at
        statutory rate                         $ 12,569             39%      $  7,458             39%      $  6,845             42%
Effect on provision of:
        Tax-exempt interest                      (2,947)            (9)        (2,352)           (12)        (1,661)           (10)
        Non-deductible expenses                     116           --              423              2            663              4
        Discount on tax credits
        purchased                                (1,006)            (3)          --             --             --             --
              Tax settlement                       --             --              393              2           --
------------------------------------------------------------------------------------------------------------------------------------
                                               $  8,732             27%      $  5,922             31%      $  5,847             36%
====================================================================================================================================
</TABLE>

In early February 1998, the Puerto Rico Treasury  Department began an income tax
examination  of R&G  Mortgage's  and the Bank's  income tax returns for the year
1995.  Management  believes that no significant  deficiencies should result from
such examination,  and accordingly,  this matter should not have any significant
adverse effect on the Company's financial condition or results of operations.

In July 1997 the Government of Puerto Rico amended the tax law that provided tax
exemption  on  interest  income  generated  by FHA and VA loans  secured by real
estate property located in Puerto Rico and mortgage-backed securities secured by
such  mortgage  loans  (GNMAs).  Under the amended  law, FHA and VA loans closed
prior to August 1, 1997, will continue to be exempt.  The interest income on FHA
and VA mortgage  loans  originated on or after August 1, 1997 for purposes other
than to finance the acquisition of new housing, and GNMAs secured by such loans,
are no  longer  exempt,  and are  taxable  at a  preferential  17%  tax  rate to
individuals  and certain other  taxpayers  other than  corporations.  FHA and VA
loans to finance the purchase of new housing,  and GNMAs  secured by such loans,
continue  to be exempt.  While the  Company has  benefited  from the  previously
available  tax  exemption,  management  believes  based on  currently  available
information  that  the  adoption  of  the  enacted  changes  should  not  have a
significant adverse effect in the results of operations of the Company.

                                                                 64
<PAGE>
14.     Stockholders' Equity

On July 15, 1997 the  Company's  Board of Directors  authorized a  nine-for-five
stock split of the  Company's  $.01 par value  Class A and Class B common  stock
(the "common stock").  The stock split was effected on September 25, 1997 in the
form of a stock  dividend  of four  shares of common  stock for each five shares
held of record on September  15,  1997.  Prior to the  declaration  of the stock
split, the Company had 7,858,216 shares of common stock outstanding. As a result
of the split,  6,286,536  shares were issued and $62,865 were  transferred  from
additional  paid-in-capital  to common  stock.  The stock  split did not  dilute
shareholders' voting rights or their proportionate  interest in the Company. All
per share data included herein has been adjusted to reflect the stock split. The
Company's average number of common shares outstanding used in the computation of
basic  earnings  per common  share was  14,144,752  (1996 -  10,920,661;  1995 -
9,340,279);   the  weighted  average  number  of  shares   outstanding  for  the
computation  of diluted  earnings per share was  14,521,252  (1996 - 11,049,866;
1995 - 9,340,279) after giving effect to outstanding stock options granted under
the Company's Stock Option Plan. During 1997, cash dividends of $0.16875 (1996 -
$0.03472) per common share amounting to $2,385,752  (1996 - $472,336) were paid.
No cash dividends were paid in 1995.

15.     Other Operating Expenses

        Other operating expenses consist of the following:
<TABLE>
<CAPTION>
                                                  Year ended December 31,
                                              1997          1996         1995
--------------------------------------------------------------------------------
<S>                                      <C>           <C>           <C>        
Advertising                              $ 3,154,189   $ 2,415,177   $ 1,586,351
Stationary and supplies                    1,640,131     1,332,108       740,666
Telephone                                    871,029       751,518       597,058
License and other taxes                    1,595,276     1,247,505     1,104,564
Deposit insurance                            346,625       652,750       954,537
Other insurance                              590,066       538,825       551,407
Legal and other professional services      2,193,687     1,304,967       890,992
Amortization of mortgage
  servicing asset                          1,837,414     1,213,606     1,497,803
Guaranty fees                              1,246,300     1,068,750       934,162
Other                                      4,776,780     4,898,911     4,873,184
--------------------------------------------------------------------------------
                                         $18,251,497   $15,424,117   $13,730,724
================================================================================
</TABLE>

16.     Related Party Transactions

During March 1996, the Company  declared and paid $500,000 cash dividends to its
Class A common stockholder.

The  Company  leases  some of its  facilities  from an  affiliate,  mostly  on a
month-to-month   basis.   The  annual   rentals  under  these   agreements   are
approximately $1,420,000.

Loans to  directors,  officers  and  employees  of the Company  were made in the
ordinary course of business. Interest rates on such loans were substantially the
same as those prevailing at the time for comparable  transactions with unrelated
parties  and did not  involve  more  than a normal  risk of  collectibility.  At
December  31,  1997 the  aggregate  amount  of loans  outstanding  to  officers,
directors,  and principal stockholders' of the Company and its subsidiaries were
insignificant.

                                       65
<PAGE>
17.     Regulatory Requirements

The Company is approved by the Board of Governors of the Federal  Reserve System
(Federal  Reserve Board) as a registered  bank holding  company  pursuant to the
Bank Holding Company Act of 1956, as amended.  The Company became a bank holding
company in connection  with its  acquisition of the 88.05%  interest in the Bank
held by the Company's  Chairman of the Board and Chief Executive  Officer (which
excludes his required  qualifying  shares as a director of the Bank) in exchange
for the Company's Class A Shares.

