R-G FINANCIAL CORPORATION
                               1998 ANNUAL REPORT















Investing in People Toward the New Century  [GRAPHIC-LOGO FOR R&g FINANCIAL]




<PAGE>


                               Table of Contents



1       Financial Highlights


3       Sources of our Success


5       Letter to Stockholders -1998 Year in Review


16      Investing for the Future


17      Our Branches


18      Our People as a Competitive Advantage


25      Corporate Information



Cover:  R&G Mortgage and R-G Premier Bank managers service our customers in over
20 branch locations throughout the island. Many of our employees have grown with
R&G  having  over 20 years  of  service  in the  Company  and over 450  years of
combined experience.
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
(Dollars in Thousands, except for per Share Data)

                                  Percent
                                  Increase            1998                  1997                  1996
                                  vs. 1997
-------------------------------------------------------------------------------------------------------
<S>                                  <C>            <C>                    <C>                  <C>    
Loan Production                      57%            1,426,069              906,324              624,570

Gross Revenues                        31              180,767              138,440              103,038

Net Earnings                          45               34,034               23,497               13,200

Total Assets                          35            2,044,781            1,510,745            1,037,798

Return on Assets                       5                 1.95%                1.85%                1.38%

Servicing Portfolio                   61            4,827,798            3,000,888            2,550,169

Efficiency Ratio                       3                48.55%               50.28%               58.89%

Spread Income                         20               43,973               36,530               28,923

Fee Income                            37               56,470               41,105               29,252

Shareholders Equity                   60              221,162              138,054              115,633

Common Shareholders
  Equity per Share                    23                 5.99                 4.88                 4.09

Return on Common Equity               14                21.32%               18.69%               15.54%

Diluted Earnings
  per Common Share                    38                 1.12                 0.81                 0.59

Cash Dividends Declared
  per Common Share                    71                0.111                0.065                0.069

Market Value per Share               218%               2.00                 9.63                 6.60
</TABLE>

[GRAPHIC- GRAPH DEPICTING REVENUES]
[GRAPHIC- GRAPH DEPICTING NET INCOME]
[GRAPHIC- GRAPH DEPICTING ASSETS]
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We will strive for long-term  financial  strength and profitability by centering
our strategy on customer  satisfaction-  on becoming our customers' first choice
for service and solutions.

We seek to be a  high-performance  organization that delivers one-stop financial
services to its clients; that is recognized as the best provider of value-added,
financial services; and that offers services

                               Mission Statement


of unmatched  quality in terms of accessibility,  responsiveness  and turnaround
time. The key to our success is effective execution,  every day, everywhere.  By
everyone.

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, and by creating a work environment where all team members care and are
committed individually and as a team to do their best.

What makes us a leader is not what we say, but what we do and the way we do it.

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R&G: Sources of Our Success
--------------------------------------------------------------------------------
A Super  Community  Bank and a Leading  Mortgage  Banking  Operation  Working in
Tandem.

R&G Financial Corporation, with more than $2.0 billion in assets, is the holding
company for R&G Mortgage  Corporation  and R-G Premier Bank of Puerto Rico.  The
Company is a  financial  services  provider  with 26 years of  experience  and a
history of outstanding growth in Puerto Rico.

When the  Company  was  founded  in 1972,  its  business  was based on  mortgage
lending.  At the time,  mortgage  lending  represented a large  opportunity  for
growth, since there was minimal competition,  the economy was strong, and people
were pressing for new homes and business facilities.

In 1990,  R&G began its  banking  operation  with R&G Premier  Bank,  offering a
variety of  financial  products  and  services.  The Company has since grown and
diversified  further.  It now  offers a  complete  range of  financial  services
through  bank  offices and  mortgage  banking  facilities  through 22  different
locations  throughout  the island.  R&G will  continue to grow as a  diversified
financial services company,  constantly  reengineering  itself as customer needs
and market conditions change.

R&G is now  regarded  not only as one of the top-  performing  companies  in the
financial  services  industry,  but also among all companies in Puerto 

[GRAPHIC-GRAPH DEPICTING LOAN PORTFOLIO]
[GRAPHIC-GRAPH DEPICTING DEPOSITS]
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Rico. For example, last year marked the 26th year of record earnings. And in the
two and a half years since  becoming a public  company,  R&G has seen its market
value grow by 421%.

Committed to Exceptional Service
--------------------------------

The Company also is considered one of the top private-sector  employers. In 1998
R&G  employed  over  1,000  people,  all  sharing  the same  vision,  values and
philosophy.  R&G believes that its most valuable  asset is its people,  and that
the service they deliver is critical to its success.  We understand that given a
convenient  location, a customer will decide between competing banking companies
on the  basis of  quality  service.  That is  something  we  never  forget - and
something our expert  management  team never ceases to remind each and every one
of our staff.

Our management team has over 20 years of combined  experience in different areas
of the banking and financial  industries,  providing the knowledge and expertise
necessary to comply with the most demanding client's requirements. However, what
keeps us ahead of the competition is the motivation,  satisfaction and skills of
our employees. These are key to customer satisfaction and retention.

Our  financial  products  are  commodities.  The  only  way to  differentiate  a
commodity  is by the way we deliver it - the way we sell and price the  product,
but also the quality of the service we provide. In our business,  we have to try
harder to attract new customers; but once they are with us, they tend to stay.

Because our 1,000 people are our most valuable asset - the source of our success
- we dedicate this annual report to them.



[GRAPHIC-GRAPH DEPICTING STOCKHKOLDERS' EQUITY]

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LETTER TO STOCKHOLDERS 
1998 Year in Review

Dear Fellow Stockholders:

By all accounts 1998 was a remarkable year for R&G. Among other accomplishments,
we added a  substantial  number  of new  customers,  and  each of our  earnings,
assets,  deposits  and  capital  increased  to  record  levels.  The  strategies
underlying these achievements are equally notable because they form the basis of
our business plan for future growth, which we will continue to implement.

For the first time since our Company was founded 26 years ago, we have increased
our work force to more than 1,000  employees.  In view of this  achievement,  we
have decided to make our people and their  contribution the theme of this annual
report. 

[GRAPHIC-PHOTO FO VICTOR J. GALAN, R&G FINANCIAL CORPORATION
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER]
                                                                               5
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After many years in retail banking,  I have yet to hear a customer's  compliment
that does not revolve around the quality of service  delivered by our employees.
Great people provide exceptional results, but the retention of our quality staff
has been as a result of our belief in the following rules:

That  employee  satisfaction  and skills,  coupled with  excellent  services and
internal processes, create superior performance in banking and mortgage banking.

That offering performance  incentives  throughout the organization - from senior
management  down to loan processors and tellers - spurs all our employees to new
accomplishments and rewards them for their efforts.

That banking and mortgage banking still depend upon people,  and that technology
is simply an  enabler.  Technology  is half the game and  people  skills are the
rest.  We  think  that  marketing  and  staff  training,   along  with  improved
integration of internal processes, are the best strategies for meeting the needs
of our  customers.  We want our team  members to act as if they own the Company,
because to a large extent they do!

That our employees  will be loyal to us because we are loyal to them. We promote
a climate of loyalty and trust by providing job security, promoting from within,
and offering  salaries,  benefits  and  incentives  that are  perceived as fair.
People who are treated as if they are the key to the Company's  success,  become
just that.

Record Financial Results
------------------------

Financially,  1998  was a  banner  year for R&G.  Our  profits,  volume  of loan
originations  and assets all reached new highs.  In addition,  we increased  our
loan servicing  portfolio to $4.8 billion,  a record amount for the Company.  We
are  currently  serving  more than  180,000  customers  through our mortgage and
commercial  banking  operations.  The retention of this clientele will depend on
the motivation, satisfaction and skills of our work force. We are sure our staff
has  what it takes  not only to keep  these  clients  but also to  substantially
increase their relationships with R&G in the future.

Earnings  for 1998  rose to a record  $34.0  million,  increasing  45% from 1997
earnings of $23.5 million. On a per share basis (diluted),  R&G Financial earned
$1.12,  compared to $0.81 the previous  year, an increase of 38%. Our compounded
annual growth rate in total assets was 38.8% for the period 1978-1998, and 34.4%
for the period since August 22, 1996 when we became a public company. We believe
that this rapid growth is attributable  to three  strategies in particular - our
investment in technology,  promotional  campaigns and advertising;  geographical
expansion through the opening of new branches; and development of a strong sales
culture. This has resulted in improved market share in mortgage,  commercial and
consumer lending, as well as banking deposits.

Total gross  revenues  for 1998  amounted to $180.8  million  compared to $138.4
million for 1997. Net


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revenues after  deducting our cost of interest were $100.4  million  compared to
$77.6 million in 1997. A significant  portion of our 1998 net revenues consisted
of net interest income totaling $44.0 million.  Net interest income for 1998 was
up by 20% from the 1997 level.  The balance of our net  revenues,  amounting  to
$56.4 million,  consisted of fees generated  primarily from the servicing of our
mortgage portfolio, the origination and sale of loans, and banking services.

The  level of fee  income  in 1998 was 37%  higher  than in  1997.  The  Company
achieved  solid gains in fee income in virtually  all  categories - mortgage and
banking  operations,  electronic  banking,  trusts,  commercial loans and credit
cards - as a direct  result of  providing a unique line of banking  products and
personalized services.

Also in 1998,  the Board of Directors  declared a  two-for-one  stock split that
became  effective  in June.  Total  shares  outstanding  as of December 31, 1998
increased to  28,586,647.  The decision to split the Company's  common stock was
part of our ongoing effort to increase the stock's liquidity.

We increased  dividends  to $0.111 per share from $0.065 per share in 1997.  For
the quarter  ended  December 31,  1998,  the dividend was raised to $0.132 on an
annualized  basis,  a 29% increase  from the  annualized  rate of $0.123 for the
prior  quarterly  dividend.  This was our ninth  consecutive  increase since the
Company went public. We plan to continue 


[GRAPHIC-GRAPH DEPICTING MORTGAGE SERVICING PORTFOLIO]
                                                                               7
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increasing  our future  dividend  payments  proportionately  to our increases in
profit.

Our stock price  climbed from $4.03 (as  adjusted  for our stock  splits) at the
time of our initial public offering on August 22, 1996 to $21.00 at the close of
operations  in December  1998,  representing  an  increase  of 421%.  Our market
capitalization  increased  proportionately  to $600.3  million  as of the latter
date.  (If the stock splits had not happened,  the value of a share of R&G stock
would have been $75.60 on December 31, 1998, compared with $14.50 at the time of
our public  offering.)  We are  optimistic  that the strong  upward trend in our
revenues,   plus  the  synergies   between  our  banking  and  mortgage  banking
operations,  will provide  meaningful  earning increases in the coming years and
beyond.

In August 1998 we completed a public offering in the local market of $50 million
of preferred  stock with a gross  return to investors of 7.40%.  The proceeds of
this stock issue were allocated to increase the capital of our bank and mortgage
company by $20  million  and $30  million,  respectively.  Most of the  proceeds
provided  to the  mortgage  company  were used to finance the  acquisition  of a
servicing  portfolio  purchased  from a local  commercial  bank; the balance was
retained in the mortgage company for working capital.

Shareholders  equity of $221.2  million as of December  31, 1998 was up 60% from
$138.1 million in 1997. Core capital represented 10.88% of our total assets, and
risk-based capital represented 14.28% (on a consolidated  basis),  substantially
exceeding the minimums required by our regulators.

We were successful in improving our efficiency  ratio (expenses to revenues) for
1998 to 48.55% from 50.28% in the prior year.  The  improvement in the ratio was
achieved in spite of a 25% increase, to $48.8 million, in non-interest expenses.
These expenses were primarily  related to the opening of four new branches;  the
addition of another branch through the mid-1998  acquisition of Fajardo  Federal
Savings  Bank;   increased  loan  originations  and  servicing;   and  increased
administrative costs to handle the additional volume of loans and other assets.

Branch Expansion
----------------
During 1998 we opened new branches in Fajardo,  Ponce, San Juan and Bayamn.   We
also added another  branch in Fajardo with the  acquisition  of Fajardo  Federal
Savings Bank.

In our market,  branch  availability  and location  still  influence  consumers'
decisions on which bank to do business with. Branches are also important to many
of our  commercial  customers,  who,  to a large  extent,  still  value and need
physical access. All our branches are strategically  located and are designed to
be  selling  platforms  for  cross-selling  and  relationship  building.  We are
creating,  in fact, a network of physical  sites where we can interact  with our
customers. This

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personal  presence allows us to strengthen our franchise in banking and mortgage
banking.

At the close of the year we had 20 branches of R-G Premier  Bank, 21 branches of
R&G Mortgage and 2 branches of Champion Mortgage (a subsidiary of R&G Mortgage),
each working in tandem in 22  different  locations.  In addition,  we had 6 more
branches under construction and 10 more committed for future opening.  About 710
employees were assigned to branches,  loan  origination  and  processing,  52 to
operations,   204  to  loan   administration,   and  the   balance   to  general
administration and finance, which results in a total of 1,054 employees.  We are
continuing  to open new branches in strategic  locations  across Puerto Rico. At
the current pace of growth, we expect to have about 75 bank and mortgage company
branches in 35 locations by the end of 2001.  At that time,  we should cover the
northeastern part of the island (from Arecibo to Fajardo), the markets of Caguas
and Humacao in the southeast,  and the markets of Ponce,  Mayaguez and Aguadilla
in the western half of Puerto  Rico.  After that  expansion,  we are planning to
cover the rest of Puerto Rico via  additional  satellite  offices or through our
virtual banking operation, which should be fully developed by that time.

Record Assets and Loan Production
---------------------------------
Loan  production - comprised of  residential  and commercial  mortgage  lending,
consumer  and 

[GRAPHIC-PHOTO  OF VICTOR J. GALAN, R&aG FINANCIAL  CORPORATION  CHAIRMAN OF THE
BOARD AND CHIEF EXECUTIVE  OFFICER,  AND RAMON PRATS, VICE CHAIRMAN OF THE BOARD
AND EXECUTIVE VICE PRESIDENT OF RGM.

                                                                               9
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business  lending  -  reached  an all time high of $1.4  billion  in 1998.  This
represented  a 57% increase  from the $906.3  million of  production in 1997. We
achieved this substantial  growth through a very strong advertising effort using
print and broadcast  media,  a  substantial  expansion in branches and increased
telemarketing.

Our residential and construction mortgage originations  translated into a market
share of 28%, based on an estimated  total  residential  mortgage market of $4.7
billion in Puerto  Rico last  year.  Significant  opportunities  remain for even
greater market share growth in mortgage lending. The more banking  relationships
a household or business has with us, the more loyal that customer is to R&G.

Champion  Mortgage,  a subsidiary of R&G Mortgage,  achieved  excellent results,
producing a record volume of loan  originations.  We organized  Champion in 1997
for the purpose of originating  residential  non-conforming and sub-prime loans.
In view of the  initial  success of this  operation,  we  expanded  its scope of
business  to  include a full line of  mortgage  products.  Our  intention  is to
separate this part of our business in order to focus on the requirements of this
very special market niche.  During 1998 we opened a new Champion Mortgage office
in Hato Rey and a new branch in Ponce;  our plans for 1999  include a new branch
in Bayamn to open in  February  and a new  branch in Caguas to open in June.  In
addition, we are presently evaluating five other locations.

[GRAPHIC-GRAPH DEPICTING TOTAL LOAN PRODUCTION]
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Our residential  portfolio in 1998 totaled $765.8  million,  a 53% increase from
$501.6  million in 1997.  The average  yield for 1998 was 7.76%.  The  portfolio
included $747.2 million of residential first-mortgage loans and $18.6 million of
second mortgage loans.

During  1998  we  expanded  our  services  by  organizing  a  Construction  Loan
Department to work primarily  with real estate  developers.  Previously,  we had
focused  exclusively on financing  individual  residential  construction.  As of
December 31, 1998, the new department  had  outstanding  loans of $16.2 million,
plus commitments for future funding of $18.2 million.

Our  commercial  loans  portfolio,  including  commercial  mortgages and leases,
increased to $167.9 million at year-end, an increase of 33% from the prior year.
This increase was due mostly to the introduction of customized  commercial loans
structured to fit borrowers  needs.  Most of this  portfolio is structured  with
interest  rates  floors,  so our  portfolio  yield has not been  affected by the
reductions in the prime lending rate during late 1998.

Our consumer portfolio,  which includes collateralized consumer loans and credit
cards,  amounted to $143.3 million at the end of 1998. This portfolio  generated
an  average  yield of 10.37%  which  improved  the  average  return of our total
portfolio and our spread income.

We expanded our servicing portfolio to 96,000 loans with a total balance of $4.8
billion,  an increase of $1.8 billion,  or 61%, from 1997. We estimate the total
value of our  servicing  portfolio at $84.4  million as of December 31, 1998, or
$26.2  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 $16.0 million in 1998
from $13.2 million in 1997.

On November 30, 1998, we completed the acquisition of a servicing portfolio from
a local  commercial bank. This  acquisition,  consisting of 32,400 loans with an
outstanding  balance of $1.1  billion,  has  expanded  our client  base and will
increase our income from servicing during future years. Most of the portfolio is
already  mature,   providing  opportunities  for  our  refinancing  program.  We
publicize this program through  advertisements,  telemarketing  and face-to-face
contact in the 23 branches of our mortgage company.

We strengthened our credit loss reserves during the year, increasing the reserve
for loan losses to $8.1 million, a 19.0% increase from $6.8 million the previous
year. Reserves  approximate 67.3% of total  non-performing  loans as of December
31,  1998,   excluding  our  residential  loan  portfolio,   where  losses  have
historically been minimal.

Loans sold during 1998 were  substantial,  totaling $775.0 million.  These sales
consisted of $298.1 million of residential FHA and VA mortgage loans securitized
and sold in GNMA pools,  and $476.9  

11
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million  of  residential  conventional  loans  mainly  sold  to  the  government
sponsored   agencies   (Fannie  Mae  and  Freddie  Mac).  Our  ability  to  sell
conventional  mortgage  loans was made  easier by the  installation  of  scoring
systems directly connected with both entities.  The direct connection allows for
faster response about loan  approvals,  shorter  processing  time, and immediate
delivery to the secondary market once the loans are closed.

Our  securities  portfolio  increased by 13% in 1998,  growing to $639.7 million
from $566.9 million in 1997. These  investments  represented 31% of total assets
as of December 31, 1998, and with an average yield of 6.14%,  generated revenues
of $33.3 million.  Most of these  securities were tax-free GNMAs,  which enabled
the Company to reduce its taxes for 1998 to an effective  tax rate of 24.5% from
27% in 1997.

Liquid  assets  constituted  19.2% of total assets at  year-end,  even though we
closed  new loans for more than $1.4  billion  during the year.  Assets  grew by
$534.0 million  during 1998, to a record $2.0 billion.  This growth was financed
by a $284.5  increase in  deposits  plus a $200.6  million  increase in lines of
credit  with banks and the Federal  Home Loan Bank of New York.  The balance was
financed  through  profits,  loan payoffs,  and funds generated by our preferred
stock issue. At year-end,  our unused lines of credit (including lines of credit
with the Federal Home Loan Bank) totaled $513.8  million.  We had $397.4 million
of excess  collateral  available to cover  advances  from these lines,  with the
collateral primarily available from our residential mortgage portfolio.

Record  Deposits  ---------------  Deposits  exceeded the  billion-dollar  mark,
increasing  by 39% to $1.0  billion in 1998 from  $722.4  million in 1997.  This
growth was mainly due to three initiatives:  a very strong promotional  campaign
designed to generate core deposits and to expand our Private  Banking  business;
the opening of new branches;  and the expansion of our existing  locations.  New
deposits with our Private Banking Group rose  substantially,  and these accounts
will lead to additional  business in 1999 as the Private  Banking Group provides
other products and services to these customers. The overall increase in deposits
was also due to new deposit  products  introduced in 1997, such as 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 customers who have a
small volume of transactions  and use a minimum amount of checks.  Early in 1998
we introduced the "Dinoro", a special account for children.