The Company, as a bank holding company, is subject to regulation and supervision
by the Federal  Reserve  Board and the  Commissioner  of the Office of Financial
Institutions of the Commonwealth of Puerto Rico (the Commissioner).  The Federal
Reserve Board has established  guidelines regarding the capital adequacy of bank
holding  companies,  such as the Company.  These  requirements are substantially
similar to those adopted by the FDIC for depository  institutions,  as set forth
below.

The Bank is incorporated  under the Puerto Rico Banking Act, as amended,  and is
subject to extensive  regulation and examination by the  Commissioner,  the FDIC
and certain requirements established by the Federal Reserve Board.

The mortgage banking business  conducted by R&G Mortgage is subject to the rules
and regulations of FHA, VA, FNMA,  FHLMC, GNMA and the Commissioner with respect
to  originating,  processing,  selling  and  servicing  mortgage  loans  and the
issuance and sale of mortgage-backed securities. R&G Mortgage's affairs are also
subject to supervision and examination by FNMA, FHA, FHLMC,  GNMA, HUD and VA at
all times to assure  compliance  with the applicable  regulations,  policies and
procedures.  Mortgage  origination  activities are subject to, among others, the
Equal Credit Opportunity Act, Federal  Truth-in-Lending  Act and the Real Estate
Settlement  Procedures  Act  and the  regulations  promulgated  thereunder.  R&G
Mortgage is a U.S.  Department of Housing and Urban  Development  (HUD) approved
non-supervised mortgagee.

The Company is subject to various regulatory capital  requirements  administered
by the federal  banking  agencies.  Under capital  adequacy  guidelines  and the
regulatory  framework  for  prompt  corrective  action,  the  Company  must meet
specific capital guidelines that involve quantitative  measures of the Company's
assets,  liabilities  and certain  off-balance  sheet items as calculated  under
regulatory   accounting   practices.   The   Company's   capital   amounts   and
classification are also subject to qualitative judgments by the regulators about
components,   risk  weightings,   and  other  factors.   Quantitative   measures
established  by regulation to ensure capital  adequacy  requires the Company and
the Bank to maintain  minimum  amounts and ratios (set forth in the table below)
of total and Tier I capital (as  defined in the  regulations)  to  risk-weighted
assets  (as  defined),  and of Tier I capital to  average  assets (as  defined).
Failure to meet capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. As of December 31,
1997,  the  Company  meets  all  capital  adequacy  requirements  to which it is
subject.

As of December 31, 1997, the most recent  notification from the FDIC categorized
the  Bank  as  well  capitalized  under  the  regulatory  framework  for  prompt
corrective  action. To beaction.  To be categorized as well capitalized the Bank
must maintain  minimum total  risk-based,  Tier I risk-based and Tier I leverage
ratios as set forth in the table below.  There are no conditions or events since
that notification that management believes have changed the Bank's category.

                                       66
<PAGE>
The following table reflects the Company's and the Bank's actual capital amounts
and ratios, and applicable  regulatory capital requirements at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
                                                                                                             To be well capitalized
                                                                                            For capital      under prompt corrective
                                                                    Actual               adecuacy purposes      action provisions
                                                            Amount         Ratio         Amount      Ratio     Amount        Ratio
                                                                                          ($ in thousands)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>          <C>            <C>    <C>               <C>
As of December 31, 1997
Total capital (to risk weighted assets):
 Consolidated                                              $139,411        17.85%       $ 62,493       8%          N/A          N/A
  R-G Premier Bank only                                    $ 74,822        14.00%       $ 42,766       8%     $ 53,457           10%
Tier I capital (to risk weighted assets):                                                       
Consolidated                                               $132,639        16.98%       $ 31,247       4%          N/A          N/A
  R-G Premier Bank only                                    $ 70,050        13.10%       $ 21,383       4%     $ 32,074            6%
Tier I capital (to average assets):                                                             
Consolidated                                               $132,639         9.16%       $ 57,935       4%          N/A          N/A
  R-G Premier Bank only                                    $ 70,050         7.34%       $ 38,162       4%     $ 47,702            5%
                                                                                                
As of December 31, 1996                                                                         
 Total capital (to risk weighted assets):                                                       
        Consolidated                                       $113,644        17.45%       $ 52,114       8%          N/A          N/A
  R-G Premier Bank only                                    $ 67,866        14.79%       $ 36,716       8%     $ 45,895           10%
Tier I capital (to risk weighted assets):                                                       
Consolidated                                               $109,627        16.83%       $ 26,057       4%          N/A          N/A
  R-G Premier Bank only                                    $ 63,849        13.91%       $ 18,358       4%     $ 27,537            6%
Tier I capital  (to average assets):                                                            
Consolidated                                               $109,627         8.80%       $ 49,847       4%          N/A          N/A
  R-G Premier Bank only                                    $ 63,849         8.45%       $ 30,215       4%     $ 37,769            5%
</TABLE>

During 1996 the Company  received a special  assessment  of  approximately  $2.5
million  ($1.7  million  net of taxes) as the result of federal  legislation  to
recapitalize the SAIF administered by the FDIC. The legislation,  enacted by the
U.S.  Congress,  recapitalized  the SAIF by a one-time  charge of  approximately
$0.657  for every  $100 of  assessable  deposits  held at March 31,  1995.  As a
result,  the Bank's  insurance  premiums,  which had amounted to $0.23 for every
$100 of deposits,  were  reduced to $0.064 for every $100 of deposits  beginning
January 1, 1997.

                                       67
<PAGE>
18.     Stock Option Plan

In June 1996 the Board of Directors of the Company  adopted a Stock Option Plan,
which is designed to attract and retain  qualified  personnel in key  positions,
provide officers and key employees with a proprietary interest in the Company as
an  incentive  to  contribute  to the  success  of the  Company,  and reward key
employees for outstanding  performance and the attainment of targeted goals. The
Stock Option Plan was approved by the Company's sole  stockholder at the time in
June  1996.  An amount of Company  common  stock  equal to 10% of the  aggregate
number of Class B Shares sold in the Company's  initial public offering (241,500
shares,  equivalent  to 434,700  shares after giving effect to stock split) were
authorized  under the Stock Option Plan,  which may be filled by authorized  but
unissued shares,  treasury shares or shares purchased by the Company on the open
market or from private sources.  The Stock Option Plan provides for the grant of
stock options at an exercise price equal to the fair market value of the Class B
shares at the date of the grant.  Stock  options are  available for grant to key
employees of the Company and any  subsidiaries.  No options were issued prior to
the public offering. In connection with the Company's initial offering on August
27,1996,  the Company  awarded  options for 200,000  shares  (360,000  shares as
adjusted  for stock  split) to 28  employees of R&G Mortgage and the Bank at the
initial public  offering price of $14.50 per share.  In January 1997 the Company
awarded  options for an additional  10,000 shares (18,000 shares as adjusted for
stock split) to a certain employee.  The maximum term of the options granted are
ten  years.  Under the  provisions  of the Stock  Option  Plan,  options  can be
exercised as follows:  20% after one year, 40% after two years,  60% after three
years,  80% after four years and 100% after five years.  As of December 31, 1997
none of the options granted have been exercised.

The  Company  adopted  in  1996  the  disclosure  provisions  of SFAS  No.  123,
"Accounting  for  Stock-Based   Compensation"   (SFAS  123).   Accordingly,   no
compensation  cost has been  recognized for the Company's Stock Option Plan. Had
compensation  cost for the Company's Stock Option Plan been determined  based on
the fair value of the options at the grant date  consistent  with the provisions
of SFAS 123,  the  Company's  net  earnings and earnings per share for the years
ended  December  31,  1997 and 1996  would  have been  reduced  to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
                                                      1997              1996
--------------------------------------------------------------------------------
<S>                                             <C>               <C>           
Net earnings - as reported                      $   23,497,212    $   13,199,516
--------------------------------------------------------------------------------
Net earnings - pro forma                        $   23,342,698    $   13,143,675
--------------------------------------------------------------------------------
Basic earnings per share - as reported          $         1.66    $         1.21
--------------------------------------------------------------------------------
Basic earnings per share - pro forma            $         1.65    $         1.20
--------------------------------------------------------------------------------
Diluted earnings per share - as reported        $         1.62    $         1.19
--------
Diluted earnings per share - pro forma          $         1.61    $         1.19
--------------------------------------------------------------------------------
</TABLE>

The fair  value of the option  grants  were  estimated  on the date of the grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:

Stock Price and Exercise  Price - $14.50 for options  granted based on the terms
of the awards.

Expected Option Term - 6 years.

Expected Volatility - 42.54% for options granted calculated using weekly closing
prices of three peer financial institutions given the Company's limited publicly
trading history.

Expected  Dividend  Yield -  Calculated  as the  annualized  quarterly  dividend
closest to the grant date divided by the stock price on the grant date.

Risk-Free  Interest Rate - 6.48% for options granted determined as the yield, on
the date of grant, on a U.S.  Treasury zero coupon bond with a maturity equal to
the expected term of the option.

                                       68
<PAGE>
19      Profit Sharing Plan

The Company has a profit sharing plan (the Plan) which covers  substantially all
regular  employees.  Annual  contributions  to the  Plan are  based on  matching
percentages  up to 5% of employee  salaries,  based on the  employee's  years of
service and on operational  income, as defined by the Plan, and are deposited in
a trust.  Contributions  to the Plan during the years ended  December  31, 1997,
1996  and  1995  amounted  to  approximately  $79,000,   $72,000  and  $120,000,
respectively.

20.     Commitments and Contingencies

        Commitments to developers providing end loans

The Company has outstanding  commitments for various  projects in the process of
completion.  Total  commitments  amounted  to  approximately  $443.6  million at
December 31, 1997. All  commitments  are subject to prevailing  market prices at
time of  closing  with no market  risk  exposure  for the  Company  or with firm
back-to-back commitments extended in favor of the mortgagee.

        Loans in process

Loans in process pending final approval and/or closing amounted to approximately
$98.8 million at December 31, 1997.

        Commitments to buy and sell GNMA certificates

As of  December  31,  1997,  the  Company  had open  commitments  to issue  GNMA
certificates in the amount of $119.0 million.

        Commitments to sell mortgage loans

As of December 31, 1997 the Company had  commitments  to sell mortgage  loans to
third party investors amounting to $17.8 million.

        Lease commitments

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

As of December 31, 1997, minimum annual rental commitments under  noncancellable
operating  leases for certain office space and equipment,  including leases with
an affiliate, were as follows:

        Year                 Amount
-------------------------------------
        1998             $  2,106,792
        1999                2,049,407
        2000                1,935,473
        2001                1,707,945
        2002                1,505,233
        Later years         3,031,047
-------------------------------------
                          $12,335,897
=====================================

Rent expense  amounted to approximately  $2,483,000 in 1997,  $2,171,000 in 1996
and $1,914,000 in 1995.

        Litigation

The Company is a defendant in legal  proceedings  arising  from normal  business
activities. Management believes, based on the opinion of legal counsel, that the
final  disposition  of these matters will not have a material  adverse effect on
the Company's financial position or results of operations.