With the  successful  introduction  of these new  accounts,  we are  providing a
unique line of banking  products and  personalized  services in "niche"  savings
programs.  These  programs  are  designed  for  customers  who seek high yields,
diversity of products and access to electronic banking services,

12
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but who also want their  accounts  to be  FDIC-insured.  The  average per branch
deposit size increased 4.6% to $50.3 million in 1998 from $48.1 million in 1997,
even though we opened five new branches  during the year. Our average per branch
deposit  size  exceeds the  average  per branch  deposits of Puerto Rico by $7.3
million or 17%. Core deposits, primarily consisting of saving and direct deposit
accounts, represented 39.2% of our total deposits (only 6% below the average for
the  banking  industry in Puerto  Rico),  and  increased  from the prior year by
48.4%. Brokered deposits were only 1.4% of our total deposits.  Our share of the
total deposit market in Puerto Rico increased to 4.34% from 3.74% in 1997, while
our share of the primary markets we serve  (northeastern  Puerto Rico plus Ponce
and Mayaguez) increased to 5.39% from 4.02% .

Technology
----------
Last June we introduced  Interactive  Internet Banking  (including bill paying),
moving a step closer to creating a true virtual bank.  With a virtual bank, most
of the  transactions  done at a physical  branch can instead be  performed  from
one's home or office via computer.  The  introduction  of this new product means
that  we now  offer  customers  the  full  gamut  of  technological  services  -
electronic  commerce,  home banking and Internet,  as well as our voice response
system, ATMs and platform branch automation. With a push of a button, click of a
mouse,  or phone call,  our  customers  can access  their  accounts  and Company
information 24 hours a day, 7 days a week. During 1999 we are



[GRAPHIC-PHOTO]
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planning  to expand our  Internet  system to download  digital  cash onto a card
straight from a banking account. We also plan to complete our fiber optic system
interconnecting all our branches.  Another project is to expand our call center,
which includes developing customer profiling analysis.

As has been widely reported, computers worldwide are programmed to read only the
last two digits of a calendar  year, to save computer  memory.  Now thousands of
lines of computer code must be rewritten to stop  computers  from reading "1900"
instead of "2000".

The Company is on schedule in making  changes in software  coding  needed to fix
this "Year 2000"  problem.  The  estimated  cost of this work is only  $300,000,
which includes the investment in equipment and software.  As of the date of this
report, we have completed the assessment of our Year 2000 Plan, plus most of the
remediation,  testing and validation phases of the Plan. We are on schedule with
the steps called for in our Year 2000 Plan and no delays have been  experienced.
The most important  computer  applications  used by the mortgage company - those
related with loan originations and servicing - are already being approved by the
Mortgage  Bankers  Association  of  America  as Year  2000-compliant  under  the
Inter-System Readiness Test.

Other Developments
------------------
Last December we increased the size of our central  office in Hato Rey to 60,000
square  feet and 398 parking  spaces.  We are  planning to expand this  facility
further  by  constructing  a  twenty-story  office  tower  next to our  existing
building.  This new tower will add 124,000  square feet of office  space,  7,000
square  feet of  commercial  space,  and  parking  facilities  for 387 cars (See
rendering of the proposed  building  elsewhere in this report).  Combined,  both
buildings  will have total  office  space of  184,000  square  feet and  parking
facilities  for 785  cars -  enough  space  to meet  our  future  needs.  At the
completion of this expansion,  our facilities will be about 60 times the size of
the  Companys  original  building,  which had only 3,000 square feet when it was
built in 1979.

Last September the island was affected by Hurricane Georges, probably one of the
greatest  disasters  ever to strike  Puerto Rico.  The economy of the island was
severely affected,  but has now returned to pre-hurricane levels - thanks to the
strong assistance provided by the Commonwealth and the federal  government,  and
to the efforts and  sacrifices  made by all of the islands  people.  Most of the
main business  sectors,  such as manufacturing,  tourism and  construction,  are
already in full gear.  At the end of  November,  Puerto Rico  reached a level of
employment  that implied that the damage  caused by the  hurricane had basically
been overcome.

We are pleased with the Company's  results for 1998. We significantly  increased
loan originations and added $478 million of unsold loans to our balance

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sheet,  expanding our earning-assets  base. As a result,  total assets grew to a
record $2.0  billion,  and our  servicing  portfolio  increased to a record $4.8
billion. Total assets under administration  (including our servicing portfolio),
grew to $6.9 billion  during 1998,  rising 52% from the prior year. All of these
accomplishments led to a strong improvement in revenues and net income for 1998.
We are  optimistic  that these  accomplishments  will  translate  into increased
profitability in the future.

The Company  will  continue  to  emphasize  strong  capital  ratios,  good asset
quality,  expense  control and increased fee income as key financial  sources of
future success.  Our competitive  advantage is a talented,  motivated and highly
trained staff that is compensated through carefully designed incentive programs.
Employees are committed to delivering  exceptional  products and services to our
customers.  We are a unique  financial  company,  focused on a limited number of
well-crafted financial products coupled with old-fashioned personalized service.
This focus,  and our values,  provide the foundation for improving our return on
equity,  achieving consistent top performance,  and rapidly building shareholder
value.

The future is bright for R&G. We believe that the Company's  strong  position in
the mortgage sector, combined with its rapidly expanding banking operation, will
continue  producing asset and earnings growth in the future,  which should boost
the value of our  shares.  Moreover,  market  demand is  strong  across  all our
business  lines,  and we have the internal and external  financial  resources we
need to  continue  our  planned  growth.  R&G is  already  a  widely  recognized
financial brand with a significant franchise in the Puerto Rico market.

I wish to express my appreciation to our valued  customers for their  patronage,
to our great  people  for being the very best at what they do, to our  directors
for their exceptional dedication to the Company's success, and to our owners for
their  confidence and support.  We are optimistic that 1999 will be another good
year for the Company.

/S/Victor J. Galan
-----------------
Victor J. Galan
Chairman of the Board and
Chief Executive Officer
R&G Financial Corporation


                                                                              15
<PAGE>
Investing for the Future
------------------------

As we approach the year 2000, we see two challenges in particular  affecting the
banking  industry:  consolidation  and  technological  change.  More than  ever,
staying  ahead means being  prepared.  It is  essential  that R&G  maintain  its
leadership not only in banking and mortgage products, but also in technology. We
must  keep pace with  technology  if we are to  provide  the most  complete  and
advanced services to our customer.

Our strategic plan for 1999 consists of the following key elements:

1. Continue to expand the Company's  branch network into desirable  locations in
Puerto Rico in order to gain access to  additional  retail  funding  sources and
loan business.

2. Retain a portion of our residential,  commercial and consumer loan production
volume and the  associated  servicing  (thereby  benefiting  from  economies  of
scale).

3. Continue to utilize advanced  technology and automated  processes  throughout
the Company's  business to improve  customer  service,  reduce the costs of loan
production and servicing, and increase efficiencies.

4.  Cross-sell  retail banking  services to the Company's large base of mortgage
customers.

As time becomes an increasing  valued  commodity in daily life,  customers  will
increasingly demand faster, more convenient service.  Only the latest technology
will be able to satisfy these  expectations.  Technology  will become an enabler
for new  products and  services  that will be offered with the quality  personal
service that has given R&G a competitive edge in the market.

Right: Over one thousand employees form the R&G work force. People who work as a
team  sharing a common  vision and a commitment  to quality  service to each and
every customer.

16
<PAGE>

[GRAPHICS-MAPS]




                                                                              17
<PAGE>
Our People as a Competitive Advantage
-------------------------------------

At R&G,  the  most  important  value  we  hold  is our  belief  in  people  as a
competitive  advantage.  Our  products  can  be  copied  and  our  training  and
technology duplicated.  Nobody, however, can match our corps of talented, highly
motivated people who care.

To maintain this  advantage,  we must do even better in training,  rewarding and
recognizing  all our team members.  We must build an inclusive work  environment
and a diverse  organization.  All  members of our team should know that they are
valued,  that they can go as far as their  ability  and desire to work hard will
take them.  We have  created a process to provide the right kind of training for
the right kind of skills rewarding and recognizing the right behaviors.  We have
identified the outstanding skills of our best managers.  We want to extend those
winning  attributes  across the Company.  R&G's success has much more to do with
attitude than with aptitude...  with what is in our hearts,  not just our heads.
Our team members care for their  customers,  for each other, for our communities
and for our  stockholders.  Because  we  believe  in people  as our  competitive
advantage,  we will  continue to invest in our "human  capital".  It is the most
important, valuable investment we can make.

Building  people  skills  is the  way  R&G  will  grow  and  excel  in an age of
lightning-fast  technological change,  intense competition and volatile markets.
Our  portfolio  of  people  skills  built  around  core  competencies  - not our
portfolio of changing  businesses and products - will be critical to our success
regardless of economic conditions.

The best financial services companies must do literally hundreds of things well.
In doing most of these things,  we need only be as good as the  competition.  In
the following core  competencies  however,  our performance must be outstanding,
clearly superior to that of the competition:

A QUALITY WORK FORCE:  We must attract,  develop,  retain and motivate a diverse
group of the most talented people.

SELLING ABILITY: We must recognize that we are all salespeople,  and be proud of
it!

QUALITY SERVICE:  Superb salespeople know the importance of service. There is no
sale  without  ongoing  excellent  service from our entire team - from the front
office to the operations  center and  everywhere in between.  We need to provide
such great service that our customers become "raving fans".


18
<PAGE>



                       [GRAPHIC-PHOTOS OF R&G EMPLOYEES]


                                                                              19
<PAGE>



                      [GRAPHIC-PHOTOS OF R&G EMPLOYEES]







20
<PAGE>
Risk management:  To be the best in financial  services,  we must be the best at
managing risk.

Technological  competence:  We must quickly and effectively  develop and use the
latest technology.

Positive work  environment:  We must ensure that our people enjoy their work. We
will not be  better  than  our  competitors  in sales  and  service  unless  the
environment  our team members work in is enjoyable  and fun. The attitude of our
team members - their commitment to customers,  co-workers,  stockholders and the
community - is the single most important  factor in making us a great  financial
services company, not merely a good one.







                                                                              21
<PAGE>







                     [GRAPHIC-PHOTO OF BOARD OF DIRECTORS]







22
<PAGE>
Corporate Information
Board of Directors of R&G Financial Corporation
Vctor J. Galn,
Chairman of the Board and
Chief Executive Officer

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

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

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

Benigno R. Fernndez,
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 capacities 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. Daz,
Senior Vice President-Loan
Administration RGM

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

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

Vctor L. Galn,
Vice President Branch Administration
RGM and Champion Mortgage

Ileana Coln Carlo,
CPA
Former Comptroller of the Commonwealth of Puerto Rico

Roberto Gorbea,
Engineer
President & CEO of Lord Electric Company of Puerto Rico, Inc.

                                                                              23
<PAGE>
Officers of R-G Financial Corporation

Senior Management Team
Vctor J. Galn, Chairman, President and CEO

Ramn Prats, Executive Vice President of RGM

Joseph R. Sandoval, Senior Vice President and CFO

Juan J. Daz, Senior Vice President Loan Administration RGM

Mario Ruiz, Senior Vice President Secondary Market, RGM

Ana M. Armendriz, Senior Vice President Finance RGM

Ivn Vlez, Senior Vice President Operations RGPB

Jose L. Ortz, Vice President Finance RGPB

William Martnez, Vice President Administration RGM

Sonia I. Vzquez, Vice President and General Auditor



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

Felipe Franco, Senior Vice President Consumer Lending RGPB

Roberto Crdova, Senior Vice President Loan Production RGM

Steven Vlez, Senior Vice President Underwriting & Technology RGM

Edwin Reyes, Vice President Branch Administration RGPB

Vctor L. Galn, Vice President Branch Administration RGM & Champion Mortgage

Ricardo Agudo, Vice President New Housing RGM

Jeannette Mir, Vice President Marketing RGPB

Ismenia Isidor, Vice President Closings Department RGM



24
<PAGE>
Stockholder Information
Corporate Office
R&G Plaza
280 JT Pi-ero Ave.
San Juan, PR 00918
Telephone (787) 758-2424

Annual Meeting
April 29, 1999, 10:00 a.m. Atlantic time
Bankers Club, Hato Rey, PR

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

Independent Public Accountants
PricewaterhouseCoopers, LLP
BBV Tower - 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 & Valds
270 Mu-oz 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 Mu-oz 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, 1998 with the Securities and Exchange Commission. Copies
of its Annual Report and  quarterly  reports may be obtained  without  charge by
contacting:
<PAGE>
[GRAPHIC-GRAPH DEPICTING STOCK PERFORMANCE COMPARED WITH PUERTO RICO PEER GROUP]

[GRAPHIC-GRAPH DEPICTING STOCK PRICE BEHAVIOR]



Sonia Coln, Investor Relations
Telephone (787) 756-2801
Stock Listings
Symbol: RGFC-NASDAQ
        RGFCP-NASDAQ

At December 31, 1998, the Company had 145 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 stock  splits  paid in 1998 and 1997) for the  Company's  stock  during each
quarter during the last two fiscal years is as follows:
<TABLE>
<CAPTION>
                   Mar 31     Jun 30    Sep 30     Dec 31     Mar 31     Jun 30     Sep 30     Dec 31
                     1997       1997      1997       1997       1998       1998       1998       1998
-----------------------------------------------------------------------------------------------------
<S>               <C>        <C>       <C>        <C>        <C>        <C>        <C>        <C>    

High                7.778      7.222     11.25      11.00      17.25      21.50      21.25      21.50
Low                 6.319      6.458     7.083     9.3125      9.625     16.407    15.0625      12.25
Dividends Paid    0.01910    0.02083   0.02153    0.02287    0.02500    0.02687    0.02875    0.03075
</TABLE>

                                                                               
<PAGE>
SELECTED CONSOLIDATED FINANCIAL
AND OTHER DATA OF R&G FINANCIAL                                December 31, 1998


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, 1998.
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,
                                                                          1998         1997         1996         1995        1994
                                                                      ----------   ----------   ----------   ----------   ---------
                                                                          (Dollars in Thousands, except for per share data)
<S>                                                                   <C>          <C>          <C>          <C>         <C>       
Selected Balance Sheet Data:

        Total assets(1)                                               $2,044,781   $1,510,746   $1,037,798   $  853,206   $ 622,499
        Loans receivable, net                                          1,073,668      765,059      603,751      473,841     301,614
        Mortgage loans held for sale                                     117,126       46,885       54,450       21,318      22,021
        Mortgage-backed and investment securities held for trading       450,546      401,039      110,267      113,809     124,522
        Mortgage-backed securities available for sale                     95,040       46,004       50,841       61,008      13,300
        Mortgage-backed securities held to maturity                       28,255       33,326       37,900       41,731      84,122
        Investment securities available for sale                          59,502       75,863       30,973        3,280       1,878
        Investment securities held to maturity                             6,344       10,693        5,270        2,046       2,182
        Cash and cash equivalents(2)                                     103,728       68,366       98,856      104,195      45,622
        Deposits                                                       1,007,297      722,418      615,567      518,187     380,148
        Securities sold under agreements to repurchase                   471,422      433,135       97,444       98,483     108,922
        Notes payable                                                    191,748      108,453      126,842       81,130      45,815
        Other borrowings(3)                                              121,000       86,359       65,463       67,315      18,092
        Stockholders equity                                              221,162      138,054      115,633       66,385      55,970
        Common Stockholders equity per share(4)                       $     5.99   $     4.88   $     4.09   $     3.55   $    3.00

Selected Income Statement Data:

        Revenues:
                Net interest income after provision for loan losses   $   37,373   $   30,160   $   24,665   $   20,323   $  19,137
                Loan administration and servicing fees                    15,987       13,214       13,029       11,030      11,046
                Net gain on sale of investments available for sale           278          107          642         --          --
                Net gain (loss) on sale of loans(5)                       34,663       24,033       11,709        8,384      (2,899)
                Other(6)                                                   5,542        3,751        3,872        4,028       1,667
------------------------------------------------------------------------------------------------------------------------------------
                        Total revenue                                     93,843       71,265       53,917       43,765      28,951
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                   <C>          <C>          <C>          <C>         <C>       
        Expenses:
                Employee compensation and benefits                        17,095       13,653       10,794        8,284       5,252
                Office occupancy and equipment                             8,987        7,131        5,531        4,711       4,488
                SAIF special assessment                                     --           --          2,508         --          --
                Other administrative and general                          22,687       18,252       15,424       13,731      13,269

                        Total expenses                                    48,769       39,036       34,257       26,726      23,009

        Income before minority interest in the Bank and income
                taxes                                                     45,074       32,229       19,660       17,039       5,942
        Minority interest in the Bank's earnings                            --           --            538          743         500
        Income taxes                                                      11,040        8,732        5,922        5,847         856
        Cumulative effect of change in accounting principle                 --           --           --           --           866
------------------------------------------------------------------------------------------------------------------------------------
        Net income                                                    $   34,034   $   23,497   $   13,200   $   10,449   $   5,452
------------------------------------------------------------------------------------------------------------------------------------
        Diluted earnings per share (4)                                $     1.12   $     0.81   $     0.59   $     0.56   $    0.29
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
                                                                              25
<PAGE>
<TABLE>
<CAPTION>
                                                                                At or For the Year Ended December 31,
                                                                     1998          1997         1996          1995          1994
                                                                 -----------    ----------   ----------    ----------    ----------
Selected Operating Data(7):                                                              (Dollars in Thousands)
<S>                                                              <C>            <C>          <C>           <C>           <C>       

Performance Ratios and Other Data:
        Mortgage loans originated and purchased                  $ 1,237,415    $  758,486   $  480,525    $  327,107    $  501,187
        Mortgage servicing portfolio                               4,827,798     3,000,888    2,550,169     2,298,200     2,114,743
        Return on average assets(7)                                     1.95%         1.85%       1.38%          1.47%         0.91%
        Return on average common equity(7)                             21.32         18.69       15.54          17.08         10.34
        Equity to assets at end of period                              10.82          9.13       11.14           7.78          8.94
        Interest rate spread(8)                                         2.43          2.88        3.00           2.93          3.24
        Net interest margin(8)                                          2.72          3.12        3.24           3.26          3.48
        Average interest-earning assets to average
                interest-bearing liabilities                          105.93        104.61      104.60         106.50        105.60
        Total non-interest expenses to average total assets             2.80          3.08        3.59           3.80          3.84
        Full-service Bank offices                                         20            15          15             14             8
        R&G Mortgage offices(9)                                           23            19          16             13            13
        Cash dividends declared per common share(4)                     .111          .065        .069(9)          --            --

Asset Quality Ratios(11):
        Non-performing loans to total loans at end of period            4.11%         3.89%       3.09%          2.18%         1.84%
        Non-performing assets to total assets at end of period          2.41          2.12        1.90           1.32          1.04
        Allowance for loan losses to total loans at end of period       0.74          0.87        0.55           0.72          0.92
        Allowance for loan losses to total non-performing
                loans at end of period                                 17.92         22.34       17.64          33.19         50.10
        Net charge-offs to average loans outstanding                    0.55          0.40        0.75           0.08          0.05

Bank Regulatory Capital Ratios(12):
        Tier 1 risk-based capital ratio                                13.41%        13.10%      13.91%         10.53%        11.03%
        Total risk-based capital ratio                                 14.46         14.00       14.79          11.66         13.59
        Tier 1 leverage capital ratio                                   8.04          7.34        8.45           6.25          5.95
</TABLE>
(footnotes on following page)
26
<PAGE>
1) At  December  1998,  R&G  Mortgage  and the Bank had  total  assets of $652.9
million and $1.412 billion, 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.

(4) Per share information for all periods presented takes into consideration a 2
for 1 stock split paid in June 1998 and an 80% stock  dividend paid in September
1997.

(5) Includes $2.9 million gain on sale servicing rights in 1994.

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

(7) 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.

(8) 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".