On January 15, 1998 the Company received $2 million as part of a settlement with
its fidelity insurance carrier on a claim filed by the Company in late 1996 as a
result of certain  irregularities  discovered by the Company with respect to its
former  insurance  premiums  financing  business.  Based  on  a  review  of  the
collectibility of the loans in question at the time,  management wrote-off loans
amounting to approximately  $2.5 million in 1996. The settlement was recorded as
a recovery of loans  previously  charged-off and reflected as an addition to the
Company's allowance for loan losses as of December 31, 1997.

        Others

At December 31, 1997 the Company is liable  under  limited  recourse  provisions
resulting from the sale of loans to several  investors  principally  FHLMC.  The
principal balance of these loans, which are serviced by the Company,  amounts to
approximately $340.5 million at December 31, 1997. Liability,  if any, under the
recourse  provisions  at December  31, 1997 is  estimated  by  management  to be
insignificant.

21.     Supplemental Disclosure on the Statements of Cash Flows

During 1997, 1996 and 1995, the Company paid interest amounting to approximately
$60,846,000,  $45,939,000  and  $34,403,000,  respectively,  and income taxes of
approximately  $9,699,000,  $7,573,000  (including $1,065,000 on settlement of a
1992 income tax examination) and $1,820,000, respectively.

During 1997, 1996 and 1995 the Company  securitized loans from its mortgage loan
portfolio  totaling  approximately  $11,346,000,  $43,673,000  and  $17,631,000,
respectively.

As discussed in Note 1 to the consolidated financial statements, during 1996 the
Company  granted  20,000 Class B common shares to its Vice Chairman of the Board
in  consideration  for his past and ongoing  services,  recognizing  $290,000 as
compensation cost.

22.     Financial Instruments with Off-Balance Sheet
        Risk and Concentrations of Credit Risk

In the normal  course of business,  the Company uses various  off-balance  sheet
financial  instruments  to satisfy the  financing  needs of its customers and to
reduce its own  exposure to  fluctuations  in interest  rates.  These  financial
instruments  include loan  commitments  and interest  rate  exchange  agreements
(swaps).  These instruments involve, to varying degrees,  elements of credit and
interest rate in excess of the amount  recognized in the statements of financial
condition. The contract or notional amounts of these instruments,  which are not
included in the  statements  of  financial  condition,  are an  indicator of the
Company's activities in particular classes of financial instruments.

                                       69
<PAGE>

The  Company's  exposure  to credit loss in the event of  nonperformance  by the
other party to the financial  instruments  for  commitments  to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit  policies in making  commitments  as it does for on-balance
sheet  instruments.  For interest rate swap contracts,  the contract or notional
amounts  do  not  represent  exposure  to  credit  loss.  Instead,   the  amount
potentially subject to credit loss is substantially less.

Contractual  commitments to extend credit are legally binding agreements to lend
money to customers at  predetermined  interest  rates for a specified  period of
time.  Since many of the loan  commitments  may expire without being drawn upon,
the  total  commitment  amount  does  not  necessarily   represent  future  cash
requirements.

To extend credit the Company  evaluates each customer's  credit  worthiness on a
case-by-case  basis. The amount of collateral  obtained,  if deemed necessary by
the Company upon extension of credit, is based on management's credit evaluation
of the  counterparty.  A geographic  concentration  exists  within the Company's
mortgage loans portfolio since most of the Company's  business  activity is with
customers located in Puerto Rico.

Interest  rate swap  agreements  involve the exchange of fixed and floating rate
interest payment obligations  without the exchange of the underlying  principal.
Entering  into  interest  rate  agreements  involves  the risk of  dealing  with
counterparties  and their ability to meet the terms of the  contracts,  and also
the interest rate risk associated with unmatched positions.

The total  amounts  of  financial  instruments  with  off-balance  sheet risk at
December  31,  1997  follows:

Financial instruments whose contract amounts represent potential credit risk:

Commitments to extend credit excluding the undisbursed portion of loans
in process:

       Unused lines of credit                                        $ 8,876,000
================================================================================

Financial instruments whose notional or contractual
amounts exceed the amount of potential credit risk:

      Interest rate swap contracts                                   $50,000,000
================================================================================

A detail of interest rate swaps at December 31, 1997 follows:

           Notional                            Pay Fixed      Receive
            Amount              Maturity          Rate     Rate Floating
--------------------------------------------------------------------------------
         $15,000,000      September 17, 1999      5.79%   3 months Libor
          10,000,000      October 24, 2000        5.20%   3 months Libid
          25,000,000      October 9, 2001         5.06%   3 months Libid

The following table summarizes the changes in notional amounts of swaps
outstanding during 1997:

        Beginning balance               $       45,000,000
        New Swaps                               15,000,000
        Maturities                             (10,000,000)
--------------------------------------------------------------------------------
        Ending balance                  $       50,000,000
================================================================================

As of December 31, 1997, interest rate swap maturities are as follows:

         1999                           $       15,000,000
         2000                                   10,000,000
         2001                                   25,000,000
--------------------------------------------------------------------------------
                                        $       50,000,000
================================================================================

Net interest  settlements  on Swap  agreements  are recorded as an adjustment to
interest expense on deposits.  Net interest  received  amounted to approximately
$187,000  during  1995;  net  payments  amounted to  approximately  $293,000 and
$61,000 during 1997 and 1996, respectively.

                                       70
<PAGE>
23.     Supplemental Income Statement Information

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

Total employee costs and other expenses before capitalization follow:
<TABLE>
<CAPTION>
                                             Year ended December 31,
                                       1997             1996             1995
--------------------------------------------------------------------------------
<S>                                <C>              <C>              <C>        
Employee costs                     $21,368,723      $17,357,976      $13,248,477
================================================================================
Other administrative
and general expenses               $22,662,971      $18,916,546      $16,661,353
================================================================================
</TABLE>

Set forth below are the direct loan  origination  costs that were capitalized as
part of the carrying cost of mortgage loans inventory or offset against mortgage
loan sales and fees and interest income.
<TABLE>
<CAPTION>
                                               Year ended December 31,
                                         1997            1996            1995
--------------------------------------------------------------------------------
<S>                                   <C>             <C>             <C>       
Offset against mortgage
loan sales and fees                   $2,973,820      $7,173,028      $5,382,186
================================================================================
Offset against interest
income on loans                       $2,122,727      $1,937,403      $1,470,128
================================================================================
Capitalized as part of
loans held for sale and
loans held for investment             $7,030,896      $  946,673      $1,042,983
================================================================================
</TABLE>

As part of the carrying costs in 1997 of the Company's mortagage loans inventory
held for  investment,  the  Company  deferred  loan  origination  fees  totaling
approximately $5,213,000.

                                       71
<PAGE>
24.     Fair Value of Financial Instruments

The estimated fair value of the Company's  financial  instruments as of December
31 are as follows:
<TABLE>
<CAPTION>
                                                                                1997                            1996
                                                                                    Estimated                           Estimated
                                                                      Carrying         Fair          Carrying              Fair
                                                                       Value           Value           Value               Value
                                                                                              (In thousands)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>               <C>              <C>               <C>      
Financial Assets
Cash and due from banks                                              $  32,607         $  32,607        $  31,990         $  31,990
Money market investments                                                35,759            35,759           66,866            66,866
Mortgage loans held for sale                                            46,885            48,345           54,450            55,110
Mortgage-backed securities held for trading                            400,457           400,457          108,917           108,917
Investment securities held for trading                                     581               581            1,351             1,351
Investment and mortgage-backed securities
  available for sale                                                   116,961           116,961           77,567            77,567
Investment  in Federal Home Loan Bank
  stock                                                                  4,906             4,906            4,247             4,247
Investment and mortgage-backed securities
  held to maturity                                                      44,019            43,876           43,170            42,346
Loans, net                                                             765,059           791,309          603,751           608,455
Accounts receivable                                                     17,704            17,704           12,397            12,397
====================================================================================================================================
Financial Liabilities                           
Deposits:                                       
  Non-interest bearing demand                                        $  91,504         $  91,504        $  54,244         $  54,244
  Savings and NOW accounts                                             174,923           156,859          156,150           141,813
  Certificates of deposit                                              454,394           460,001          403,676           408,521
Securities sold under agreements to     
  repurchase                                                           392,283           392,283           97,444            97,444
Notes payable                                                          159,304           161,418          126,842           128,692
Advances from FHLB                                                      42,000            41,971           15,000            14,986
Other secured borrowings                                                34,359            35,019           50,463            50,712
Accounts payable and accrued liabilities                                15,872            15,872           13,598            13,598
Subordinated notes                                                       3,250             3,304            3,250             3,641
Unrecognized financial instruments -
 Interest rate swap agreements in a net
 receivable (payable) position*                                      $     (14)        $     370        $     (44)        $    (551)
====================================================================================================================================
</TABLE>

* The amount shown under "carrying  amount"  represents net accrual arising from
those unrecognized financial instruments.

                                       72
<PAGE>
The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instruments:

        Short-term financial instruments

Short-term financial  instruments,  which include cash and due from banks, money
market  investments,  accounts  receivable,  securities sold under agreements to
repurchase, warehousing lines included in notes payable and accounts payable and
accrued  interest,  have been valued at their carrying amounts  reflected in the
Consolidated Statements of Financial Condition as these are reasonable estimates
of fair value given the relatively  short period of time between  origination of
the instruments and their expected realization.

        Investment securities

The fair value of  investment  securities  is based on quoted  market  prices or
dealer  quotes except for the  investments  in FHLB stock which is valued at its
redemption value.

        Loans

The fair value for loans has been  estimated  for  groups of loans with  similar
financial  characteristics.  Loans were  classified by type such as  commercial,
commercial  real  estate,   residential  mortgage,  and  consumer.  These  asset
categories were further segmented into various maturity groups,  and by accruing
and  non-accruing  groups.  The fair value of accruing  loans was  calculated by
discounting  scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent in
the loan. Prepayment experienced in previous periods when interest rates were at
levels  similar to  current  levels was  assumed  to occur for  mortgage  loans,
adjusted  for any  differences  in the  outlook of interest  rates.  Other loans
assume little or no prepayments.

Non-accruing  loans were  assumed to be repaid after one year.  Presumably  this
would occur  either  because the loan is repaid or  collateral  has been sold to
satisfy the loan. The value of non-accruing  loans was therefore  discounted for
one year at the going rate for new loans.

Mortgage  loans  held  for  sale,  except  for  loans  from  the  Bank  totaling
$10,413,322  in 1997 and  $6,538,190  in 1996,  have been valued based on market
quotations or committed selling prices in the secondary  market.  Loans held for
sale from the Bank have been valued using the same methodology  described in the
first paragraph above.

        Deposits

The fair value of deposits with no stated maturity, such as non-interest bearing
demand  deposits,  savings,  and NOW  accounts,  and money  market and  checking
accounts,  is  equal  to the  amount  payable  on  demand.  The  fair  value  of
certificates  of deposit is based on the discounted  value of  contractual  cash
flows.  The discount  rate is estimated  using the rates  currently  offered for
deposits of similar remaining maturities.

The fair value  estimates  of  deposits  do not  include  the fair value of core
deposits intangible.