(9) Includes 2 branches of Champion Mortgage  Corporation,  R&G Mortgages wholly
owned  subsidiary.  Also includes 14 R&G Mortgage  banking  facilities which are
located within the Banks offices.

(10)  Includes  $500,000 or $0.025 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.

(11)  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 1998 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, 1998 amounted to
67.29%.

(12) All of such ratios were in compliance  with the applicable  requirements of
the FDIC.



                                                                              27
<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 20 offices at December 31, 1998) and, without taking
into consideration possible branch acquisition opportunities, the Bank presently
anticipates opening from three to five 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.
<PAGE>
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 and off-balance sheet  commitments,  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  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  institutions  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, 1998, 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
$241.2 million, or 11.80% 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.
<PAGE>
        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  Mortgag'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 customers 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

28
<PAGE>
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,  1998,  R&G Mortgage had $93.2
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,  1998,  R&G
Mortgage held $450.5 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. On January  1,1999 R&G Mortgage
reclassified  $427.4  million  of  mortgage-backed  securities  from  trading to
available for sale upon adoption of a new accounting  pronouncement.  See Recent
Accounting Pronouncements.

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.  R&G  Mortgage may also use interest
rate swaps,  caps,  collars,  options and futures to effectively fix the cost of
short-term  funding  sources  which  are  used  to  originate  and  or  purchase
interest-earning   assets   with   longer   effective   maturities,    such   as
mortgage-backed  securities and fixed rate residential mortgage loans held prior
to sale in the  secondary  market.  Such  agreements  thus  reduce the impact of
increases in interest  rates by preventing  R&G Mortagage from having to replace
funding  sources at a higher  cost  prior to the time that the  interest-earning
asset which was originated or purchased with such source matures, reprices or is
sold, and thus can be replaced with a higher-yielding asset.

At  December  31,  1998 R&G  Mortgage  was a party to four  interest  rate  swap
agreements. An interest rate swap is an agreement where one party (generally the
Company) 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
<PAGE>
predetermined  period of time.  No actual assets are exchanged in a swap of this
type and  interest  payments  are  generally  netted.  R&G  Mortgage's  existing
interest rate swap agreements have an aggregate notional amount of approximately
$100.0  million and expire from June 8 to June 17,  2008.  With  respect to such
agreements,  R&G Mortgage  makes fixed interest  payments  ranging from 5.00% to
5.17% and receives  payments based upon the three-month  London  Interbank Offer
Rate (Libor).  The net interest  received  relating to R&G  Mortgages  fixed-pay
interest rate swaps  amounted to  approximately  $248,000  during the year ended
December 31, 1998.  Such  interest  rate  contracts  have reduced the  imbalance
between R&G Mortgage's interest-earning assets and interest-bearing  liabilities
within shorter maturities, thus reducing R&G Mortgage's exposure to increases in
interest rates that may occur in the future.

As discussed  above,  R&G Mortgage may also enter into  interest  rate  collars,
caps, options and futures.  However, at December 31, 1998 R&G Mortgage 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 Company), 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.

        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, 1998, the Bank's interest-earning
assets  included a  portfolio  of loans  receivable,  net of $1.1  billion and a
portfolio of investment  securities and  mortgage-backed  securities  (including
held to maturity and available for sale) of $189.1  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,  1998,  $154.5  million  or 81.7% of the  Bank's
mortgage-backed and investment  securities were classified as available for sale
and  reported at fair value,  with  unrealized  gains and losses  excluded  from
earnings  and reported net of taxes in other  comprehensive  income,  a separate
component of stockholders' equity.
<PAGE>
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,  1998,
mortgage-backed securities available for sale had a fair value of $95.0 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 

                                                                              29
<PAGE>
sale to the FNMA or the FHLMC in the secondary  market.  Such agreements  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,  1998,  the  Bank  was a party to  eight  interest  rate  swap
agreements.  The Bank's existing interest rate swap agreements have an aggregate
notional amount of approximately $105.0 million and expire from October 24, 2000
to September  15, 2003.  With respect to such  agreements,  the Bank makes fixed
interest  payments ranging from 4.70% to 6.09% and receives  payments based upon
the  three-month  Libor  and  Libid.  The net  expense  relating  to the  Bank's
fixed-pay interest rate swaps amounted to approximately  $198,000,  $293,000 and
$61,000 during the years ended  December31,  1998, 1997 and 1996,  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  31,1998 the Bank was not a party to
any such interest rate contracts. 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, 1998,  based on the information
and assumptions set forth in the notes below.



30
<PAGE>
<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            $   25,768     $   72,414    $   163,489    $  127,299   $   365,459    $  754,429
        Construction loans                            3,934         12,287           --            --            --          16,221
        Commercial real estate loans                119,336             49            152           188         1,668       121,393
        Consumer loans                               20,480         43,936         52,860        18,598         7,787       143,661
        Commercial business loans                    21,714         11,368         11,794         1,618            38        46,532
Mortgage loans held for sale                         31,258         85,868           --            --            --         117,126
Mortgage-backed securities(2)(3)                     46,058        130,774        153,974       123,186       119,851       573,843
Investment securities(3)                             22,845         32,745          6,472         1,664         2,120        65,846
Other interest-earning assets(4)                     51,922           --             --            --            --          51,922

        Total                                    $  343,315     $  389,441    $   388,741    $  272,553   $   496,923    $1,890,973

Interest-bearing liabilities:

Deposits(5):
        NOW and Super NOW accounts(6)            $    5,823     $   16,307    $    17,927    $   14,521   $    61,905    $  116,483
        Passbook savings accounts(6)                  2,730          7,908         18,193        14,737        62,825       106,393
        Checking and commercial checking(6)           8,625         24,147         26,546        21,501        91,664       172,483
        Certificates of deposit                     170,690        320,134         60,930        46,969        11,189       609,912
FHLB advances                                        10,000         10,000         52,000        10,000        39,000       121,000
Securities sold under agreements to repurchase      471,422           --             --            --            --         471,422
Other borrowings(7)                                 107,648         23,600         60,500          --            --         191,748

            Total                                   776,938        402,096        236,096       107,728       266,583     1,789,441

Effect of hedging instruments                      (205,000)          --           50,000        55,000       100,000         --

                                                 $  571,938     $  402,096    $   286,096    $  162,728   $   366,583    $1,789,441

Excess (deficiency) of interest-earning
        assets over interest-bearing liabilities $ (228,623)    $  (12,655)   $   102,645    $  109,825   $   130,340

Cumulative excess (deficiency) of
        interest-earning assets over
        interest-bearing liabilities             $ (228,623)    $ (241,278)   $  (138,633)   $  (28,808)  $   101,532

Cumulative excess (deficiency) of
        interest-earning assets over
        interest-bearing liabilities as a
        percent of total assets                      (11.18)%       (11.80)%        (6.78)%       (1.41)%        4.96% 

</TABLE>

                                                                              31
<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 Office of Thrift
Supervision ("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 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) Comprised of warehousing lines and notes payable.

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 assumptions  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  reviews  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  institutions  existing  assets,
liabilities and  off-balance  sheet  instruments,  and by evaluating such impact
against the maximum potential changes in net interest income and MVPE.

The  following  table sets forth at December 31, 1998 the  estimated  percentage
change in R&G Financial's MVPE based on the indicated changes in interest rates.
<PAGE>

                                      MVPE(2)
--------------------------------------------------------------------------------
     Change in                                           Change as a
   Interest Rates            Amount       Percentage      Percentage
 (in Basis Points)(1)      of Change        Change        of Assets
--------------------------------------------------------------------------------
                             (Dollars in Thousands)

        +400               $ (59,840)        (27.5)%      (2.93)%  
        +300                 (44,671)        (20.5)       (2.18)   
        +200                 (29,436)        (13.5)       (1.44)   
        +100                 (14,416)        (6.6)         (.70)   
          --                      --           --            --    
        -100                  28,960         13.3          1.42    
        -200                  59,405         27.3          2.90    
        -300                 118,500         54.4          5.79    
        -400                 193,757         89.0          9.47    
                           



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

(2) Based on R&G  Financial's  pre-tax  MVPE of $217.7  million at December  31,
1998,  which is  approximately  $3.5 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, 1998, R&G Financial's total assets amounted to $2.0 billion,  as
compared  to $1.5  billion at December  31,  1997.  The $534.0  million or 35.3%
increase in total assets  during the year ended  December 31, 1998 was primarily
the result of a $308.6  million or 40.3%  increase in loans  receivable,  net, a
$99.1 million or 22.2% increase in  mortgage-backed  securities held for trading
and available for sale, and a $70.2 million or 149.8% increase in mortgage loans
held for sale,  which are  attributable  to the  origination  of $1.4 billion of
loans,   primarily   single-family   residential  loans,  before  reduction  for
repayments  and sales.  In addition  the  Company had a $37.0  million or 174.5%
increase  in its  servicing  asset,  which  is  primarily  the  result  of  loan
originations  during  the  year  net  of  repayments,  and  the  purchase  of  a
residential  mortgage loans servicing  portfolio of  approximately  $1.1 billion
from another financial institution in Puerto Rico.
<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 $103.7 million and
$68.4 million as of December31, 1998 and 1997, respectively.

        Loans Receivable and Mortgage Loans Held for Sale.

At December 31, 1998, R&G  Financial's  loans  receivable,  net amounted to $1.1
billion or 52.5% of total assets,  as compared to $765.1  million or 50.6% as of
December31,  1997. 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, 1998, 1997 and 1996,  total
loans  originated and purchased by the Bank (including  loans  originated by R&G
Mortgage on behalf of the Bank) amounted to $755.1  million,  $435.4 million and
$342.2 million, respectively.

At December 31, 1998, R&G Financial's allowance for loan losses (all of which is
maintained  in  the  Bank's  loan  portfolio)   totalled  $8.1  million,   which
represented  a $1.3  million  or 18.9%  increase  from the level  maintained  at
December31,  1997. At December 31, 1998,  R&G Financia's  allowance  represented
approximately   0.74%  of  the  total  loan   portfolio   and  17.92%  of  total
non-performing  loans, as compared to 0.87% and 22.34% at December31,  1997. The
increase in the  allowance for loan losses is  attributable  to the provision of
$6.6 million for loan losses during the year,  which was primarily  attributable
to the overall growth in the loan portfolio.

Management  of R&G  Financial  believes  that its  allowance  for loan losses at
December 31, 1998 was adequate,  based upon, among other things, the significant
level of  single-family  residential  loans 


32
<PAGE>
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, 1998 and 1997,  mortgage  loans held for sale amounted to $117.1
million and $46.9 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.  At December 31, 1998,  R&G  Financials
aggregate  mortgage-backed  and investment  securities totaled  $639.7million or
31.3% of total  assets,  as compared to $566.9  million or 37.5% at December 31,
1997, 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 Banks
Trust  Department.  At December 31, 1998 and 1997,  securities  held for trading
amounted to $450.5  million and $400.4  million,  respectively.  At December 31,
1998, all such securities were held by R&G Mortgage. 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 December31,
1998 and 1997,  securities  available for sale totaled $154.5 million and $121.9
million, respectively.  Securities available for sale are reported at fair value
with unrealized  gains and losses excluded from earnings,  and reported in other
comprehensive income, 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, 1998 and
1997,  securities  held to maturity  totaled  $34.6  million and $44.0  million,
respectively.  Securities  held to maturity are accounted for at amortized cost.
At December 31, 1998 and 1997, R&G Financials  securities held to maturity had a
market value of $34.6 million and $43.8 million, respectively.

        Mortgage Servicing Asset.

As of December 31, 1998 and 1997,  R&G Financial  reported  servicing  assets of
$58.2 million and $21.2 million,  respectively.  R&G Financial  recognizes  both
purchased and originated mortgage servicing rights as assets in its Consolidated
Financial  Statements.  R&G Financial  evaluates the fair value of its servicing
asset on a quarterly  basis 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 the  value  of R&G  Financial's
mortgage  servicing  rights,  which is  dependent  upon the cash  flows from the
underlying mortgage loans.
<PAGE>
        Deposits.

At December  31, 1998,  deposits  totaled  $1.0  billion,  as compared to $722.4
million at December 31, 1997.  The $284.9  million or 39.4% increase in deposits
during the year ended  December  31, 1998 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 $266.4 million or 36.9% of total
deposits at December  31, 1997 to $395.4  million or 39.2% of total  deposits at
December 31, 1998.

        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, 1998 and 1997, repurchase
agreements totaled $471.4 million and $433.1 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, 1998, notes payable  amounted to $191.7 million,  as compared to
$108.4  million at December 31,  1997.  The $83.3  million or 76.8%  increase in
notes payable during the year ended December 31, 1998 reflected $83.3 million or
342.0% of increased warehousing lines.

Advances from the FHLB of New York amounted to $121.0  million and $42.0 million
at December 31, 1998 and 1997, respectively. At December 31, 1998, FHLB advances
were  scheduled to mature at various  dates  commencing on January 7, 1999 until
March 10, 2008, with an average interest rate of 5.25%.

At December 31, 1997,  R&G  Financial  reported  approximately  $34.4 million of
other secured borrowings, representing the outstanding principal at such date of
certain  mortgage loans sold by the Bank in prior years which had been accounted
as a transfer of loans with  recourse in the  Company's  Consolidated  Financial
Statements.  In such transaction,  the purchasers of the loans had the right, at
their option, to require R&G Mortgage to purchase the loans. In January 1998 the
Company repurchased the loans.


        Stockholder' Equity.

Stockholders' equity increased from $138.1 million at December31, 1997 to $221.2
million at December31, 1998. The $83.1 million or 60.2% increase in stockholders
equity  during 1998 was  primarily  due to the  issuance of $50 million of 7.40%
non-cumulative,  perpetual Monthly Income Preferred Stock, Series A (the "Series
A Preferred Stock"),  the $34.0 million net income for the year, and an increase
in  unrealized  gains on  securities  available  for sale from $1.2  million  at
December  31, 1997 to $1.4  million at  December  31,  1998.  The  increases  in
stockholders'  equity were slightly  offset by dividends paid during the year of
$4.4 million on common and preferred stock.
<PAGE>
        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  non-interest  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  non-interest  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 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 Banks Trust
Department.


                                                                              33
<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,
                                                      -------------------------------------------------------------------------- 
                                                              1998                       1997                      1996
                                                      --------------------      ---------------------      --------------------
                                                      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             $31,193        33.24%     $25,544        35.84%      $20,884       38.73%   
        Net gain on sale of loans                      12,191        12.99        5,436         7.63         1,355        2.51    
        Net gain on sale of investment securities         278         0.30          107         0.15           642        1.19    
        Other income(1)                                 4,780         5.09        2,915         4.09         3,664        6.80
                                                      ------------------------------------------------------------------------ 
                                                       48,442        51.62       34,002        47.71        26,545       49.23    
                                                      ------------------------------------------------------------------------
                                                                                                                                  
R&G Mortgage:                                                                                                                     
        Net interest income                             6,180         6.58        4,616         6.48         3,781        7.01    
        Loan administration and servicing fees         15,987        17.04       13,214        18.54        13,029       24.17    
        Net gain on origination and sale of loans      22,472        23.95       18,597        26.10        10,354       19.20    
        Other income(1)                                   762         0.81          836         1.17           208        0.39    
                                                      ------------------------------------------------------------------------
                                                                                                                                  
                                                       45,401        48.38       37,263        52.29        27,372       50.77    
                                                      ------------------------------------------------------------------------
                                                                               
                                                      $93,843     100.00%       $71,265       100.00%      $53,917      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 $34.0  million,  $23.5  million and $13.2
million during the years ended December 31, 1998,  1997 and 1996,  respectively.
Net income  increased by $10.5  million or 44.8% during the year ended  December
31, 1998,  as compared to 1997,  due to a $7.4 million  increase in net interest
income and a $15.4 million increase in total other income,  which were partially
offset by a $9.7  million  increase  in total  operating  expenses.  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 a 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  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.
<PAGE>
Net interest  income  totaled  $43.9  million,  $36.5  million and $28.9 million
during the years ended  December  31,  1998,  1997 and 1996,  respectively.  Net
interest  income  increased  by $7.4  million  or 20.4%  during  the year  ended
December 31, 1998 as compared to the year ended  December  31,  1997,  due to an
increase   in  the  ratio  of   average   interest-earning   assets  to  average
interest-bearing  liabilities  from 104.61% for 1997 to 105.93% for 1998,  which
was partially offset by a decrease in R&G Financials  interest  rate-spread from
2.88% for 1997 to 2.43% for 1998. Net interest income  increased by $7.6 million
or 26.3%  during the year ended  December  31,  1997,  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.

34
<PAGE>
The following  table presents for the periods  indicated R&G  Financial's  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 for
the Bank in each case during the periods presented.
<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
                                                                             1998                                1997               
                                                            Average                   Yield/      Average                    Yield/ 
                                                            Balance        Interest   Rate (1)    Balance      Interest     Rate (1)
                                                            -------        --------   --------    -------      --------     --------
                                                                                     (Dollars in Thousands)
<S>                              <C>                      <C>           <C>             <C>    <C>            <C>              <C>  
Interest-Earning Assets:

        Cash and cash equivalents(2)                      $   25,731    $    1,341      5.21   $   30,967     $     1,674      5.41%
        Investment securities held for trading                   344            19      5.52        5,466             328      6.00 
        Investment securities available for sale              57,042         3,338      5.85       51,105           3,205      6.27 
        Investment securities held to maturity                 9,485           544      5.74       15,095             777      5.15 
        Mortgage-backed securities held for trading          406,123        24,876      6.13      249,930          17,174      6.87 
        Mortgage-backed securities available for sale         38,608         2,645      6.85       44,693           3,200      7.16 
        Mortgage-backed securities held to maturity           31,095         1,877      6.04       35,642           2,152      6.04 
        Loans receivable, net(3)(4)                        1,037,829        89,044      8.58      732,064          68,514      9.36 
        FHLB of New York stock                                 8,517           614      7.21        4,710             311      6.60 
                                                          --------------------------------------------------------------------------
            Total interest-earning assets                  1,614,774    $  124,298      7.70    1,169,672     $   97,335       8.32%
                                                          --------------------------------------------------------------------------
         Non-interest-earning assets                         129,498                               98,880                           
                                                          --------------------------------------------------------------------------
          Total assets                                    $1,744,272                           $1,268,552                           
                                                          ==========================================================================
Interest-Bearing Liabilities:
          Deposits                                        $  826,487    $    38,439     4.65   $  668,704     $    32,434      4.85%
          Securities sold under agreements to
                repurchase(5)                                416,249        23,876      5.74      226,771          13,483      5.95 
          Notes payable                                      186,147        12,641      6.79      151,440           9,616      6.35 
          Subordinated debt(6)                                 1,469           148     10.07        3,250             324      9.97 
          Other borrowings(7)                                 94,025         5,220      5.55       67,973           4,948      7.28 
                                                          --------------------------------------------------------------------------

            Total interest-bearing liabilities             1,524,377    $   80,324      5.27%   1,118,138      $   60,805      5.44%
                                                          --------------------------------------------------------------------------
          Non-interest-bearing liabilities                    46,025                               24,680                           

            Total liabilities                              1,570,402                            1,142,818                           
          Stockholders equity                                173,870                              125,734                           
                                                          --------------------------------------------------------------------------
           Total liabilities and stockholders' equity     $1,744,272                           $1,268,552                           
                                                          ==========================================================================
         Net interest income; interest rate spread(8)                  $   43,974      2.43%  $   36,530                       2.88%
                                                          ==========================================================================
          Net interest margin(8)                                                       2.72%                                   3.12%
                                                          ==========================================================================
          Average interest-earning assets to average
    interest-bearing liabilities                                                      105.93%                                104.61%
                                                          ==========================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                                               1996                                
                                                               Average                     Yield/                  
                                                               Balance      Interest       Rate (1) 
                                                               -------      --------       -------- 
<S>                                                         <C>            <C>              <C>       
Interest-Earning Assets:                                    
                                                        
        Cash and cash equivalents(2)                        $   43,072     $    2,322       5.39%     
        Investment securities held for trading                   2,271            116       5.11      
        Investment securities available for sale                19,102          1,193       6.25      
        Investment securities held to maturity                  10,069            515       5.11      
        Mortgage-backed securities held for trading            136,618          9,258       6.78      
        Mortgage-backed securities available for sale           50,633          3,602       7.11      
        Mortgage-backed securities held to maturity             40,403          2,478       6.13      
        Loans receivable, net(3)(4)                            587,730         54,044       9.20      
        FHLB of New York stock                                   3,999            258       6.45      
                                                            ------------------------------------      
            Total interest-earning assets                      893,897     $   73,786       8.25%     
                                                             -----------------------------------       
         Non-interest-earning assets                            61,480                                
                                                             -----------------------------------       
          Total assets                                        $ 955,377                               
                                                            ------------------------------------ 
Interest-Bearing Liabilities:                                                                    
                                                                                                 
          Deposits                                            $561,548     $   27,518       4.90%
          Securities sold under agreements to                                                    
                repurchase(5)                                  100,607          5,024       4.99 
          Notes payable                                        126,171          7,284       5.77 
          Subordinated debt(6)                                   3,250            332      10.21 
          Other borrowings(7)                                   63,118          4,705       7.45 
                                                             ----------------------------------- 
            Total interest-bearing liabilities                 854,694     $   44,863       5.25%
                                                             ----------------------------------- 
          Non-interest-bearing liabilities                      15,766                           
                                                             ----------------------------------- 
            Total liabilities                                  870,460                           
          Stockholders equity                                   84,917                           
                                                             ----------------------------------- 
            Total liabilities and stockholders' equity        $955,377                           
                                                              ================================== 
          Net interest income; interest rate spread(8)                     $   28,923       3.00%
                                                                                                 
          Net interest margin(8)                                                            3.24%
                                                              ================================== 
           Average interest-earning assets to average                                            
    interest-bearing liabilities                                                          104.60%
                                                              ================================== 
</TABLE>

(Footnotes on following page)

                                                                              35
<PAGE>
(1) At December 31, 1998, the yields earned and rates paid were as follows: cash
and cash  equivalents,  5.33%;  investment  securities held to maturity,  4.54%;
investment securities available for sale, 5.88%; mortgage-backed securities held
for trading, 6.71%; mortgage loans held for sale, 7.50%; loans receivable,  net,
8.40%; FHLB of New York stock,  7.00%;  total  interest-earning  assets,  7.64%;
deposits,  4.50%;  securities sold under agreements to repurchase,  5.42%; notes
payable,  6.13%; other borrowings,  5.25%; total  interest-bearing  liabilities,
4.97%; interest rate spread, 2.67%.