        Borrowings

The fair value of  promissory  notes  included in notes  payable,  advances from
FHLB,  subordinated  notes and other secured  borrowings  was  determined  using
discounted cash flow analysis over the remaining term of the  obligations  using
market rates for similar instruments.

        Interest rate swap agreements

The fair value of  interest  rate swap  agreements  was  determined  taking into
account the current  interest rates at December 31, 1997. This value  represents
the  estimated  amount the Bank would pay to terminate the contract or agreement
taking into account current  interest rates and, when  appropriate,  the current
credit worthiness of the counterparties.

        Limitations

Fair value  estimates  are made at a specific  point in time,  based on relevant
market  information  and  information  about the  financial  instruments.  These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the  Company's  entire  holdings of a particular  financial
instrument.  Because no market exists for a significant portion of the Company's
financial  instruments,  fair value  estimates are based on judgments  regarding
future   expected   loss   experience,   current   economic   conditions,   risk
characteristics  of various  financial  instruments,  and other  factors.  These
estimates  are  subjective  in nature and involve  uncertainties  and matters of
significant judgment and therefore cannot be determined with precision.  Changes
in assumptions could significantly affect the estimates.

In addition,  the fair values  presented do not attempt to estimate the value of
the  Company's  fee  generating   businesses  and  anticipated  future  business
activities,  that  is,  they do not  represent  the  Company's  value as a going
concern.  Furthermore, the differences between the carrying amounts and the fair
values presented may not be realized since, in many cases, the Company generally
intends to hold these financial instruments to maturity and realize the recorded
values.

Reasonable  comparability  of fair values among  financial  institutions  is not
likely due to the wide range of  permitted  valuation  techniques  and  numerous
estimates that must be in the absence of secondary  market prices.  This lack of
objective pricing standards introduces a greater degree of subjectivity to these
derived or estimated fair values. Therefore,  while disclosure of estimated fair
values of financial instruments is required, readers are cautioned in using this
data for purposes of evaluating the financial condition of the Company.

                                       73
<PAGE>
25. R&G Financial Corporation (Holding Company Only)
    Financial Information

The following condensed financial information presents the financial position of
R&G Financial Corporation (the Holding Company) only as of December 31, 1997 and
1996 and the  results  of its  operations  and its cash flows for the years then
ended (since inception in 1996).
<TABLE>
<CAPTION>
Statements of Financial Condition
                                                            December 31,
Assets                                                   1997           1996
--------------------------------------------------------------------------------
<S>                                                 <C>             <C>         
Cash                                                $    622,478    $    810,920
Investment in R-G Premier Bank, at equity             47,407,575       3,417,333
Investment in R&G Mortgage, at equity                 59,542,059      47,696,483
Investment in preferred stock of
  R-G Premier Bank, at cost                           30,100,000      30,100,000
Accounts receivable - subsidiaries                       423,178         290,000
--------------------------------------------------------------------------------
Total assets                                        $138,095,290    $116,314,736
================================================================================

Liabilities and Stockholders' Equity
--------------------------------------------------------------------------------
Advances from subsidiaries                          $       --      $    666,975
Other liabilities and accrued expenses                    41,374          14,869
Stockholders' equity                                 138,053,916     115,632,892
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity          $138,095,290    $116,314,736
================================================================================
<CAPTION>
Statements of Income

                                                            December 31,
                                                         1997           1996
--------------------------------------------------------------------------------
<S>                                                 <C>             <C>         
Income:
     Dividends on Bank preferred stock              $  2,953,225    $       --
     Management fees                                     423,178            --
     Interest on certificates of deposit                    --            12,164
--------------------------------------------------------------------------------
                                                       3,376,403          12,164
--------------------------------------------------------------------------------
Operating expenses                                       384,707          10,811
--------------------------------------------------------------------------------
Income before income taxes and equity
  in undistributed earnings of subsidiaries            2,991,696           1,353
Income taxes                                               8,079             338
--------------------------------------------------------------------------------
Income before equity in undistributed
  earnings of subsidiaries                             2,983,617           1,015
Equity in undistributed earings of
  subsidiaries                                        20,513,595      13,198,501
--------------------------------------------------------------------------------
Net income                                          $ 23,497,212    $ 13,199,516
================================================================================
</TABLE>

The Holding  Company had no operations  during the years ended December 31, 1997
and 1996.

The principal  source of income for the Holding Company consists of dividends on
preferred  stock  held from R-G  Premier  Bank of Puerto  Rico.  The  payment of
dividends  by the  Bank  to the  Holding  Company  may be  affected  by  certain
regulatory requirements and policies, such as the maintenance of certain minimum
capital levels.

                                       74
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                                                      Year ended December 31,
                                                                                                     1997                 1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>                   <C>         
Cash flows from operating activities:
 Net income                                                                                      $ 23,497,212          $ 13,199,516