(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 $367,000,  $366,000
and  $277,000  during  the  years  ended   December31,   1998,  1997  and  1996,
respectively  or .41%,  .53% and .51% of  interest  income on loans  during such
respective periods.

(5) Includes federal funds purchased.

(6)  Represents  a  seven-year  subordinated  capital note of the Bank issued in
1991,  which was subject to an annual  sinking fund  requirement  and matured in
1998.

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

(8) 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,
                                                          --------------------------------------------------------------------------

                                                                          1998 vs. 1997                       1997 vs. 1996
                                                          --------------------------------------------------------------------------
                                                                  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)                      $    (50)    $   (283)    $   (333)    $      5     $   (653)    $   (648)
        Investment securities held for trading                  (2)        (307)        (309)          49          163          212
        Investment securities available for sale              (239)         372          133           12        2,000        2,012
        Investment securities held to maturity                  56         (289)        (233)           5          257          262
        Mortgage-backed securities held for trading         (3,031)      10,733        7,702          131        7,785        7,916
        Mortgage-backed securities held to maturity           --           (275)        (275)         (34)        (292)        (326)
        Mortgage-backed securities available for sale         (119)        (436)        (555)          26         (428)        (402)
        Loans receivable, net(2)                            (8,087)      28,617       20,530        1,191       13,279       14,470
        FHLB of New York stock                                  52          251          303            7           46           53
                                                          --------------------------------------------------------------------------
                Total interest-earning assets             $(11,420)    $ 38,383     $ 26,963     $  1,392     $ 22,157     $ 23,549
                                                          ========     ========     ========     ========     ========     ========

 Interest-Bearing Liabilities:

        Deposits                                          $ (1,648)    $  7,653     $  6,005    $    (335)    $  5,251     $  4,916
        Securities sold under agreements to repurchase        (873)      11,266       10,393        2,163        6,296        8,459
        Notes payable                                          821        2,204        3,025          853        1,479        2,332
        Subordinated debt(3)                                     2         (178)        (176)          (8)        --             (8)
        Other borrowings(4)                                 (1,624)       1,896          272         (124)         367          243
                                                          --------------------------------------------------------------------------

                Total interest-bearing liabilities        $ (3,322)    $ 22,841     $ 19,519     $  2,549     $ 13,393     $ 15,942
                                                          ========     ========     ========     ========     ========     ========

        Increase in net interest income                                             $  7,444                               $  7,607
                                                          ========     ========     ========     ========     ========     ========
</TABLE>
                                                   (Footnotes on following page)

36
<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) Includes mortgage loans held for sale.

(3)  Represents  a  seven-year  subordinated  capital note of the Bank issued in
1991,  which was subject to an annual  sinking fund  requirement  and matured in
1998.

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

        Interest Income.

Total interest income  increased by $27.0 million or 27.7% during the year ended
December31,  1998 as compared to the year ended December 31, 1997, and increased
by $23.5 million or 31.9% during the year ended  December 31, 1997 over the year
ended December 31, 1996.  Interest income on loans, the largest component of R&G
Financial's  interest-earning assets, increased by $20.5 million or 30.0% during
the year ended  December  31, 1998 as compared  to the year ended  December  31,
1997,  and  increased by $14.4  million or 26.7% during 1997 over the year ended
December 31, 1996.  Such increases were primarily the result of increases in the
average balance of loans  receivable of $305.8 million and $144.3 million during
the years ended December31, 1998 and 1997, 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 $6.5 million or 24.1% during the year
ended  December 31, 1998 as compared to the year ended  December  31, 1997,  and
increased by $9.7 million or 56.4% during the year ended  December 31, 1997 over
the  year  ended  December  31,  1996.  The  increase  in  interest   income  on
mortgage-backed  and  investment  securities  during the year ended December 31,
1998 was primarily due to a $156.2  million  increase in the average  balance of
mortgage-backed securities during the period. The increase in interest income on
mortgage-backed  and investment  securities  during 1997 was due primarily to an
increase in the average balance of mortgage-backed securities of $102.6 million,
together  with a $40.2  million  increase in the average  balance of  investment
securities during the period. The increase in mortgage-backed  securities during
1997 is  primarily  associated  with a 63.9%  increase  in such  year of  FHA/VA
mortgage loan originations (which are subsequently converted into GNMA mortgage-
backed securities);  the increase in investment securities reflects purchases of
approximately $50.2 million during such year, net of maturities and sales.

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 $333,000
or 19.9%  during the year ended  December31,  1998 as compared to the year ended
December  31,  1997,  and  decreased  by $648,000 or 27.9% during the year ended
December 31, 1997. The decrease in interest  earned on money market  investments
during  1998  reflected  a decrease  in the  average  balance  of $5.2  million,
together with a decrease in the yield from 5.41% to 5.21%.  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.  The  decrease  during  1997 was due  primarily  to a decrease in the
average balance of cash and cash equivalents during the period of $12.1 million.
<PAGE>
        Interest Expense.

Total interest expense increased by $19.5 million or 32.1% during the year ended
December  31,  1998,  as  compared  to the year ended  December  31,  1997,  and
increased  by $15.9  million or 35.5%  during the year ended  December 31, 1997.
Interest  expense  on  deposits,   the  largest  component  of  R&G  Financial's
interest-bearing liabilities, increased by $6.0 million or 18.5% during the year
ended  December 31, 1998, as compared to the year ended  December 31, 1997,  and
increased by $4.9 million or 17.9% during the year ended  December31,  1997. The
increases in interest  expense on deposits  during the years ended  December 31,
1998 and 1997 were due primarily to increases in the average balance of deposits
of $157.8  million and $107.2  million during such  respective  periods.  During
1998, the average rate paid on deposits decreased by 20 basis points as a result
of a general  decrease in market  rates of interest.  In 1997,  the average rate
paid on deposits decreased by 5 basis points as a result of general decreases in
market rates of interest.

Interest  expense on  repurchase  agreements  increased  significantly  by $10.4
million or 77.1% during the year ended  December  31,  1998,  as compared to the
year ended December 31, 1997, and increased by $8.5 million or 168.4% during the
year ended  December31,  1997.  The increase in interest  expense on  repurchase
agreements  during 1998 was due primarily to an increase in the average  balance
of repurchase  agreements  outstanding  of $189.5  million,  which was partially
offset by a decrease in the average  rate paid thereon of 21 basis  points.  The
increase in interest expense on repurchase  agreements during 1997 was primarily
due 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.  These
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  mainly 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.

Interest  expense on notes payable  (consisting of warehouse lines of credit and
promissory  notes)  increased  by $3.0  million  or 31.5%  during the year ended
December  31,  1998,  as  compared  to the year ended  December  31,  1997,  and
increased by $2.3 million or 31.5% during the year ended  December 31, 1997. The
increases  during the years ended  December 31, 1998 and 1997 were primarily due
to increases in the average  balance of  warehousing  lines of $35.6 million and
$25.6  million,  respectively,  as R&G Mortgage made increased use of such lines
due to increased mortgage loan originations in such years.

Interest expense on other borrowings (consisting of subordinated notes, advances
from the FHLB of New York and other secured borrowings)  increased by $96,000 or
1.8%  during the year ended  December  31,  1998,  as compared to the year ended
December  31,  1997,  and  increased  by  $234,000 or 4.6% during the year ended
December 31, 1997. The increase in interest expense on other  borrowings  during
1998 and 1997 was due  primarily  to an increase in the average  balance of such
borrowings  due to an  increased  use of FHLB  advances to fund  increased  loan
production in the Bank.
<PAGE>
        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 $6.6 million,
$6.4 million and $4.3 million during the years ended December 31, 1998, 1997 and
1996, respectively.

The increase in the provision  for loan losses taken by the Company  during 1997
was primarily  based on the increase of the Companys loan  portfolio  during the
period,  as R&G  Financial  experienced  a 45.1%  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 during
1997.  During 1997,  management  adopted more  stringent  consumer  underwriting
procedures to address problems experienced  generally in the market for personal
loans,  and determined to emphasize  collateralized  consumer lending instead of
personal loans.


                                                                              37
<PAGE>
The  provision  for loan  losses  taken by the  Company  during  1998 was  based
primarily on the increase in the Companys loan portfolio  during the period as a
result of a 57.3% increase in loans originated. In spite of an 11.4% increase in
bankruptcies in Puerto Rico during 1998, the provision for loan losses increased
by $200,000 during 1998.

Management believes that its allowance for loan losses at December 31, 1998, 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.

Non-Interest Income.

The following table sets forth information regarding non-interest income for the
periods shown.
<TABLE>
<CAPTION>
                                                                                            Year Ended December 31,
                                                                                        1998         1997         1996
                                                                                     --------     --------      --------
                                                                                                (In Thousands)

<S>                                                                                  <C>          <C>           <C>     
        Net gain on origination and sale of loans                                    $ 34,663     $ 24,033      $ 11,709
        Net gain on sale of investment securities available for sale                      278          107           642
        Net profit (loss) on trading account                                               14         (854)          (66)
        Loan administration and servicing fees                                         15,987       13,214        13,029
        Service charges, fees and other                                                 5,528        4,605         3,938

          Total other income                                                         $ 56,470     $ 41,105      $ 29,252
                                                                                     --------     --------      --------
</TABLE>

Total  non-interest  income  increased by $15.4 million or 37.4% during the year
ended  December 31, 1998,  as compared to the prior year and  increased by $11.9
million or 40.5%  during the year ended  December31,  1997.  Net gain on sale of
loans amounted to $34.7 million, $24.0million and $11.7 million during the years
ended December31,  1998, 1997 and 1996, 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 December31,  1998, 1997 and 1996,
R&G Mortgage originated and purchased $670.6 million,  $470.9 million and $282.4
million,  respectively,  and sold  $493.0  million,  $246.1  million  and $244.8
million of  mortgage  loans,  respectively.  In  addition,  the Bank sold $282.0
million,  $118.6  million and $49.7 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.
<PAGE>
During  the  years  ended  December  31,  1998,  1997 and  1996,  R&G  Financial
recognized net profit (loss) on trading securities of $6.0 million, $9.7 million
and $(96,000),  respectively,  which are included in net gains on sale of loans.
Such gains and losses primarily reflect  fluctuations in the market value of 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 Banks  Trust  Department.  The  decrease in net
profits in trading securities in 1998 is primarily related to a $25.6 million or
5.8% decrease in the  origination and purchase of FHA and VA loans in such year,
which is primarily  related to the changes in the tax  exemption on the interest
generated by such loans which went into effect on August 1, 1997, resulting in a
larger proportion of conventional loans from the Companys total loans originated
and  purchased.  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.

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.

During  the  years  ended  December  31,  1998,  1997 and  1996,  R&G  Financial
recognized  loan  administration  and  servicing  fees of $16.0  million,  $13.2
million and $13.0 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 48,240 loans with an aggregate  principal  balance of
$2.3  billion  at January 1, 1996 to 95,946  loans with an  aggregate  principal
balance of $4.8  billion at December 31,  1998,  which  includes the purchase in
November 1998 of a mortgage loans  servicing  portfolio  from another  financial
institution, comprised of approximately 33,000 loans with an aggregate principal
balance of $1.1 billion.

Service charges,  fees and other amounted to $5.5 million, $4.6 million and $3.9
million during the years ended December 31, 1998,  1997 and 1996,  respectively.
The $993,000 or 20.0% and the $667,000 or 16.9% increases  during 1998 and 1997,
respectively,  were 

38
<PAGE>
primarily due to increased service charges  associated with new deposit products
and an  increasing  deposit  base,  as well as increases  in the loan  portfolio
during such years.

        Non-Interest Expenses.

The  following  table  sets forth  certain  information  regarding  non-interest
expenses for the periods shown.
<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                             1998          1997            1996
                                           -------        -------        -------
                                                     (In Thousands)
<S>                                        <C>            <C>            <C>    
Employee compensation
and benefits                               $17,095        $13,653        $10,793

Office occupancy and
equipment                                    8,987          7,131          5,531

SAIF special assessment                       --             --            2,508

Other administrative and
general                                     22,687         18,252         15,424
                                           -------        -------        -------

Total non-interest expenses                $48,769        $39,036        $34,256
                                           =======        =======        =======

</TABLE>


Total  non-interest  expenses increased by $9.7 million or 24.9% during the year
ended  December 31, 1998, as compared to the year ended  December 31, 1997,  and
increased by $4.8 million or 13.9% during the year ended  December31,  1997 over
1996.  Without taking into  consideration a one-time $2.5 million  assessment to
recapitalize the SAIF, total non-interest  expenses would have increased by $7.3
million or 23.0% in 1997. The increase in total non-interest expenses during the
years  ended  December  31,  1998  and 1997  reflect  increases  in  total  loan
production  during such years as well as  increased  costs  associated  with the
opening of new branch  offices and the completion in late 1997 of the remodeling
work at six  branch  locations  acquired  in June  1995 from  another  financial
institution in Puerto Rico. Employee  compensation and benefits expense amounted
to $17.1  million,  $13.6  million  and $10.8  million  during  the years  ended
December31,  1998,  1997  and  1996,  respectively.  The $3.4  million  or 25.2%
increase in such  expense  during the year ended  December 31, 1998 is primarily
associated with an increase in the number of employees to accomodate higher loan
production  during the year, as well as to increased  bonus payments  associated
with the increased loan  production.  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.

Office occupancy and equipment  expense  amounted to $9.0 million,  $7.1 million
and $5.5  million  during  the  years  ended  December31,  1998,  1997 and 1996,
respectively.  The $1.9  million  or 26.0%  increase  in  office  occupancy  and
<PAGE>
equipment  expenses during the year ended December 31, 1998 is primarily related
to the opening of five additional branches during the year and the completion in
late 1997 of the  remodeling  work of six branches  aquired in 1995 from another
financial  institution.  The $1.6 million or 28.9%  increase in expenses  during
1997 is related to the opening of a new branch in Bayamon and to the  completion
of remodeling work at the six branches acquired in 1995.

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  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 Banks insurance premiums, which had amounted to $0.23 for every $100
of  assessable  deposits,  were  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 $22.7  million,  $18.3  million and $15.4  million  during the years
ended December31,  1998, 1997 and 1996, respectively.  The $4.4 million or 24.3%
and the $2.8 million or 18.3%  increase in such expenses  during the years ended
December 31, 1998 and 1997,  respectively,  is also  primarily  associated  with
increased loan  production and new additional  branch offices during such years,
as well as 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 $11.0 million during the year
ended  December 31, 1998,  as compared to income tax expense of $8.7 million and
$5.9 million  during the years ended  December 31, 1997 and 1996,  respectively.
R&G Financial's effective tax rate amounted to 24.5%, 27.1% and 31.0% during the
years ended December 31, 1998, 1997 and 1996, respectively.  The decrease in R&G
Financials  effective tax rate during the last several years is due primarily to
an increase in the Companys 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 managements 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 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.
<PAGE>
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, 1998, R&G Financial had $101.4 million in borrowing  capacity under
unused warehouse lines of credit and $533.5million 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, 1998,  R&G  Financial  had  outstanding  commitments  (including
unused lines of credit) to originate  and/or purchase  mortgage and non-mortgage
loans of $510.1  million.  Certificates of deposit which are scheduled to mature
within one year totaled $491.7 million at December 31, 1998, and borrowings that
are scheduled to mature within the same period amounted to $622.7  million.  R&G
Financial  anticipates  that it will have sufficient funds available to meet its
current loan commitments.

        Capital Resources.

The FDICs 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

                                                                              39
<PAGE>
ratio for such other banks to 4.0% to 5.0% or more. Under the FDICs 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,
1998,  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 8.04%,
13.41% and 14.46%, respectively.

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.
<PAGE>
        Year 2000 Issue

The Year 2000 problem is caused by the situation where computers  worldwide were
programmed  to read only the last two digits of a calendar year to save computer
memory.  Those programs could read 00 as the year 1900 instead of the year 2000,
and thus may not recognize dates after December 31, 1999. This misinterpretation
of data could  cause  significant  problems  to  banking  and  mortgage  banking
entities,  such as the Company,  as the use of date calculations is extensive in
daily  operations  for  matters  such  as  interest  accruals,  maturity  dates,
delinquency  status,  and  customer  statements.  Year 2000  problems  go beyond
computer  systems of the  Company,  and affect  anything  that uses an  internal
microchip such as telephones, fax machines,  security and alarm systems, vaults,
elevators and air conditioning systems.

The Company does not own any proprietary  software  systems or applications  and
relies on those provided by third party  vendors.  The Company has completed the
assessment  of its computer  hardware,  software  programs  and data  processing
applications,  including those provided by third party vendors.  The Company has
received  revised  programs from its third party vendors that have been modified
to address the Year 2000  problem  for the  principal  applications  used in its
mortgage banking and banking  businesses.  The Company completed the testing and
implementation  of these  revised  programs and  applications  during the fourth
quarter  of 1998  ascertaining  that  they  adequately  deal  with the Year 2000
problem.  The Companys main computer,  used  principally in banking and mortgage
banking operations, is Year 2000 compliant, meaning that it can properly process
and calculate date-related  information after January 1, 2000. The Company is in
the process of replacing other equipment,  primarily  desktop computers that are
not Year 2000 compliant.  The Company is also  developing a Business  Resumption
Contingency Plan to ascertain  continuity of daily operations after December 31,
1999 in the  event  that a given  application  which has been  duly  tested  and
implemented  does  not  function  adequately  after  such  date.  The  Company's
contingency plan is expected to be completed by March 31, 1999.

The Company does not anticipate  that the Year 2000 problem will have a material
adverse  effect on its financial  condition or results of  operations.  However,
Year 2000 problems suffered by third party providers of basic services,  such as
telephone,  waste,  sewer and  electricity,  could have an adverse impact on the
daily  operations  of the Company.  The Company  would  attempt to deal with any
disruption  of such  basic  services  caused by the Year 2000  problem  with its
existing business interruption contingency plans. Under the Companys contingency
plans,  most office  branches of the Company are  presently  equipped with power
plants and/or generators.

The Company  estimates  that the cost of addressing  the Year 2000 issue will be
approximately $300,000, most of which will be incurred during 1999. Most of such
costs  are  directly  related  to the  costs of  replacing  existing  equipment,
primarily desktop computers,  which have been fully depreciated on the Company's
financial statements.

As a bank holding company, the Company could be subject to enforcement action by
federal banking authorities if it fails to adequately address Year 2000 issues.

        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  Financia's  Notes to  Consolidated  Financial
Statements.
<PAGE>
In June 1998,  the  Financial  Accounting  Standards  Board  (FASB)  issued SFAS
No.133-  Accounting  for Derivative  Instruments  and Hedging  Activities.  This
Statement  requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  If certain  conditions are met, a derivative may be specifically
accounted as a hedge . The  accounting for changes in fair value of a derivative
(that is, gains and losses)  depends on the intended use of the  derivative  and
the resulting designation.

This  Statement is effective for all fiscal  quarters of fiscal years  beginning
after June 15, 1999.  Initial  application of this Statement should be as of the
beginning of an entitys fiscal quarter; on that date, hedging relationships must
be designated anew and documented pursuant to the provisions of this Statement.

Management is evaluating its hedging strategy in light of this new pronouncement
to establish the initial designation of its hedging activities and determine the
effect and timing of adoption.  However, due to the relatively limited extent to
which the Company is using  derivative  instruments and the simple nature of the
instruments  used,  management  does not  expect the  impact of  adoption  to be
significant.

In October 1998,  the FASB issued SFAS No.134 - Accounting  for  Mortgage-Backed
Securities  Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise.  This Statement amends SFAS No.65 to require that
after the  securitization  of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed securities or
other  retained  interest  based on its ability and intent to sell or hold those
investments.  This Statement  conforms the subsequent  accounting for securities
retained  after the  securitization  of  mortgage  loans by a  mortgage  banking
enterprise  with the subsequent  accounting  for  securities  retained after the
securitization  of other types of assets by a non-mortgage  banking  enterprise.
This  Statement  is  effective  for the first  fiscal  quarter  beginning  after
December 15, 1998. In connection  with the adoption of this Statement on January
1,   1999,   the   Company   reclassified   approximately   $427.4   million  of
mortgage-backed securities from trading to available for sale.


40
<PAGE>
                      [LETTERHEAD PRICEWATERHOUSECOOPERS]

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 comprehensive  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,  1998 and 1997,  and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, in comformity with generally accepted accounting  principles.
These financial  statements are the  responsability of the Companys  management;
our responsability is to express an opinion on theses 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/PricewaterhouseCoopers, LLP
------------------------------
PricewaterhouseCoopers, LLP
San Juan, Puerto Rico

February 10, 1999

Certified Public Accountants
(of Puerto Rico)
License No. 216 Expires on December 1, 2001
Stamp 1537391 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, 1998 AND 1997
                                                                                           1998               1997
                                                                                    --------------     --------------
<S>                                                                                 <C>                <C>           
        Assets
Cash and due from banks                                                             $   51,804,750     $   32,607,001
Money market investments:
        Securities purchased under agreements to resell                                 11,544,123         16,000,000
        Time deposits with other banks                                                  30,361,527         16,758,722
        Federal funds sold                                                              10,018,048          3,000,000
Mortgage loans held for sale, at lower of cost or market                               117,126,040         46,885,323
Mortgage - backed securities held for trading, at fair value                           450,546,034        400,457,456
Mortgage - backed securities available for sale, at fair value                          95,040,331         46,003,849
Mortgage - backed securities held to maturity, at amortized cost
 (estimated market value: 1998 - $28,260,925; 1997 - $33,185,672)                       28,255,518         33,326,472
Investment securities held for trading, at fair value                                         --              581,332
Investment securities available for sale, at fair value                                 59,502,140         75,863,353
Investment securities held to maturity, at amortized cost
 (estimated market value: 1998 - $6,378,634; 1997 - $10,655,981)                         6,343,929         10,692,802
Loans receivable, net                                                                1,073,668,278        765,059,419
Accounts receivable, including advances to investors, net                                9,665,290          7,358,663
Accrued interest receivable                                                             12,505,431         10,345,722
Servicing asset                                                                         58,221,052         21,212,998
Premises and equipment                                                                  12,962,435          9,527,559
Other assets                                                                            17,216,602         15,064,845
                                                                                    --------------     --------------
                                                                                     $2,044,781,528     $1,510,745,516
                                                                                    --------------     --------------
        Liabilities and Stockholders' Equity

Liabilities:
        Deposits                                                                    $1,007,297,304     $  722,418,494
        Federal funds purchased                                                               --           10,000,000
        Securities sold under agreements to repurchase                                 471,421,726        433,134,506
        Notes payable                                                                  191,747,956        108,452,619
        Advances from FHLB                                                             121,000,000         42,000,000
        Other secured borrowings                                                              --           34,359,168
        Accounts payable and accrued liabilities                                        28,020,080         15,871,770
        Other liabilities                                                                4,132,603          3,205,043
                                                                                    --------------     --------------
                                                                                     1,823,619,669      1,369,441,600
                                                                                    --------------     --------------
Subordinated notes                                                                            --            3,250,000
                                                                                    --------------     --------------

Commitments and contingencies                                                                 --                 --
                                                                                    --------------     --------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                                 <C>                <C>           
Stockholders' equity: 
        Preferred stock, $.01 par value, 10,000,000 shares authorized:
                7.40% Monthly Income Preferred Stock, Series A, $25 liquidation
                value, 2,000,000 shares authorized, issued and outstanding              50.000,000               --    
        Common stock:
                Class A - $.01 par value, 40,000,000 shares authorized,
                18,440,556 issued and outstanding in 1998 and 1997                         184,406             92,203
                Class B - $.01 par value, 20,000,000 shares authorized,
                 10,146,091 issued and outstanding in 1998 (1997 - 9,848,948)              101,461             49,245
        Additional paid-in capital                                                      41,544,378         38,347,818
        Retained earnings                                                              124,418,278         96,129,140
        Capital reserves of the Bank                                                     3,547,798          2,215,172
        Accumulated other comprehensive income                                           1,365,538          1,220,338
                                                                                    --------------     --------------
                                                                                       221,161,859        138,053,916
                                                                                    --------------     --------------
                                                                                    $2,044,781,528     $1,510,745,516
                                                                                    --------------     --------------

</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, 1998, 1997 and 1996

                                                                                    1998             1997              1996
                                                                               ------------     ------------      ------------
<S>                                                                            <C>              <C>               <C>         
Interest income:
        Loans                                                                  $ 89,043,798     $ 68,513,571      $ 54,081,908
        Money market and other investments                                        5,855,157        6,295,443         4,364,861
        Mortgage-backed securities                                               29,397,985       22,525,876        15,338,950
                                                                               ------------     ------------      ------------
                Total interest income                                           124,296,940       97,334,890        73,785,719
                                                                               ------------     ------------      ------------

Less -  interest expense:
        Deposits                                                                 38,439,016       32,434,559        27,517,852
        Securities sold under agreements to repurchase                           23,875,744       13,483,500         5,023,794
        Notes payable                                                            12,641,438        9,615,560         7,283,593
        Secured borrowings                                                             --          3,583,471         4,189,845
        Other                                                                     5,367,631        1,688,034           847,607
                                                                               ------------     ------------      ------------
                                                                                 80,323,829       60,805,124        44,862,691
                                                                               ------------     ------------      ------------
Net interest income                                                              43,973,111       36,529,766        28,923,028
Provision for loan losses                                                         6,600,000        6,370,000         4,258,047
                                                                               ------------     ------------      ------------

Net interest income after provision for loan losses                              37,373,111       30,159,766        24,664,981
                                                                               ------------     ------------      ------------
Non-interest income:
        Net gain on origination and sale of loans                                34,662,975       24,032,714        11,708,974
        Net profit (loss) on trading account                                         14,580         (853,700)          (65,656)
        Net gain on sales of investment securities available for sale               278,028          107,430           641,798
        Loan administration and servicing fees                                   15,986,831       13,213,948        13,029,053
        Service charges, fees and other                                           5,527,860        4,604,670         3,937,878
                                                                               ------------     ------------      ------------
                                                                                 56,470,274       41,105,062        29,252,047
                                                                               ------------     ------------      ------------
                Total revenues                                                   93,843,385       71,264,828        53,917,028
                                                                               ------------     ------------      ------------
Non-interest expenses:
        Employee compensation and benefits                                       17,094,783       13,652,754        10,793,301
        Office occupancy and equipment                                            8,986,953        7,131,497         5,531,129
        SAIF special assessment                                                        --               --           2,508,380
        Other administrative and general                                         22,687,336       18,251,497        15,424,117
                                                                               ------------     ------------      ------------
                                                                                 48,769,072       39,035,748        34,256,927
                                                                               ------------     ------------      ------------
                Income before minority interest and income taxes                 45,074,313       32,229,080        19,660,101

Minority interest in the Bank                                                          --               --             538,168
                                                                               ------------     ------------      ------------
Income before income taxes                                                       45,074,313       32,229,080        19,121,933
                                                                               ------------     ------------      ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                            <C>              <C>               <C>         
Income tax expense:
        Current                                                                   6,814,496        6,263,549         5,687,865
        Deferred                                                                  4,226,020        2,468,319           234,552
                                                                               ------------     ------------      ------------
                                                                                 11,040,516        8,731,868         5,922,417
                                                                               ------------     ------------      ------------
                Net income                                                     $ 34,033,797     $ 23,497,212      $ 13,199,516
                                                                               ============     ============      ============ 
Earnings per common share:
        Basic                                                                  $       1.15     $        .83      $        .60
                                                                               ============     ============      ============
        Diluted                                                                $       1.12     $        .81      $        .59
                                                                               ============     ============      ============
</TABLE>

The accompanying notes are an integral part of these financial statements 


                                                                              43
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS oF COMPREHENSIVE INCOME
 YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

                                                                          1998              1997              1996
                                                                     ------------      ------------      ------------
<S>                                                                  <C>               <C>               <C>         
Net income                                                           $ 34,033,797      $ 23,497,212      $ 13,199,516
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
        Arising during period                                             516,061         2,275,009        (1,086,291)
        Less: Reclassification adjustments for gains included in
                       net income                                        (278,028)         (107,430)         (641,798)
                                                                     ------------      ------------      ------------
                                                                          238,033         2,167,579        (1,728,089)
Income tax (expense) benefit related to items of other
comprehensive income                                                      (92,833)         (845,356)          673,955
                                                                     ------------      ------------      ------------
Other comprehensive income (loss), net of tax                             145,200         1,322,223        (1,054,134)
                                                                     ------------      ------------      ------------
Comprehensive income, net of tax                                     $ 34,178,997      $ 24,819,435      $ 12,145,382
                                                                     ============      ============      ============
</TABLE>

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

 
 
44
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

                                                Preferred Stock            Common Stock            Common Stock
                                                   Series A                  Class A                 Class B            Additional 
                                               Shares       Amount      Shares       Amount     Shares      Amount   Paid-in Capital
                                               ------       ------      ------       ------     ------      ------   ---------------
<S>                                           <C>        <C>            <C>         <C>         <C>         <C>         <C>         
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     31,339,065 
   December                                                                                       300,839      3,010      6,708,908 
Transfer to capital reserves                                                                                                        
Cash dividends declared on common stock                                                                                             
Net income                                                                                                                          
Other comprehensive income, net of tax                                                                                              
                                              ---------  -----------   ----------   ---------  ----------  ---------   ------------ 

Balance at December 31, 1996                                            5,122,377     51,223    2,735,839     27,360     38,410,683 

Transfer to capital reserves                                                                                                        
   Common stock split on September 25, 1997:            
   Stock split                                                          4,097,901     40,980    2,188,635     21,885        (62,865)
   Cash paid in lieu of fractional shares                                                                                           
Cash dividends declared on common stock                                                                                             
Net income                                                                                                                          
Other comprehensive income, net of tax    
                                              ---------  -----------   ----------   ---------  ----------  ---------   ------------ 
                                                                                         
Balance at December 31, 1997                                            9,220,278     92,203    4,924,474     49,245     38,347,818 

Transfer to capital reserves                                                                                                        
Common stock split on June 25, 1998                                     9,220,278     92,203    4,924,474     49,245       (141,448)
Issuance of common stock on
  July 31,1998 to acquire Fajardo Federal                                                         297,143      2,971      5,258,874 
Issuance of Series A
 Preferred Stock                              2,000,000  $50,000,000                                                     (1,920,866)
Cash dividends declared:
 Common stock                                                                                                                       
 Preferred stock                                                                                                                    
Net income                                                                                                                          
Other comprehensive income, net of tax                                                                                              

Balance at December 31, 1998                  2,000,000  $50,000,000   18,440,556   $ 184,406  10,146,091  $ 101,461   $ 41,544,378 
                                              ---------  -----------   ----------   ---------  ----------  ---------   ------------ 
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                     Accumulated                                    
                                                    Capital     other comprehensive     Retained      
                                                   reserves            income           earnings        Total  
                                                   --------            ------           --------        -----  
<S>                                               <C>                <C>             <C>             <C>            
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)                  
Common stock split on June 25, 1998                                                      (972,336)       (972,336)                  
Cash dividends declared on common stock                                                13,199,516      13,199,516                   
Net income                                                          (1,054,134)                        (1,054,134)                  
Other comprehensive income, net of tax                                                                            
                                                 ----------         ----------       ------------    ------------      
                                                  1,460,707           (101,885)        75,784,804     115,632,892   
Balance at December 31, 1996                                                                                      
                                                    754,465                              (754,465)                                  
Transfer to capital reserves                                                                                      
   Common stock split on September 25, 1997:                                                                      
   Stock split                                                                            (12,659)        (12,659)                  
   Cash paid in lieu of fractional shares                                              (2,385,752)     (2,385,752)                  
Cash dividends declared on common stock                                                23,497,212      23,497,212                   
Net income                                                           1,322,223                          1,322,223                   
Other comprehensive income, net of tax            2,215,172          1,220,338         96,129,140     138,053,916  
                                                 ----------         ----------       ------------    ------------      
   
Balance at December 31, 1997                                                                                      
                                                  1,332,626                            (1,332,626)           
Transfer to capital reserves                                                                                      
Issuance of common stock on                                                                                       
  July 31,1998 to acquire Fajardo Federal                                                               5,261,845                   
Issuance of Series A                                                                                              
 Preferred Stock                                                                                       48,079,134                   
Cash dividends declared:                                                                                          
 Common stock                                                                          (3,168,422)     (3,168,422)                  
 Preferred stock                                                                       (1,243,611)     (1,243,611)                  
Net income                                                                             34,033,797      34,033,797                   
Other comprehensive income, net of tax                                 145,200                            145,200                   
                                                ----------          ----------       ------------    ------------
Balance at December 31, 1998                    $3,547,798          $1,365,538       $124,418,278    $221,161,859      
                                                ==========          ==========       ============    ============      
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                                                                        1998              1997            1996
                                                                                   -------------    -------------    -------------
<S>                                                                                <C>              <C>              <C>          
Cash flows from operating activities:
        Net income                                                                 $  34,033,797    $  23,497,212    $  13,199,516
        Adjustments  to reconcile  net income to net cash
  provided by (used in)
         operating activities:
                Depreciation and amortization                                          3,059,742        2,659,888        2,142,275
                (Accretion of discount) amortization of premium on
                 investments and mortgage - backed securities, net                       (86,761)        (371,816)         199,955
                Amortization of deferred loan origination costs (fees)                   350,114         (258,324)        (411,219)
                Amortization of excess servicing receivable                                 --               --             77,530
                Amortization of servicing rights                                       2,994,307        1,837,414        1,213,606
                Compensation cost on common shares granted                                  --               --            290,000
                Provision for loan losses                                              6,600,000        6,370,000        4,258,047
                Provision for bad debts in accounts receivable                           300,000          300,000          300,000
                Gain on sales of mortgage loans                                       (7,785,630)      (2,721,154)        (599,935)
                Gain on sales of investment securities available for sale               (278,028)        (107,430)        (641,798)
                Minority interest in earnings of the Bank                                   --               --            538,168
                (Increase) decrease in mortgage loans held for sale                  (70,240,717)       7,564,836      (33,131,819)
                Net (increase) decrease in mortgage-backed
                 securities held for trading                                        (105,247,419)    (291,540,928)       5,662,504
                Net decrease (increase) in investment securities held for trading        581,332          769,495       (1,350,827)
                Increase in interest and accounts receivable                          (4,590,500)      (5,607,804)      (3,065,914)
                Decrease (increase) in other assets                                    1,678,184       (2,840,360)      (4,179,528)
                Increase in notes payable                                             83,295,337      (15,989,480)      10,212,067
                Increase (decrease) in accounts payable
                 and accrued liabilities                                              11,545,874        5,128,545       (1,542,763)
                 Increase (decrease) in other liabilities                                702,593         (394,179)       1,167,645
                                                                                   -------------    -------------    -------------
                Total adjustments                                                    (77,121,572)    (295,201,297)     (18,862,006)
                                                                                   -------------    -------------    -------------
Net cash used in operating activities                                                (43,087,775)    (271,704,085)      (5,662,490)
                                                                                   -------------    -------------    -------------
Cash flows from investing activities:
        Purchases of investment securities available for sale and
         held to maturity                                                            (72,532,667)     (83,021,527)     (47,623,969)
        Proceeds from sales and maturities of investment
         securities available for sale                                                92,867,182       36,265,089       63,127,623
        Proceeds from maturities of investment securities held to maturity             4,715,420             --            377,000
        Principal repayments on mortgage-backed securities                            13,955,086        9,475,202       10,554,678
        Proceeds from sale of loans                                                  254,011,245      120,955,837       50,326,054
        Net originations of loans                                                   (574,007,391)    (285,970,693)    (227,155,954)
        Purchases of FHLB stock, net                                                  (6,211,400)        (658,757)        (967,700)
        Net assets acquired, net
        of cash received                                                               4,287,492             --               --
        Acquisition of premises and equipment                                         (5,936,102)      (3,914,192)      (2,592,494)
        Acquisition of servicing rights                                              (40,002,361)     (10,455,392)      (5,598,965)
                                                                                   -------------    -------------    -------------
                Net cash used in investing activities                               (328,853,496)    (217,324,433)    (159,553,727)
                                                                                   -------------    -------------    -------------
</TABLE>
                                                                     (continued)
46
<PAGE>
<TABLE>
<CAPTION>
R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (continued)
                                                                                 1998                1997               1996
                                                                              -------------      -------------      -------------
<S>                                                                           <C>                <C>                <C>          
Cash flows from financing activities:
        Proceeds from issuance of notes payable                               $        --        $        --        $  60,500,000
        Payments on notes payable                                                      --           (2,400,000)       (25,000,000)
        Payments of long-term debt                                                     --                 --           (5,323,899)
        Increase in deposits, net                                               263,311,675        106,750,114         97,160,090
        Increase (decrease) in securities sold
         under agreements to repurchase, net                                     38,287,220        335,690,058         (1,038,740)
        (Decrease) increase in federal funds purchased                          (10,000,000)        10,000,000               --
        Payments on secured borrowings                                                 --          (16,103,451)        (5,520,882)
        Advances from FHLB                                                      133,700,000        161,700,000         16,000,000
        Repayment of advances from FHLB                                         (58,400,000)      (134,700,000)        (7,000,000)
        Repayment of subordinated notes                                          (3,250,000)              --                 --
        Net proceeds from issuance of Series A
          Preferred Stock                                                        48,079,134               --                 --
        Proceeds from issuance of common stock on initial public offering              --                 --           31,072,748
        Capital contribution to subsidiary                                          (12,000)              --                 --
        Cash dividends                                                           (4,412,033)        (2,385,752)          (972,336)
        Payment of cash in lieu of fractional shares on stock split                    --              (12,659)              --
                                                                              -------------      -------------      -------------

                Net cash provided by financing activities                       407,303,996        458,538,310        159,876,981
                                                                              -------------      -------------      -------------

Net increase (decrease) in cash and cash equivalents                             35,362,725        (30,490,208)        (5,339,236)

Cash and cash equivalents at beginning of year                                   68,365,723         98,855,931        104,195,167
                                                                              -------------      -------------      -------------

Cash and cash equivalents at end of year                                      $ 103,728,448      $  68,365,723      $  98,855,931
                                                                              -------------      -------------      -------------

Cash and cash equivalents include:
        Cash and due from banks                                               $  51,804,750      $  32,607,001      $  31,989,944
        Securities purchased under agreements to resell                          11,544,123         16,000,000         19,633,178
        Time deposits with other banks                                           30,361,527         16,758,722         33,232,809
        Federal funds sold                                                       10,018,048          3,000,000         14,000,000
                                                                              -------------      -------------      -------------

                                                                              $ 103,728,448      $  68,365,723      $  98,855,931
                                                                              -------------      -------------      -------------
</TABLE>
                                                                              47
<PAGE>
R&G FINANCIAL  CORPORATION Notes to Consolidated  Financial  Statements December
31, 1998, 1997 and 1996

1. Reporting Entity and 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 Companys  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).  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.  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 Companys 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 the NASDAQ
Stock  Market.  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
Companys 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
Government National Mortgage Association (GNMA)  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.