 Adjustments  to  reconcile  net  income to cash  provided  by  operating
  activities:
 Equity in undistributed earnings of subsidiaries                                                 (20,513,595)          (13,198,501)
 Increase in accounts receivable - subsidiaries                                                      (423,178)                 --
 Increase (decrease) in other liabilities and accrued expenses                                         26,505              (357,482)
------------------------------------------------------------------------------------------------------------------------------------
Total adjustments                                                                                 (20,910,268)          (13,555,983)
------------------------------------------------------------------------------------------------------------------------------------
        Net cash provided by (used in) operating activities                                         2,586,944              (356,467)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
        Collections of advances to subsidiaries                                                       290,000                  --
        Purchase of investment in preferred stock of the Bank                                            --             (30,100,000)
------------------------------------------------------------------------------------------------------------------------------------
        Cash provided by (used in) investing activities                                               290,000           (30,100,000)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
        Proceeds from issuance of common
         stock on initial public offering                                                                --              31,072,748
        Cash dividends on common stock                                                             (2,385,752)             (472,336)
        Net advances from subsidiaries                                                                   --                 666,975
        Repayment of advances from subsidiaries                                                      (666,975)                 --
        Payment of cash in lieu of fractional shares on stock split                                   (12,659)                 --
------------------------------------------------------------------------------------------------------------------------------------
        Net cash (used in) provided by financing activities                                        (3,065,386)           31,267,387
------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash                                                                      (188,442)              810,920
Cash at beginning of year                                                                             810,920                  --
------------------------------------------------------------------------------------------------------------------------------------
Cash at end of year                                                                              $    622,478          $    810,920
====================================================================================================================================
</TABLE>


                                       75
<PAGE>
26.     Industry Segments

The  following  summarized  financial  information  presents  the results of the
Company's  operations  for the three year period ended December 31, 1997 for its
traditional banking and mortgage banking activities:
<TABLE>
<CAPTION>
                                               1997                                     1996                    
                                 Bank        Mortgage      Total          Bank        Mortgage        Total     
----------------------------------------------------------------------------------------------------------------
<S>                          <C>           <C>           <C>           <C>           <C>           <C>          

Net interest
 income after
 provision of
 loan losses                 $25,543,992   $ 4,615,774   $30,159,766   $20,883,829   $ 3,781,152   $24,664,981  
Other income:
 Net gain on
  origination
  and sale
  of loans                     5,436,030    18,596,684    24,032,714     1,354,373    10,354,601    11,708,974  
 Change in
  allowance for
  cost in excess of
  market value of
  loans held for sale               --            --            --            --            --            --    
 Net gain on sales
  of investment securities
  available for sale             107,430          --         107,430       641,798          --         641,798  
  Loan administration
  and servicing fees                --      13,213,948    13,213,948          --      13,029,053    13,029,053  
 Service charges,
  fees and other               2,915,328       835,642     3,750,970     3,664,577       207,645     3,872,222  
----------------------------------------------------------------------------------------------------------------
                              34,002,780    37,262,048    71,264,828    26,544,577    27,372,451    53,917,028  
----------------------------------------------------------------------------------------------------------------
Operating expenses:
 Salaries and
  employee benefits            7,654,668     5,998,086    13,652,754     6,062,221     4,731,080    10,793,301  
 Office
  occupancy and
  equipment                    4,660,583     2,470,914     7,131,497     3,551,035     1,980,094     5,531,129  
 SAIF special assessment            --            --            --       2,508,380          --       2,508,380  
 Other                         8,803,210     9,448,287    18,251,497     7,698,577     7,725,540    15,424,117  
----------------------------------------------------------------------------------------------------------------
                              21,118,461    17,917,287    39,035,748    19,820,213    14,436,714    34,256,927  
----------------------------------------------------------------------------------------------------------------
Income before
 income taxes (and
 minority interest in
 1996 and 1995)              $12,884,319   $19,344,761   $32,229,080   $ 6,724,364   $12,935,737   $19,660,101  
================================================================================================================
<PAGE>
<CAPTION>
                                               1995
                                  Bank        Mortgage       Total
--------------------------------------------------------------------
<S>                           <C>           <C>           <C>        

Net interest
 income after
 provision of
 loan losses                  $17,943,694   $ 2,379,287   $20,322,981
Other income:
 Net gain on
  origination
  and sale
  of loans                      1,249,612     7,134,459     8,384,071
 Change in
  allowance for
  cost in excess of
  market value of
  loans held for sale             855,834          --         855,834
 Net gain on sales
  of investment securities
  available for sale                 --            --            --
  Loan administration
  and servicing fees                 --      11,029,995    11,029,995
 Service charges,
  fees and other                2,368,128       803,821     3,171,949
--------------------------------------------------------------------
                               22,417,268    21,347,562    43,764,830
--------------------------------------------------------------------
Operating expenses:
 Salaries and
  employee benefits             4,330,248     3,953,561     8,283,809
 Office
  occupancy and
  equipment                     2,860,176     1,851,136     4,711,312
 SAIF special assessment             --            --            --
 Other                          6,406,237     7,324,487    13,730,724
--------------------------------------------------------------------
                               13,596,661    13,129,184    26,725,845
--------------------------------------------------------------------
Income before
 income taxes (and
 minority interest in
 1996 and 1995)               $ 8,820,607   $ 8,218,378   $17,038,985
====================================================================
</TABLE>

                                       76
<PAGE>
27.     Quarterly Financial Data (Unaudited):