The Bank  provides a full  range of banking  services  through  twenty  branches
located  mainly in the northern  part of the  Commonwealth  of Puerto  Rico.  As
discussed  in Note 15 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.
<PAGE>
        Significant Accounting Policies

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  disclosure  of
contingent  assets and  liabilities  at the date of the  consolidated  financial
statements,  and the  reported  amounts  of  revenues  and  expenses  during the
reporting period. 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.  It is
the Companys  policy to take  possession over the securities that guarantee such
loans.  However, the counterparties to these agreements retain effective control
over such collateral.

        Investment securities

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

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
other comprehensive income.

All  residual   interests  such  as  excess  servicing  fees   receivable,   and
interest-only strips (IOs) retained by the Company as a result of securitization
transactions  or bulk  sales  are  held  as  trading  securities  IOs if made in
connection with mortgage banking activities,  and available for sale if not made
in connection with such activities. In addition, all mortgage-backed  securities
retained  by  the   Company  as  part  of  its   mortgage   banking   activities
securitization transactions are also held as trading securities.
<PAGE>
Premiums are  amortized  and discounts are accreted 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 on 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.

In October 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
134 -Accounting for Mortgage-Backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This Statement
amends SFAS No. 65 to require that after the  securitization  of mortgage  loans
held for sale, an entity  engaged in mortgage  banking  activities  classify the
resulting  mortgage-backed  securities or other  retained  interest based on its
ability and intent to sell or hold those  investments.  This Statement  conforms
the subsequent  accounting for securities  retained after the  securitization of
mortgage loans by a mortgage banking  enterprise with the subsequent  accounting
for securities  retained after the  securitization of other types of assets by a
non-mortgage  banking  enterprise.  This  Statement is  effective  for the first
fiscal  quarter  beginning  after  December 15,  1998.  In  connection  with the
adoption  of this  Statement  on  January  1,  1999,  the  Company  reclassified
approximately  $427.4  million of  mortgage-backed  securities  from  trading to
available for sale.

        Loans and allowance for loan losses

Loans are stated at their outstanding principal balance, less unearned interest,
deferred loan origination  fees and allowance for loan losses.  Loan origination
and  commitment  fees and costs  incurred  in the  origination  of new loans are
deferred and  amortized  over the life of 

48
<PAGE>
the loans as an adjustment of interest yield using the interest method. 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 managements  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,  managements  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 loans 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
managements  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. 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.
<PAGE>
        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

The Company  capitalizes  servicing  rights  acquired  through loan  origination
activities by allocating a portion of the cost of originating  mortgage loans to
the mortgage  servicing right for those loans for which there is a definite plan
to sell or securitize. The allocation is based on the relative fair value of the
loans and the servicing rights at the date of origination.

If the Company does not have a definite plan to sell or securitize  the loans at
the  time of  origination,  a  portion  of the  amortized  cost of the  loans is
allocated to the mortgage  servicing right at the time of sale or securitization
based on the relative  fair values at such date.  To determine the fair value of
the servicing rights, the Company uses the market prices of comparable servicing
sale contracts.

Mortgage  servicing  rights  related to loans  originated  prior to 1995 are not
recognized in the Companys  consolidated  financial statements until the related
loans are sold. Prior to 1995 only servicing  rights acquired through  purchases
were capitalized.

The  capitalized  cost of  acquiring  the  rights to service  mortgage  loans is
amortized in proportion to and over the period of net servicing income. Mortgage
servicing rights are evaluated for impairment.

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, 1998
or 1997.  As of  December  31,  1998 and  1997,  the fair  value of  capitalized
mortgage  servicing  rights  was  approximately   $59,880,000  and  $24,566,000,
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

The  Company  recognizes  on  its  financial  statements  financial  assets  and
servicing assets  controlled by the Company,  and derecognizes  financial assets
when control has been  surrendered.  The Company  follows the specific  criteria
established in SFAS No. 125- Accounting for Transfers and Servicing of Financial
Assets and  Extinguishment  of  Liabilities,  to determine when control has been
surrendered in a transfer of financial assets. Liabilities are derecognized when
they are extinguished.

Liabilities  and  derivatives  incurred  or obtained by the Company as part of a
transfer  of  financial  assets  are  initially   measured  at  fair  value,  if
practicable.  Servicing  assets and other retained  interests in the transferred
assets are measured by  allocating  the  previous  carrying  amount  between the
assets sold, if any, and retained  interests,  if any,  based on their  relative
fair values at the date of the transfer.  Servicing  assets and  liabilities are
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.
<PAGE>
        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.

        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.

The Company evaluates for impairment  long-lived assets and certain identifiable
intangibles held and used 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.

        Goodwill and other intangibles

On July 31, 1998, the Company  acquired  Fajardo  Federal  Savings Bank,  F.S.B.
(Fajardo Federal) at a cost of approximately  $5.9 million.  The acquisition was
accounted under the purchase method of accounting,  resulting in the recognition
of goodwill of  approximately  $3.1 million.  Total assets of Fajardo Federal at
the time of acquisition were approximately $28.9 million.

Goodwill also resulted 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.

Goodwill is  amortized  over a fifteen  year  period.  Accumulated  amortization
amounted  to  $1,757,000  and  $1,363,000  as of  December  31,  1998 and  1997,
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  $477,000  and $342,000 at
December 31, 1998 and 1997, respectively.

        Securities sold under agreements to repurchase

The Company sells  securities under agreements to repurchase the same or similar
securities. The Company retains effective control over the securities pledged as
<PAGE>
collateral  on these  agreements.  Accordingly,  amounts  received  under  these
agreements  represent  short-term  borrowings and the securities  underlying the
agreements remain in the asset accounts.

        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, 1998.

        Income taxes

The  Company  follows an asset and  liability  approach  to 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  managements  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.

        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 plan

As discussed in Note 16 to the consolidated  financial  statements,  the Company
adopted a Stock Option Plan in June 1996 and granted stock options thereunder to
certain  employees 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 complies with 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
<PAGE>
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  Companys  Stock Option Plan are
included in the  weighted  average  number of shares for purposes of the diluted
earnings per share computation.

        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.

        Accounting for derivative instruments and hedging activities

In June 1998, the FASB issued SFAS  No.133-Accounting for Derivative Instruments
and Hedging Activities.


50
<PAGE>
This  Statement  requires  that an entity  recognize all  derivatives  as either
assets or liabilities  in the statement of financial  position and measure those
instruments  at fair value.  If certain  conditions are met, a derivative may be
specifically accounted as a hedge. The accounting for changes in fair value of a
derivative  (that is,  gains and  losses)  depends  on the  intended  use of the
derivative and the resulting designation.

This  Statement is effective for all fiscal  quarters of fiscal years  beginning
after June 15, 1999.  Management is evaluating its hedging  strategy in light of
this new  pronouncement  to  establish  the initial  designation  of its hedging
activities and determine the effect and timing of adoption.  However, due to the
relatively  limited extent to which the Company is using derivative  instruments
and the simple nature of the  instruments  used,  management does not expect the
impact of adoption to be significant.

        Adoption of new accounting standards

On January  1,1998,  the Company  adopted 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
was the only other  comprehensive  income item to be  included in  comprehensive
income,  which is now reported with the statement of comprehensive  income.  The
adoption of this Statement affected only financial statements presentation.

On January 1, 1998 the Company  also  adopted  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.

The adoption of this Statement  affected only financial  statement  presentation
and  disclosure.  The  required  disclosures  are  provided  in  Note  24 to the
consolidated financial statements.

        Reclassifications

Certain  reclassifications  have  been  made  to the  1997  and  1996  financial
statements to conform to the 1998 financial statement presentation.


  
                                                                              51
<PAGE>                                                                 
2.      Mortgage loans held for sale

        Mortgage loans held for sale consist of:
<TABLE>
<CAPTION>

                                                         December 31,
                                                  1998                   1997
                                             ------------           ------------
<S>                                          <C>                    <C>         
Conventional loans                           $ 93,021,032           $ 25,003,291
FHA/VA loans                                   24,105,008             21,882,032
                                             ------------           ------------

                                             $117,126,040           $ 46,885,323
                                             ============           ============
</TABLE>
The aggregate amortized cost and approximate market value of loans held for sale
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
      Amortized      Gross unrealized     Gross unrealized         Approximate
         cost          holding gains       holding losses          market value
   --------------     ------------         -----------          --------------
<S>                   <C>                  <C>                  <C>           
   $  117,126,040     $  1,543,907         $  (214,798)         $  118,455,149
   --------------     ------------         -----------          --------------
</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,
                                                            1998               1997                1996
                                                        -------------      -------------      -------------
<S>                                                     <C>                <C>                <C>          
Proceeds from sales of mortgage loans
and mortgage-backed securities                          $ 783,899,858      $ 370,121,097      $ 297,606,773

Mortgage loans and mortgage-
backed securities sold                                   (761,449,308)      (359,001,427)      (290,777,907)
                                                        -------------      -------------      -------------
Gain on sales, net                                         22,450,550         11,119,670          6,828,866

Deferred fees earned, net of loan origination costs
and commitment fees paid                                    6,207,098          3,235,381          4,976,079
                                                        -------------      -------------      -------------

                                                           28,657,648         14,355,051         11,804,945
Net unrealized profit (loss) on
trading securities                                          6,005,327          9,677,663            (95,971)
                                                        -------------      -------------      -------------
Net gain on origination and
sale of mortgage loans                                  $  34,662,975      $  24,032,714      $  11,708,974
                                                        -------------      -------------      -------------

</TABLE>
<PAGE>
Total gross loan origination fees totaled approximately $20,270,000, $13,683,000
and  $13,041,000  during  the years  ended  December  31,  1998,  1997 and 1996,
respectively.

Gross gains of  $25,430,599,  $11,532,566  and  $7,479,507,  and gross losses of
$2,980,049,  $412,896 and $650,641  were  realized on the above sales during the
years ended December 31, 1998, 1997 and 1996, respectively.


52
<PAGE>
3.      Investment Securities

Mortgage-backed securities held for trading
<TABLE>
<CAPTION>
                                                            December 31,
                                                      1998              1997
                                                ------------        ------------

<S>                                             <C>                 <C>         
CMO Certificate                                 $         --        $ 15,228,000
CMO Residuals (interest only)                      7,146,762           7,867,662
GNMA Certificates                                443,399,272         377,361,794
                                                ------------        ------------

                                                $450,546,034        $400,457,456
                                                ------------        ------------
</TABLE>
The carrying value and estimated fair value of investment  securities  available
for sale and held to maturity 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.  Expected  maturities  on debt
securities will differ from contractual  maturities  because  borrowers may have
the  right to call or  repay  obligations  with or  without  call or  prepayment
penalties.
<TABLE>
<CAPTION>
                                                                December 31,
                                                   1998                              1997
                                        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            $ 7,845,382     $ 9,661,171     $ 7,006,610     $ 8,381,982
                                       -----------     -----------     -----------     -----------

FNMA certificates -
        Due over ten years               8,091,335       8,161,704       9,468,141       9,670,108
                                       -----------     -----------     -----------     -----------

FHLMC  certificates:
        Due from one to five years          89,209          90,765          70,584          70,452
        Due from five to ten years         240,394         244,140         359,980         368,203
        Due over ten years              21,368,689      21,723,711      27,104,346      27,513,104
                                       -----------     -----------     -----------     -----------

                                        21,698,292      22,058,616      27,534,910      27,951,759
                                       -----------     -----------     -----------     -----------
GNMA certificates-
         Due over ten years             55,158,840      55,158,840            --              --
                                       -----------     -----------     -----------     -----------

                                       $92,793,849     $95,040,331     $44,009,661     $46,003,849
                                       ===========     ===========     ===========     ===========
</TABLE>
<PAGE>
Mortgage-backed  securities  available for sale include interest only securities
with an amortized cost of $2,363,942 as of December 31, 1998 and 1997, which are
associated with the sale in prior years of collateralized  mortgage  obligations
not related to the Company's mortgage banking activities.

                                                                              53
<PAGE>
<TABLE>
<CAPTION>
                                                                        December 31,
                                                           1998                            1997
                                               Amortized          Fair         Amortized          Fair
                                                  cost            value           cost            value
                                              -----------     -----------     -----------     -----------       
<S>                                          <C>             <C>             <C>             <C>       
Investment securities available for sale

U.S. Treasury securities:
        Due within one year                   $      --       $      --       $   773,156     $   771,593       
        Due from one to five years              4,995,028       4,990,625      30,009,771      30,100,000       
                                              -----------     -----------     -----------     -----------       
                                                                                                               
                                                4,995,028       4,990,625      30,782,927      30,871,593       
                                              -----------     -----------     -----------     -----------       
                                                                                                                
U.S. Government and Agencies                                                                                    
 securities:                                                                                                    
        Due from one to five years             38,100,000      38,106,648      35,145,089      35,104,828       
        Due from five to ten years              5,010,140       5,000,000       5,022,904       4,980,865       
                                              -----------     -----------     -----------     -----------       
                                                                                                                
                                               43,110,140      43,106,648      40,167,993      40,085,693       
                                              -----------     -----------     -----------     -----------       
                                                                                                                
                                                                                                                
FHLB stock                                     11,404,867      11,404,867       4,906,067       4,906,067       
                                              -----------     -----------     -----------     -----------       
                                                                                                                
                                              $59,510,035     $59,502,140     $75,856,987     $75,863,353       
                                              -----------     -----------     -----------     -----------       
</TABLE>
Mortgage-backed securities held to maturity
<TABLE>
<CAPTION>
<S>                                    <C>             <C>             <C>             <C>        
GNMA certificates:
        Due from one to five years     $    27,227     $    29,201     $    49,347     $    50,128
        Due from five to ten years      13,024,960      12,751,640            --              --
        Due over ten years               2,359,713       2,306,529      18,321,595      17,704,769
                                       -----------     -----------     -----------     -----------

                                        15,411,900      15,087,370      18,370,942      17,754,897
                                       -----------     -----------     -----------     -----------

FNMA certificates-
        Due over ten years              12,607,700      12,944,020      14,674,783      15,164,453
                                       -----------     -----------     -----------     -----------

FHLMC certificates-
        Due over ten years                 235,918         229,535         280,747         266,322
                                       -----------     -----------     -----------     -----------

                                       $28,255,518     $28,260,925     $33,326,472     $33,185,672
                                       -----------     -----------     -----------     -----------
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
                                                                            December 31,
                                                               1998                            1997
                                                   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                       $   194,892     $   196,000     $    309,839     $   310,775
                                                  -----------     -----------     ------------     -----------

U.S. Government and Agencies securities-
        Due within one year                           204,167         204,167               --              --
                                                  -----------     -----------     ------------     -----------

Puerto Rico Government and Agencies
 obligations:
        Due within one year                                --              --        4,433,177       4,439,474
        Due from five to ten years                  5,944,870       5,978,467        5,920,000       5,910,000
        Due over ten years                                 --              --           29,786          29,786
                                                    5,944,870       5,978,467       10,382,963      10,379,260
                                                  -----------     -----------     ------------     -----------
                                                  $ 6,343,929     $ 6,378,634     $ 10,692,802     $10,690,035
                                                  -----------     -----------     ------------     -----------
</TABLE>
Unrealized  gains and losses on  securities  held to maturity and  available for
sale follows:
<TABLE>
<CAPTION>
                                                                  December 31,
                                                    1998                             1997
                                                Gross unrealized                 Gross unrealized
                                             Gains           Losses            Gains          Losses
                                         -----------      -----------      -----------      ----------- 
<S>                                       <C>              <C>              <C>              <C>         
Securities held to maturity:
        Puerto Rico and United States
         Government obligations           $    39,705      $    (5,000)     $       936      $   (37,757)
        Mortgage-backed securities            338,294         (332,887)         504,349         (645,149)
                                          -----------      -----------      -----------      ----------- 

                                          $  377,999       $  (337,887)     $   505,285      $  (682,906)
                                          -----------      -----------      -----------      ----------- 

Securities available for sale:
        U.S. Government obligations       $     6,648      $   (14,543)     $   113,223      $  (106,857)
        Mortgage-backed securities          2,276,566          (30,084)       2,043,941          (49,753)
                                          -----------      -----------      -----------      ----------- 

                                          $ 2,283,214      $   (44,627)     $ 2,157,164      $  (156,610)
                                          -----------      -----------      -----------      ----------- 
</TABLE>
<PAGE>
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.  There  were  no  sales  of
investment  securities  held for  trading  during  1998.  During the years ended
December 31, 1998, 1997 and 1996, proceeds from the sale of securities available
for  sale  totaled  approximately   $45,917,000,   $7,915,000  and  $48,950,000,
respectively;  gains  realized  on such sales  totaled  approximately  $278,000,
$107,000 and $642,000, respectively; no losses were realized.

During 1998, the Company  reclassified  $55,159,000 (1997- $773,000)  securities
held for trading to available for sale.

As discussed in Notes 7, 8, 9 and 10 to the consolidated  financial  statements,
as of December 31, 1998 the Company had investment  securities,  mortgage-backed
securities and mortgage loans amounting to approximately  $836.7 million pledged
to secure  certain  deposits,  securities  sold under  agreements to repurchase,
advances from the FHLB, notes payable, 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,
                                                                  1998                   1997
                                                            ---------------      ---------------
<S>                                                         <C>                  <C>            
Real estate loans:
        Residential - first mortgage                        $   735,457,756      $   476,652,596
        Residential - second mortgage                            18,633,916           17,831,079
        Land                                                        337,250               76,400
        Construction                                             34,391,170           13,367,513
        Commercial                                              121,393,030           87,506,802

                                                                910,213,122          595,434,390
Undisbursed portion of loans in process                         (18,170,178)          (6,218,039)
Net deferred loan (fees) costs                                     (166,056)             172,019
                                                            ---------------      ---------------

                                                                891,876,888          589,388,370
                                                            ---------------      ---------------

Other loans:
        Commercial                                               46,532,311           39,127,363
        Consumer:
                Loans secured by deposits                        17,225,437           12,471,772
                Loans secured by real estate                     85,054,815           81,251,989
                Other                                            41,381,304           50,103,282
        Unamortized discount                                       (163,499)            (151,460)
        Unearned interest                                          (183,546)            (360,195)
                                                            ---------------      ---------------

                                                                189,846,822          182,442,751
                                                            ---------------      ---------------

                Total loans                                   1,081,723,710          771,831,121
Allowance for loan losses                                        (8,055,432)          (6,771,702)
                                                            ---------------      ---------------

                                                            $ 1,073,668,278      $   765,059,419
                                                            ---------------      ---------------
</TABLE>
<PAGE>
The changes in the allowance for loan losses follow:
<TABLE>
<CAPTION>

                                                       Year ended December 31,
                                              1998                 1997                 1996
                                      ---------------      ---------------      ---------------
<S>                                   <C>                  <C>                  <C>            
Balance, beginning of year            $     6,771,702      $     3,331,645      $     3,510,251
Provision for loan losses                   6,600,000            6,370,000            4,258,047
Acquired reserves                             364,064                 --                   --
Loans charged-off                          (6,012,792)          (5,376,573)          (4,662,407)
Recoveries                                    332,458            2,446,630              225,754
                                      ---------------      ---------------      ---------------

Balance, end of year                  $     8,055,432      $     6,771,702      $     3,331,645
                                      ---------------      ---------------      ---------------
</TABLE>

Recoveries  during the year ended December 31, 1997 include $2 million  received
from the Companys fidelity  insurance carrier as part of a settlement of a claim
filed by the  Company  in late 1996.  The  amount  received  was  recorded  as a
recovery of loans  previously  charged-off.  During 1996, as a result of certain
irregularities  discovered  by the Company with respect to its former  insurance
premiums   financing   business,   management   wrote-off   loans  amounting  to
approximately $2.5 million.

As of December 31, 1998 and 1997 the Company had commercial  loans classified as
impaired  totaling  $1,020,642  and  $1,570,642,  respectively.  No reserves for
impairment  were  necessary  as of  such  dates  since  the  fair  value  of the
collaterals securing such loans exceeded their outstanding balances.


56
<PAGE>
As of December 31, 1998,  1997 and 1996,  loans on which the accrual of interest
income had been discontinued amounted to approximately $44,526,000,  $30,086,000
and $18,730,000,  respectively.  The additional  interest income that would have
been  recognized  during  1998,  1997 and 1996 had  these  loans  been  accruing
interest  amounted  to  approximately   $1,408,000,   $1,095,000  and  $864,000,
respectively.  The Company has no material  commitments to lend additional funds
to borrowers whose loans were in non-accruing status at December 31, 1998.

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, 1998 and
1997,  the  mortgage  loans  servicing   portfolio   amounted  to  approximately
$4,827,798,000  and  $3,000,888,000,   respectively,   including   approximately
$754,623,000 and $448,858,000, respectively, serviced for the Bank.

The changes in the servicing asset of the Company follows:
<TABLE>
<CAPTION>
                                                Year ended December 31,
                                        1998              1997              1996
                                   ------------      ------------      ------------
<S>                                <C>               <C>               <C>         
Balance at beginning of period     $ 21,212,998      $ 12,595,020      $  8,209,661
Rights originated                    11,845,775         8,057,574         4,172,868
Rights purchased                     28,156,586         2,397,818         1,426,097
Scheduled  amortization              (2,994,307)       (1,837,414)       (1,213,606)
Unscheduled  amortization                  --                --                --
                                   ------------      ------------      ------------

Balance at end of period           $ 58,221,052      $ 21,212,998      $ 12,595,020
                                   ------------      ------------      ------------
</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, 1998, the
mortgage  loan  portfolio  serviced for GNMA,  FNMA and FHLMC and subject to the
timely payment commitment amounted to approximately $2,575,794,000, $219,178,000
and  $831,184,000,   respectively  (1997  -  $1,779,252,000,   $53,760,000,  and
$474,079,000).

Total funds  advanced as of  December  31, 1998 in relation to such  commitments
amount to $1,458,000, $3,429,000 and $757,000 for escrow advances, principal and
interest  advances  and  foreclosure  advances,  respectively  (1997 - $782,000,
$1,688,000 and $530,000).

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,  1998 and 1997,  the related  escrow  funds  include
<PAGE>
approximately $109,857,000 and $50,163,000, respectively, deposited in the Bank;
these funds are included in the  Company's  consolidated  financial  statements.
Escrow funds also include  approximately  $6,732,000  and $8,654,000 at December
31, 1998 and 1997,  respectively,  deposited  with other banks and excluded from
the Companys assets and liabilities.


6.      Premises and Equipment

        Premises and equipment consist of:
<TABLE>
<CAPTION>

                                        Estimated  
                                       useful lives             December 31,
                                         (Years)          1998             1997
                                       -------------------------------------------

<S>                                        <C>      <C>               <C>         
Furniture and fixtures                       5      $ 17,588,015      $ 13,026,459
Leasehold improvements                      10         7,966,402         6,073,038
Autos                                        5           487,562           375,826
                                        -------------------------------------------
                                                      26,041,979        19,475,323

Less - Accumulated
depreciation and amortization                        (13,079,544)       (9,947,764)
                                        -------------------------------------------

                                                    $ 12,962,435      $  9,527,559
                                        -------------------------------------------
</TABLE>

                                                                              57
<PAGE>
7.      Deposits

        Deposits are summarized as follows:      
<TABLE>
<CAPTION>
                                             December 31,
                                        1998               1997
                                 --------------     --------------
<S>                              <C>                <C>           
Passbook savings                 $  106,389,879     $   79,628,833
                                 --------------     --------------

NOW accounts                         34,954,647         27,644,104
Super NOW accounts                   81,511,705         67,650,384
Regular checking accounts    
(non-interest bearing                46,328,445         32,720,996
Commercial checking accounts
(non-interest bearing)              126,171,795         58,783,328
                                 --------------     --------------

                                    288,966,592        186,798,812
                                 --------------     --------------

Certificates of deposit:                 
        Under $100,000              315,641,230        257,431,730
        $100,000 and over           294,270,322        196,961,831
                                 --------------     --------------

                                    609,911,552        454,393,561

Accrued interest payable              2,029,281          1,597,288
                                 $1,007,297,304     $  722,418,494
                                 --------------     --------------
</TABLE>

The weighted  average stated  interest rate on all deposits at December 31, 1998
and 1997 was 4.50% and 4.82%, respectively.

As of December 31, 1998, the Company had delivered investment securities held to
maturity with an amortized cost and market value of  approximately  $1.5 million
as collateral for public funds deposits.

At December 31, 1998  scheduled  maturities  of  certificates  of deposit are as
follows:

                 1999                 $  490,932,867
                 2000                     39,417,301
                 2001                     21,295,061               
                 2002                     15,481,443
                 2003                     31,596,339
                 Thereafter               11,188,541
                                      --------------
                                      $  609,911,552
                                      ==============
<PAGE>
8.      Securities Sold Under Agreements to Repurchase

At December 31, 1998 and 1997, the Company had repurchase agreements outstanding
with  interest  ranging  from 5.02% to 5.60% in 1998 and 5.10% to 6.00% in 1997.
These  agreements  mature within thirty days,  except for repurchase  agreements
totaling $100,000,000 at December 31, 1998, maturing in June 1999.

        Information on these agreements follows:
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                        1998                                          1997
                                                              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        6,967,000            7,151,947              5,580,000              5,995,405  
GNMA                                         443,380,446          450,812,190            363,315,559            397,598,925  
CMO Tranches                                        --                   --               13,576,380             15,228,000  
CMO Residuals                                  4,742,280            3,769,137              8,162,280              7,264,420  
FHLMC                                         12,682,000           12,983,712             12,405,000             12,954,146  
FNMA                                           3,650,000            3,216,694                   --                     -- 
                                            ------------         ------------           ------------           ------------     
                                            $471,421,726         $477,933,680           $433,134,506           $469,367,563  
                                            ------------         ------------           ------------           ------------  
</TABLE>                                                                    
58
<PAGE>
Maximum amount of borrowings  outstanding at any month-end  during 1998 and 1997
under  the  agreements  to  repurchase  were   $471,422,000  and   $433,135,000,
respectively.  The approximate average aggregate  borrowings  outstanding during
the periods  were  $410,701,000  and  $226,771,000,  respectively.  The weighted
average  interest  rate of such  agreements  was 5.42% and 5.81% at December 31,
1998 and 1997, respectively;  the weighted average rate during 1998 and 1997 was
5.74% and 5.95%, respectively.

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.

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.


9.      Notes Payable

        Notes payable consist of:
<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                            1998             1997
                                                                                       ------------     ------------
<S>                                                                                    <C>              <C>         
Warehousing lines,  bearing  interest at floating  rates  ranging  from 1.25% to
        1.50% over the counterpartys cost
        of funds (6.43% in 1998 and 5.85% in 1997)                                     $107,647,956     $ 24,352,619
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 5.60% to 6.30%                                   15,000,000       15,000,000
Promissory note maturing in 2000 paying quarterly interest at a
        floating rate of 84% of the three month Libor rate less .125%
        (4.36% at December 31, 1998 and  4.73% at December 31, 1997)                     10,000,000       10,000,000
Promissory note maturing in 2001 paying quarterly interest at a
        floating rate of  96% of the three month Libid  rate (4.95% at
        December 31, 1998 and 5.34% at December 31, 1997)                                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
                                                                                       ------------     ------------

                                                                                       $191,747,956     $108,452,619
                                                                                       ------------     ------------
</TABLE>
As of  December  31,  1998,  the Company  had  various  credit  line  agreements
permitting the Company to borrow up to $209.0 million in warehousing  lines with
banks;  the unused portion of  warehousing  lines totaled  approximately  $101.4
million.   Warehousing  lines  at  December  31,  1998  are   collateralized  by
approximately $103.9 million in mortgage loans, mortgage servicing rights with a
fair  value  of $8  million,  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.
<PAGE>
Several credit line  agreements  impose certain  requirements  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.  At December  31, 1998 the  Company was in  compliance  with the loan
requirements.


                                                                              59
<PAGE>
The following  information relates to borrowings of the Company under the credit
line agreements:
<TABLE>
<CAPTION>
                                                              December 31,
                                                         1998              1997
<S>                                                <C>                <C>         

Maximum aggregate borrowings    
    outstanding at any month-end                   $ 161,060,146      $ 93,523,091

Approximate average aggregate borrowings                                              
    outstanding during the year                    $ 102,047,157      $ 66,404,621

Weighted average interest rate during
    the year computed on a monthly basis                    7.07%             6.03%

Weighted average interest rate                                          
    at end of year                                          6.43%             5.85%
</TABLE>

Certain promissory notes 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, 1998 securities pledged in relation to this requirement  consist of
investment   and   mortgage-backed   securities   with  an  amortized   cost  of
approximately  $35.9 million and approximate  market value of $35.8 million.  At
December 31, 1998 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, 1998 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
<PAGE>
        Advances from the FHLB are as follows:
<TABLE>
<CAPTION>
                                                                                 December 31,
                                                      Interest
Maturity                                                rate                1998              1997
                                                        ----         ------------         ------------
<S>                                                     <C>          <C>                  <C>                                 
January 7, 1998                                         6.15%        $         --         $ 10,000,000                        
January 15, 1998                                        6.00%                  --           32,000,000                       
January 26, 1999                                        5.66%          10,000,000                   --                         
July 30, 1999                                           5.14%          10,000,000                   --                         
January 26, 2000                                        5.74%          10,000,000                   --                 
August 28, 2000                                         4.22%          10,000,000                   --                         
August 28, 2000                                         5.60%          15,000,000                   --                         
January 26, 2001                                        5.54%          12,000,000                   --                 
August 27, 2001                                         5.67%           5,000,000                   --                         
December 18, 2003                                       4.54%          10,000,000                   --                         
June 9, 2005                                            5.25%           4,000,000                   --                         
June 17, 2005                                           5.25%          15,000,000                   --                         
February 27, 2008                                       5.15%          10,000,000                   --                         
February 19, 2008                                       5.16%           5,000,000                   --                 
March 10, 2008                                          5.23%           5,000,000                   --                         
                                                                                                                               
                                                                     $121,000,000         $ 42,000,000   
                                                        ----------------------------------------------
Weighted average stated interest rate                                        5.25%                6.03%  
                                                        ----------------------------------------------
</TABLE>  
60
<PAGE>                                                                  
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
$533.5  million as of December 31, 1998.  The unused  portion under such line of
credit  was  approximately  $412.5  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
$51.3 million at December 31, 1998. At December 31, 1998 the specific collateral
(principally  in the form of first mortgage  notes)  amounting to  approximately
$217.4 was pledged to the FHLB as part of the  Agreement  and to secure  standby
letters of credit.  At December  31, 1998,  the market  value of the  collateral
indicated above was sufficient to comply with the provisions of the Agreement.

11. 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,
                                                                         1998               1997
                                                                      ------------      ------------
<S>                                                                   <C>               <C>         
Deferred tax liabilities:

        Deferred net loan origination costs                           $       --        $    346,286
        Unrealized gain on securities held for trading                   6,038,762         3,696,685
        Reserve for bad debts                                               19,371            45,885
        CMO residuals (IOs)                                              1,778,693         1,096,090
        Servicing assets                                                 4,839,238         1,424,600
        Unrealized gain on securities available for sale                   873,049           780,216
                                                                      ------------      ------------
                                                                         13,549,113         7,389,762
                                                                      ------------      ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                   <C>               <C>         
Deferred tax assets:

        Deferred loan origination income, net                             (313,111)             --
        Allowance for loan losses                                       (2,799,369)       (1,176,463)
        Contingency reserve                                               (234,000)             --
        AMT credits                                                       (124,937)             --
        Other foreclosed property reserve                                     --             (11,232)
        Recourse contingency                                               (61,653)          (61,653)
        Discount on tax credits purchased                                     --            (247,960)
        Deferred gains on sale of loans and investment securities         (183,336)         (378,600)
                                                                      ------------      ------------

                                                                        (3,716,406)       (1,875,908)
                                                                      ------------      ------------

Net deferred tax liability                                            $  9,832,707      $  5,513,854
                                                                      ------------      ------------
</TABLE>
                                                                              61
<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>
                                                                     Year ended December 31,
                                              1998                           1997                         1996
                                                   % of pretax                    % of pretax                  % of pretax
                                     Amount           income        Amount          income       Amount           income
                                     ------           ------        ------          ------       ------           ------

                                                                         ($ in thousands)
<S>                                 <C>                  <C>      <C>                  <C>      <C>                  <C> 
Computed income tax at
        statutory rate              $ 17,579             39%      $ 12,569             39%      $  7,458             39%
Effect on provision of:
        Tax-exempt interest           (7,084)           (14)        (2,947)            (9)        (2,352)           (12)
        Non-deductible expenses          931              1            116             --            423              2
        Discount on tax credits
        purchased                       (385)            (1)        (1,006)            (3)          --
        Tax settlement                    --             --             --             --            393              2
                                    --------             --       --------             --       --------             -- 

                                    $ 11,041             25%      $  8,732             27%      $  5,922             31%
                                    --------             --       --------             --       --------             -- 

</TABLE>
In early February 1998, the Puerto Rico Treasury  Department began an income tax
examination  of R&G  Mortgages  and the Bank's  income tax  returns for the year
1995.  Management  believes  that  this  examination  should  not  result in any
significant  adverse effect on the Company's  financial  condition or results of
operations.

12. Stockholders' Equity

On April 16, 1998 the Companys Board of Directors authorized a two-for-one 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 June 25, 1998 in the form of a
stock  dividend  of one share for each  share  held of record on June 12,  1998.
Prior to the declaration of the stock split,  the Company had 14,144,752  shares
of common stock  outstanding.  As a result of the split,  14,144,752 shares were
issued and $141,448 were transferred from additional  paid-in-capital  to common
stock.  On  July  15,  1997  the  Company's  Board  of  Directors  authorized  a
nine-for-five  stock split of the Company's  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 splits 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 splits.

The  Company's  average  number  of  common  shares   outstanding  used  in  the
computation of basic earnings per common share was 28,413,314  (1997-28,289,504;
1996-21,841,322);  the weighted  average  number of shares  outstanding  for the
computation of diluted earnings per share was 29,169,314 (1997 -29,042,504; 1996
-22,099,732)  after giving effect to outstanding stock options granted under the
Company's  Stock Option  Plan.  During 1998,  cash  dividends of $.111375  (1997
-$0.084375;  1996  -$0.01736)  per common share  amounting to  $3,168,422  (1997
-$2,385,752; 1996 -$472,336) were paid.

62
<PAGE>
13. Non-interest Expenses

        Non-interest expenses consist of the following:
<TABLE>
<CAPTION>
                                                        Year ended December 31,
                                                  1998            1997            1996
                                             -----------     -----------     -----------
<S>                                          <C>             <C>             <C>        
Advertising                                  $ 4,277,685     $ 3,154,189     $ 2,415,177
Stationary and supplies                        1,548,459       1,640,131       1,332,108
Telephone                                      1,004,213         871,029         751,518
License and other taxes                        2,074,144       1,595,276       1,247,505
Deposit insurance                                401,933         346,625         652,750
Other insurance                                  661,951         590,066         538,825
Legal and other professional services          2,169,209       2,193,687       1,304,967
Amortization of mortgage servicing asset       2,994,307       1,837.414       1,213,606     
Guaranty fees                                  1,366,296       1,246,300       1,068,750
Other                                          6,189,139       4,776,780       4,898,911
                                             -----------     -----------     -----------

                                             $22,687,336     $18,251,497     $15,424,117
                                             -----------     -----------     -----------
</TABLE>
14. 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  during 1998
where approximately $1,566,000 (1997- $ 1,245,000).

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,  1998 the  aggregate  amount  of loans  outstanding  to  officers,
directors,  and principal  stockholders of the Company and its subsidiaries were
insignificant.

15. 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, 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.
<PAGE>
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 Mortgages 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.


                                                                              63
<PAGE>
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
classifications  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,
1998,  the  Company  meets  all  capital  adequacy  requirements  to which it is
subject.

As of December 31, 1998, the most recent  notification from the FDIC categorized
the  Bank  as  well  capitalized  under  the  regulatory  framework  for  prompt
corrective  action. 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.

The following table reflects the Company's and the Bank's actual capital amounts
and ratios, and applicable  regulatory capital requirements at December 31, 1998
and 1997:
<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>                        
As of December 31, 1998 Total capital (to risk weighted assets):
        Consolidated                                               $215,287     14.28%      $120,638     8%          N/A      N/A   
        R-G Premier Bank only                                      $110,501     14.46%      $ 61,124     8%     $ 76,405       10%  
Tier I capital (to risk weighted assets):                                                                                           
        Consolidated                                               $207,232     13.74%      $ 60,319     4%          N/A      N/A   
        R-G Premier Bank only                                      $102,446     13.41%      $ 30,562     4%     $ 45,843        6%  
Tier I capital (to average assets):                                                                                                 
        Consolidated                                               $207,232     10.88%      $ 76,172     4%          N/A      N/A   
        R-G Premier Bank only                                      $102,446      8.04%      $ 50,993     4%     $ 63,741        5%  
                                                                                                                                    
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%  
                                                                                           
</TABLE>
<PAGE>
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 Banks insurance premiums, which had amounted to $0.23 for every $100
of  deposits,  were  reduced to $0.064 for every $100 of deposits  beginning  on
January 1, 1997. 

64
<PAGE>
16. 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 869,400  shares after giving effect to stock splits) 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  (720,000  shares as
adjusted  for stock  splits) 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 (36,000 shares as adjusted for
stock splits) 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, 1998
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 Companys 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,
1998 and 1997 would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>

                                                   1998                 1997
--------------------------------------------------------------------------------
<S>                                       <C>                  <C>             
Net earnings - as reported                $    34,033,797      $     23,497,212
--------------------------------------------------------------------------------
Net earnings - pro forma                  $    33,879,283      $     23,342,698
--------------------------------------------------------------------------------
Basic earnings per share - as reported    $          1.15      $           0.83
--------------------------------------------------------------------------------
Basic earnings per share - pro forma      $          1.15      $           0.82
--------------------------------------------------------------------------------
Diluted earnings per share - as reported  $          1.12      $           0.81
--------------------------------------------------------------------------------
Diluted earnings per share - pro forma    $          1.12      $           0.80
--------------------------------------------------------------------------------
</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:
<PAGE>
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.