Following  is a summary  of  selected  financial  information  of the  unaudited
quarterly results of operations.  In the opinion of management,  all adjustments
necessary for a fair presentation have been made.
<TABLE>
<CAPTION>
                                                                             (In thousands, except for per share data)
                                                                             1997
                                                                   March 31          June 30             Sept. 30           Dec. 31
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                <C>                <C>                <C>     
Total interest income                                             $ 20,408           $ 22,764           $ 26,213           $ 27,950
Total interest expense                                             (12,355)           (14,173)           (16,427)           (17,850)
Net interest income                                                  8,053              8,591              9,786             10,100
Provision for loan losses                                           (1,250)            (1,695)            (1,700)            (1,725)
Income before income taxes                                           7,650              7,536              8,402              8,641
Income tax expense                                                  (2,615)            (2,158)            (2,351)            (1,608)
Net income                                                           5,035              5,378              6,051              7,033
Net income per common share - Basic                               $    .36           $    .38           $    .43           $    .49
Net income per common share - Diluted                             $    .35           $    .37           $    .42           $    .48
<CAPTION>
                                                                             1996
                                                                   March 31          June 30             Sept. 30           Dec. 31
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                <C>                <C>                <C>     
Total interest income                                             $ 15,991           $ 18,355           $ 19,459           $ 19,981
Total interest expense                                              (9,891)           (11,009)           (11,689)           (12,274)
Net interest income                                                  6,100              7,346              7,770              7,707
Provision for loans losses                                              (7)              (350)            (2,485)            (1,416)
SAIF special assessment                                               --                 --                2,508               --
Income before income taxes                                           4,963              4,954              3,696              5,509
Income tax expense                                                  (2,035)            (1,787)            (1,229)              (871)
Net income                                                           2,928              3,167              2,467              4,638
Net income per common share - Basic                               $    .31           $    .34           $    .22           $    .34
Net income per common share - Diluted                             $    .31           $    .34           $    .21           $    .33
</TABLE>


                                       77
<PAGE>





                                    [BLANK]






                                       78
<PAGE>
Corporate Information

Board of Directors of R-G Financial Corporation:
Victor J. Galan, Chairman of the Board and
Chief Executive Officer

Ramon Prats, Vice Chairman of the Board and
Executive Vice President of RGM

Ana M. Armendariz, Treasurer of the Board and
Senior Vice President of Finance RGM

Enrique Umpierre Suarez, Secretary of the Board
and Attorney in private practice

Benigno R. Fernandez,  Senior Partner of
Fernandez, Perez, Villariny & Co., CPA
firm in Hato Rey, P.R.

Eduardo McCormack, Retired Businessman.
Previously worked for Bacardi Corp. in
various functions of the business.



Gilberto Rivera Arreaga,  Executive  Director and  Administrator of the National
College of Business & Technology, educational center in Bayamon, P.R.

Juan J. Diaz, Senior Vice President-Loan
Administration RGM

Laureano  Carus  Abarca,  Chairman of Alonso  Carus Iron Works in Catano,  P.R.,
manufacturers of metal products

Pedro  Ramirez,  President & CEO of Empresas  Nativas,  Inc.,  local real estate
development firm

Victor L. Galan, Vice President Marketing Department
of RGM


Officers of R-G Financial Corporation:
Senior Management Team:
Victor J. Galan, Chairman, President and CEO
Ramon Prats, Excecutive Vice President
Juan J. Diaz, Senior Vice President Loan Administration
Ana M. Armendariz, Senior Vice President  Finance RGM
Mario Ruiz, Senior Vice President Secondary Market
Jose Sandoval, Vice President and Chief Financial Officer
Jose L. Ortiz, Vice President Finance RGPB
Ivan Velez, Vice President Operations
William Martinez, Vice President Administration
Sonia I. Vazquez, General Auditor

Production Group:
Dennis C. Tristani, Senior Vice President
Commercial Loans RGPB

Roberto Cordova, Senior Vice President Loan
Production RGM

Steven Velez, Senior Vice President Underwriting and
Technology RGM

Jeannette Miro, Vice President Marketing RGPB

Ismenia Isidor, Vice President Closing Department RGM

Edwin Reyes, Vice President Branch
Administration RGPB

Ricardo Agudo, Vice President New Housing RGM

Victor L. Galan, Vice President Branch
Administration RGM

Stockholder Information
Corporate Office
R-G Plaza
280 JT Pinero Ave.
San Juan, PR 00918
Telephone (787) 758-2424

Annual Meeting:
April 23, 1998, at  R-G Plaza , Hato Rey, PR

Transfer Agent and Registrar:
American Stock Transfer & Trust Co.
40 Wall Street- 46th Floor
New York, NY 10005

Independent Public Accountants:
Price Waterhouse
Chase Manhattan Bldg. - 9th Fl.
San Juan, PR 00918

Special Counsel:
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street  N.W. - 12th Floor
Washington , DC 20005

Mc Connell & Valdes
270 Munoz Rivera Ave.
San Juan, PR 00918

Market Makers:
Friedman Billings Ramsey & Co.
1001 19th Street North
Arlington, VA 22209

PaineWebber  Incorporated of PR American International Plaza Penthouse Floor 250
Munoz Rivera Ave.
San Juan, PR 00918
Internet Website :
http://www.rgonline.com (in Spanish and English)

General Inquiries & Reports:

R-G  Financial  is required to file an annual  report on Form 10K for its fiscal
year ended December 31, 1997 with the Securities and Exchange Commission. Copies
of its Annual Report and  quarterly  reports may be obtained  without  charge by
contacting:

Sonia Colon , Administrative Assistant
Telephone (787) 756-2801

Stock Listing:
Symbol: RGFC-NASDAQ

At December 31, 1997, the Company had 97 stockholders of record,  which does not
take into  consideration  investors who hold their stock  through  brokerage and
other forms.  The high and low prices and dividends  paid per share (as adjusted
for the Company's  80% stock split paid in 1997) for the Company's  common stock
during each  quarter  since the Company  began  trading on August 22, 1996 is as
follows:
<TABLE>
<CAPTION>
                    September 30      December 31     March 31       June 30       September 30   December 31
                          1996           1996           1997           1997            1997         1997
<S>                      <C>            <C>            <C>            <C>            <C>            <C>  
High                     $10.42         $14.31         $15.55         $14.44         $22.50         $22.0
Low                      9.17           9.86           12.64          12.92          14.17          18.875
Dividends Paid           -              .0347          .0382         .0417           .0431          .0457
</TABLE>