                                                                              65
<PAGE>
17. 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  employees  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, 1998,
1997  and  1996  amounted  to  approximately  $103,000,   $79,000,  and  $72,000
respectively.


18. 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  $474.9  million at
December 31, 1998. 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
$134.1 million at December 31, 1998.

        Commitments to buy and sell GNMA certificates

As of  December  31,  1998,  the  Company  had open  commitments  to issue  GNMA
certificates in the amount of $45.6 million.

        Commitments to sell mortgage loans

As of December 31, 1998 the Company had  commitments  to sell mortgage  loans to
third party investors amounting to $93.2 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,
1998,  minimum annual rental commitments under  noncancellable  operating leases
for certain office space and equipment, including leases with an affiliate, were
as follows:

        Year                           Amount

        1999                    $       2,896,728             
        2000                            2,633,542
        2001                            2,388,548
        2002                            2,186,479
        2003                            1,804,035
        Later years                    11,176,722
                                -----------------
                                $      23,086,054
                                =================
<PAGE>
Rent expense  amounted to approximately  $3,097,000 in 1998,  $2,483,000 in 1997
and $2,171,000 in 1996.

        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 Companys financial position or results of operations.

        Others

At December 31, 1998 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 $507.4 million at December 31, 1998. Liability,  if any, under the
recourse  provisions  at December  31, 1998 is  estimated  by  management  to be
insignificant.


19. Supplemental Disclosure on the Statements of  
              Cash Flows

During 1998, 1997 and 1996, the Company paid interest amounting to approximately
$79,576,000,  $60,846,000,  and  $45,939,000  respectively,  and income taxes of
approximately  $4,306,000,  $9,699,000,  and $7,573,000 (including $1,065,000 in
1996 on settlement of a 1992 income tax examination), respectively.

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


20.     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.


66
<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 customers  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 managements  credit evaluation
of the  counterparty.  A  geographic  concentration  exists  within the Companys
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, 1998 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                                          $     17,021,109
                                                                ----------------

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

        Interest rate swap contracts                            $    205,000,000
                                                                ----------------

A detail of  interest  rate swaps by  contractual  maturity  December  31,  1998
follows:
<TABLE>
<CAPTION>
        Notional                                  Pay Fixed       Receive
         Amount             Maturity                 Rate       Rate Floating                 
    -------------      -----------------             ----    --------------------                 
<S>                    <C>                           <C>     <C>              
    $  10,000,000      October 24, 2000              5.20%   84% of 3 month Libid
       25,000,000      September 10, 2001            6.09%   96% of 3 month Libid   
       15,000,000      January 26, 2001              5.59%   3 month Libor          
       15,000,000      September 17, 2002            5.79%   3 month Libid          
       15,000,000      June 15, 2003                 5.29%   3 month Libor          
       15,000,000      August 13, 2003               5.16%   3 month Libor          
       10,000,000      September 15, 2003            4.70%   3 month Libor          
       50,000,000      June 8, 2008                  5.17%   3 month Libor          
       20,000,000      June 12, 2008                 5.09%   3 month Libor          
       25,000,000      June 15, 2008                 5.04%   3 month Libor          
        5,000,000      June 17, 2008                 5.00%   3 month Libor          
</TABLE>
<PAGE>
The  following  table  summarizes  the  changes  in  notional  amounts  of swaps
outstanding during 1998:
<TABLE>
<CAPTION>
<S>                                                            <C>         
        Beginning balance                                      $ 50,000,000
        New swaps                                               155,000,000
        Maturities                                                        -
                                                               ------------
        Ending balance                                         $205,000,000
</TABLE>
        As of December 31, 1998, interest rate swap maturities are as follows:
 
                      2000    $       10,000,000
                      2001            40,000,000
                      2002            15,000,000
                      2003            40,000,000
                      2008           100,000,000
                              ------------------
                              $      205,000,000
                              ==================
 
Expected  maturities  will differ from  contracted  maturities  because  counter
parties to the agreements  may have the right to call the swaps.  As of December
31,1998 swap agreements with a notional amount of $155,000,000  had call options
at various dates commencing on June 1999 through September 2000.


                                                                              67
<PAGE>
Net interest  settlements  on swap  agreements  are recorded as an adjustment to
interest  expense on notes  payable  and  repurchase  agreements.  Net  interest
received during 1998 amounted to approximately $50,000; net payments amounted to
approximately $293,000 and $61,000 during 1997 and 1996, respectively.

21. 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,
                                   1998                     1997                  1996
                          ------------------      ------------------      ------------------
<S>                       <C>                     <C>                     <C>               
Employee costs            $       30,013,967      $       21,368,723      $       17,357,976
                          ------------------      ------------------      ------------------

Other administrative                                                  
  and general expenses    $       25,906,635      $       22,662,971      $       18,916,546
                          ------------------      ------------------      ------------------
</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,
                                         1998                     1997                 1996
<S>                             <C>                     <C>                     <C>              
Offset against mortgage
loan sales and fees             $       2,623,316       $       2,931,394       $       7,173,028
                                -----------------       -----------------       -----------------

Offset against interest                                                 
income on loans                 $       3,113,946       $       2,122,727       $       1,937,403
                                -----------------       -----------------       -----------------

Capitalized as part of                                                  
loans held for sale and                                             
loans held for investment       $       10,401,221      $       7,073,322       $         946,673
                                -----------------       -----------------       -----------------

</TABLE>
68
<PAGE>
22. Fair Value of Financial Instruments

The estimated fair value of the Company's  financial  instruments as of December
31 are as follows:
<TABLE>
<CAPTION>
                                                             1998                            1997
                                                                  Estimated                         Estimated
                                                   Carrying         Fair           Carrying           Fair
                                                    Value           Value           Value             Value
                                                  -----------      -----------     ------------     -----------
                                                                           (In thousands)
<S>                                              <C>             <C>              <C>              <C>     
Financial Assets

Cash and due from banks                          $    51,805      $    51,805     $    32,607      $    32,607
Money market investments                              51,924           51,924          35,759           35,759
Mortgage loans held for sale                         117,126          117,126          46,885           48,345
Mortgage-backed securities held for trading          450,546          450,546         400,457          400,457
Investment securities held for trading                  --               --               581              581
Investment and mortgage-backed securities
available for sale                                   143,137          143,137         116,961          116,961
Investment  in Federal Home Loan Bank  stock          11,405           11,405           4,906            4,906
Investment and mortgage-backed securities
  held to maturity                                    34,599           34,640          44,019           43,876
Loans, net                                         1,073,668        1,108,435         765,059          791,309
Accounts receivable                                   22,171           22,171          17,704           17,704
                                                 -----------      -----------     ------------     -----------

Financial Liabilities

Deposits:
 Non-interest bearing demand                     $   172,500      $   172,500     $     91,504     $    91,504
        Savings and NOW accounts                     222,856          212,797         174,923          156,859
        Certificates of deposit                      609,912          620,383         454,394          460,001
Securities sold under agreements to
    repurchase                                       471,422          471,422         443,134          443,134
Notes payable                                        191,748          194,191         108,453          110,567
Advances from FHLB                                   121,000          118,856          42,000           41,971
Other secured borrowings                                --               --            34,359           35,019
Accounts payable and accrued liabilities              28,020           28,020          15,872           15,872
Subordinated notes                                      --               --             3,250            3,304
Unrecognized financial instruments -
    Interest rate swap agreements in a net
      receivable (payable) position*             $      (111)     $     1,855     $       (14)     $       370
                                                 -----------      -----------     ------------     -----------
</TABLE>


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


                                                                              69
<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,  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.
<PAGE>
        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, 1998. 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 made 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.


70
<PAGE>
23. 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, 1998 and
1997 and the results of its  operations and its cash flows for each of the three
years ended on December 31,1998 (since inception in 1996):
<TABLE>
<CAPTION>

Statements of Financial Condition
                                                                        December 31,
                                                                    1998            1997
                                                               ------------     ------------
<S>                                                            <C>              <C>         
Assets

Cash                                                           $    145,314     $    622,478
Investment in R-G Premier Bank, at equity                       114,706,236       47,407,575
Investment in R&G Mortgage, at equity                           106,307,634       59,542,059
Investment in preferred stock of R-G Premier Bank, at cost             --         30,100,000
Accounts receivable - subsidiaries                                   69,828          423,178
Other assets                                                         32,234             --
                                                               ------------     ------------

        Total assets                                           $221,261,246     $138,095,290
                                                               ------------     ------------

Liabilities and Stockholders' Equity

Other liabilities and accrued expenses                         $     99,387     $     41,374
Stockholders' equity                                            221,161,859      138,053,916
                                                               ------------     ------------

        Total liabilities and stockholders equity              $221,261,246     $138,095,290
                                                               ------------     ------------
</TABLE>
Statements of Income
<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                         1998           1997           1996
                                                                   -----------     -----------     -----------
<S>                                                                <C>             <C>             <C>      
Income:
        Dividends from subsidaries                                 $ 2,404,787     $ 2,953,225     $      --
        Management fees                                                384,638         423,178            --
        Interest on certificates of deposit                               --              --            12,164
                                                                   -----------     -----------     -----------

                                                                     2,789,425       3,376,403          12,164
                                                                   -----------     -----------     -----------

Operating expenses                                                     349,669         384,707          10,811
                                                                   -----------     -----------     -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                                <C>             <C>             <C>      
Income before income taxes and equity
 in undistributed earnings of subsidiaries                           2,439,756       2,991,696           1,353
Income taxes                                                             9,477           8,079             338
                                                                   -----------     -----------     -----------

Income before equity in undistributed earnings of subsidiaries       2,430,279       2,983,617           1,015
Equity in undistributed earnings of subsidiaries                    31,603,518      20,513,595      13,198,501
                                                                   -----------     -----------     -----------

Net income                                                         $34,033,797     $23,497,212     $13,199,516
                                                                   -----------     -----------     -----------

</TABLE>
 
The Holding Company had no operations  during the years ended December 31, 1998,
1997 and 1996.

The  principal  source of income for the Holding  Company  consists of dividends
from R-G  Premier  Bank of Puerto  Rico and R-G  Mortgage  Corp.  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.


                                                                              71
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
                                                                                               Year ended December 31,
Cash flows from operating activities:                                                 1998               1997              1996
                                                                                  ------------      ------------      ------------
<S>                                                                               <C>               <C>               <C>         
        Net income                                                                $ 34,033,797      $ 23,497,212      $ 13,199,516

        Adjustments  to  reconcile  net  income to cash  provided  by  operating
         activities:
        Equity in undistributed earnings of subsidiaries                           (31,603,518)      (20,513,595)      (13,198,501)
        Decrease (increase) in accounts receivable - subsidiaries                      353,350          (423,178)             --
        Increase in other assets                                                       (32,234)             --                --
        Increase (decrease) in other liabilities and accrued expenses                   58,013            26,505          (357,482)
                                                                                  ------------      ------------      ------------

Total adjustments                                                                  (31,224,389)      (20,910,268)      (13,555,983)
                                                                                  ------------      ------------      ------------

        Net cash provided by (used in) operating activities                          2,809,408         2,586,944          (356,467)
                                                                                  ------------      ------------      ------------
Cash flows from investing activities:
        Capital contribution to subsidiary                                             (12,000)             --                --
        Cash investments in R-G Premier Bank
          pursuant to acquisition of Fajardo Federal                                  (639,322)             --                --
        Investment in Bank common stock                                            (19,370,000)             --                --
        Investment in R-G Mortgage common stock                                   (29,055, 000)             --                --
  Collections of advances to subsidiaries                                                 --             290,000              --
        Dividends on common stock from subsidiaries                                  2,122,649              --                --
        Purchase of investment in preferred stock of the Bank                             --                --         (30,100,000)
                                                                                  ------------      ------------      ------------
        Cash (used in) provided by investing activities                            (46,953,673)          290,000       (30,100,000)
                                                                                  ------------      ------------      ------------
Cash flows from financing activities:
        Proceeds from issuance of common
         stock on initial public offering                                                 --                --          31,072,748
        Net proceeds from issuance of Series A preferred stock                      48,079,134              --                --
        Cash dividends                                                              (4,412,033)       (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 provided by (used in) financing activities                         43,667,101        (3,065,386)       31,267,387
                                                                                  ------------      ------------      ------------
Net (decrease) increase in cash                                                       (477,164)         (188,442)          810,920
Cash at beginning of year                                                              622,478           810,920              --
                                                                                  ------------      ------------      ------------

Cash at end of year                                                               $    145,314      $    622,478      $    810,920
                                                                                  ------------      ------------      ------------
</TABLE>
72
<PAGE>
24. Industry Segments

The  following  summarized  financial  information  presents  the results of the
Company's  operations for the three year period ended  December  31,1998 for its
traditional banking and mortgage banking activities:
<TABLE>
<CAPTION>
                                                                              1998                                   1997           
                                                                                            Segment                 Segment         
                                                                Bank        Mortgage        Totals           Bank          Mortgage 
                                                            -----------   -----------     -----------    -----------     -----------
<S>                                                         <C>           <C>             <C>            <C>             <C>        
Revenues:
Net interest income after provision for
                loan losses                                 $31,279,733   $ 6,093,378     $37,373,111    $25,543,992     $ 4,615,774
Non-interest income:
                Net gain on origination and sale of loans    12,542,960    22,120,015      34,662,975      5,436,030      18,596,684
                Net gain on sales of investment securities
                available for sale                              278,028             -         278,028        107,430              --
                Loan administration and servicing fees             --      17,340,415      17,340,415             --      14,079,644
                Service charges, fees and other               5,433,556     1,383,042       6,816,598      3,431,241       1,142,014
                                                            -----------   -----------     -----------    -----------     -----------

                                                             49,534,277    46,936,850      96,471,127     34,518,693      38,434,116
Non-interest expenses:

        Salaries and employee benefits                        9,169,292     7,925,491      17,094,783      7,654,668       5,998,086
        Office occupancy and equipment                        5,917,063     3,069,890       8,986,953      4,660,583       2,470,914
        SAIF special assessment                                    --            --              --             --              --  
        Other                                                11,232,822    13,420,625      24,653,447      9,564,598       9,799,853
                                                            -----------   -----------     -----------    -----------     -----------

                                                             26,319,177    24,416,006      50,735,183     21,879,849      18,268,853
                                                            -----------   -----------     -----------    -----------     -----------
Income before income taxes (and minority
                interest in 1996)                           $23,215,100   $22,520,844     $45,735,944    $12,638,844     $20,165,263
                                                            -----------   -----------     -----------    -----------     -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                                    1996                            
                                                                    Segment                                         Segment
                                                                    Totals           Bank         Mortgage          Totals  
                                                                 -----------     -----------     -----------     -----------  
<S>                                                              <C>             <C>             <C>             <C>          

Revenues:                                                  
Net interest income after provision for                          $30,159,766     $20,883,829     $ 3,781,152     $24,664,981  
                loan losses                                                                                                   
Non-interest income:                                              24,032,714       1,364,373      10,344,601      11,708,974  
                Net gain on origination and sale of loans                                                                     
                Net gain on sales of investment securities           107,430         641,798            --           641,798  
                available for sale                                14,079,644            --        13,696,224      13,696,224  
                Loan administration and servicing fees             4,573,255       4,140,238         436,385       4,576,623  
                Service charges, fees and other                                                                               
                                                                 -----------     -----------     -----------     -----------  
                                                                  72,952,809      27,030,238      28,258,362      55,288,600  
                                                                 -----------     -----------     -----------     -----------   
Non-interest expenses:                                                                                                        
                                                                  13,652,754       6,062,221       4,731,080      10,793,301  
        Salaries and employee benefits                             7,131,497       3,551,035       1,980,094       5,531,129  
        Office occupancy and equipment                                  --         2,508,380            --         2,508,380  
        SAIF special assessment                                   19,364,451       8,537,206       8,155,520      16,692,726  
        Other                                                                                                                 
                                                                 -----------     -----------     -----------     -----------  
                                                                  40,148,702      20,658,842      14,866,694      35,525,536  
                                                                 -----------     -----------     -----------     ----------- 
Income before income taxes (and minority                           
                interest in 1996)                                $32,804,107     $ 6,371,396     $13,391,668     $19,763,064
                                                                 -----------     -----------     -----------     -----------  


</TABLE>
The  following is a  reconciliation  of reportable  segment  revenues and income
before income taxes to the Company's consolidated amounts:

Revenues:
<TABLE>
<CAPTION>
                                                                  Year ended December 31,            
                                                        1998              1997              1996
                                                    ------------      ------------      ------------

<S>                                                 <C>               <C>               <C>         
Total revenues for reportable segments              $ 96,471,127      $ 72,952,809      $ 55,288,600
Elimination of intersegment revenues                  (2,627,742)       (1,687,981)       (1,371,572)
                                                    ------------      ------------      ------------

Total consolidated revenues                         $ 93,843,385      $ 71,264,828      $ 53,917,028
                                                    ------------      ------------      ------------
</TABLE>
                                                    
                                                                              73
<PAGE>
Income before income taxes:
<TABLE>
<CAPTION>
                                                                        Year ended December 31, 
                                                                 1998              1997              1996
                                                            ------------      ------------      ------------

<S>                                                          <C>               <C>               <C>         
Total income before income taxes for reportable segments     $ 45,735,944      $ 32,804,107      $ 19,763,064
Elimination of intersegment profits                              (311,962)         (190,320)          (92,152)
Unallocated corporate expenses                                   (349,669)         (384,707)          (10,811)
                                                             ------------      ------------      ------------

Income before income taxes, consolidated                     $ 45,074,313      $ 32,229,080      $ 19,660,101
                                                             ------------      ------------      ------------

</TABLE>
Total assets of the Company among its industry  segments and a reconciliation of
reportable  segment  assets to the  Company's  consolidated  total  assets as of
December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
                                                        December 31,
                                                  1998                 1997
                                           ---------------      ---------------
<S>                                        <C>                  <C>            
Assets:
Bank                                       $ 1,413,439,195      $ 1,032,117,561
Mortgage                                       656,598,961          485,674,090
                                           ---------------      ---------------

Total assets for reportable segments         2,070,038,156        1,517,791,651
Parent company assets                               32,234                 --
Elimination of intersegment balances           (25,288,862)          (7,046,135)
                                           ---------------      ---------------

Consolidated total assets                  $ 2,044,781,528      $ 1,510,745,516
                                           ---------------      ---------------

</TABLE>
<PAGE>
25. 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)
                                                                1998
                                          March 31      June 30      Sept. 30      Dec. 31
                                          --------      -------      --------      -------

<S>                                       <C>           <C>           <C>           <C>     
Interest income                           $ 27,776      $ 29,946      $ 33,179      $ 33,395
Interest expense                           (17,790)      (19,134)      (21,443)      (21,956)
Net interest income                          9,986        10,812        11,736        11,439
Provision for loan losses                   (1,500)       (1,500)       (1,500)       (2,100)
Income before income taxes                  10,736         9,994        12,347        11,997
Income tax expense                          (3,256)       (2,023)       (3,810)       (1,951)
Net income                                   7,480         7,971         8,537        10,046
Net income per common share - Basic       $    .26      $    .28      $    .29      $    .32
Net income per common share - Diluted     $    .26      $    .27      $    .28      $    .31

<CAPTION>
                                                                  1997
                                           March 31      June 30      Sept. 30      Dec. 31
                                           --------      -------      --------      -------
<S>                                       <C>           <C>           <C>           <C>     

Interest income                           $ 20,408      $ 22,764      $ 26,213      $ 27,950
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       $    .18      $    .19      $    .21      $    .25
Net income per common share - Diluted     $    .17      $    .19      $    .21      $    .24


</TABLE>
74