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

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

                  For the fiscal year ended: December 31, 1998

                                       OR

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

                          Commission File No.: 0-21137

                            R&G FINANCIAL CORPORATION
--------------------------------------------------------------------------------

             (Exact name of registrant as specified in its charter)


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


              280 Jesus T. Pinero Avenue
            Hato Rey, San Juan, Puerto Rico                      00918
------------------------------------------------------------------------------- 

                 (Address of Principal                        (Zip Code)
                  Executive Offices)

       Registrant's telephone number, including area code: (787) 758-2424

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [ X  ]   No   [   ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
<PAGE>
As of March 19, 1999,  the aggregate  value of the  9,747,017  shares of Class B
Common  Stock of the  Registrant  issued and  outstanding  on such  date,  which
excludes  399,074 shares held by all directors and officers of the Registrant as
a group,  was  approximately  $184.6  million.  This figure is based on the last
known trade price of $18.9375 per share of the Registrant's Class B Common Stock
on March 19, 1999.

Number of  shares  of Class B Common  Stock  outstanding  as of March 19,  1999:
10,146,091

                       DOCUMENTS INCORPORATED BY REFERENCE

         List hereunder the following  documents  incorporated  by reference and
the Part of the Form 10-K into which the document is incorporated:

(1)      Portions of the Annual Report to Stockholders for the fiscal year ended
         December 31, 1998 are incorporated into Parts II and IV.

(2)      Portions of the  definitive  proxy  statement for the Annual Meeting of
         Stockholders are incorporated into Part III.
<PAGE>
PART I

Item 1. Business

                                     General

         R&G Financial  Corporation  (the  "Company" or "R&G  Financial") is the
holding company for R&G Mortgage  Corp., a Puerto Rico mortgage  banking company
("R&G  Mortgage")  and R-G Premier Bank of Puerto Rico, a Puerto  Rico-chartered
commercial bank (the "Bank"). The Company was organized under Puerto Rico law in
March 1996. In July 1996, the Company  acquired the 88.1% ownership  interest in
the common stock of the Bank and the 100% ownership interest in the common stock
of R&G Mortgage held by the Company's  Chairman of the Board and Chief Executive
Officer,  Mr. Victor J. Galan, in exchange for shares of Class A common stock of
the  Company.  In August 1996,  the Company  conducted  an  underwritten  public
offering of Class B common stock.  In December  1996,  the Company  acquired the
remaining 11.9% ownership  interest in the common stock of the Bank. At December
31 1998,  the  Company  had total  consolidated  assets of $2.0  billion,  total
consolidated  borrowings of $784.2 million,  total consolidated deposits of $1.0
billion,  and total consolidated  stockholders'  equity of $221.2 million. As of
December 31,  1998,  the Company had  18,440,556  Class A shares of common stock
outstanding,  all of which were owned by Mr. Galan, and 10,146,091 publicly held
Class B shares of common stock outstanding.

         Mr. Victor J. Galan, the Chairman of the Board, Chief Executive Officer
and controlling shareholder of R&G Financial,  originally organized R&G Mortgage
in 1972.  In February  1990,  R&G  Mortgage  acquired a 74.7%  interest in a two
branch federal savings and loan  association with total assets of $52.9 million,
which was re-named  R&G Federal  Savings  Bank.  Recognizing  the  complementary
operational  aspects  and  cross  selling  opportunities  that are  inherent  in
operating  both a mortgage bank and banking  institution,  during 1990 Mr. Galan
successfully  integrated  both the Bank's and R&G Mortgage's  operations,  which
structure has since been  emulated in Puerto Rico.  Embarking on a retail branch
expansion  strategy,  the Bank in 1993  acquired a two branch  savings  and loan
association  with total assets of $78.6 million,  in June 1995,  acquired from a
commercial bank $77.2 million in deposits and, after  consolidation,  six branch
offices and, in 1998,  acquired a one branch  federal  savings bank. In November
1994, the Bank converted to a Puerto Rico-chartered commercial bank and took its
present name.

         R&G Financial  competes for business in Puerto Rico by providing a wide
range of financial  services to  residents of all of Puerto  Rico's major cities
through  branch  offices and mortgage  banking  facilities at 23 locations.  The
operations of both R&G Mortgage and the Bank have expanded  substantially during
the 1990's, due in large part to R&G Mortgage's  emergence as the second largest
originator of loans secured by  single-family  residential  properties in Puerto
Rico.  During  the  year  ended  December  31,  1998,  R&G  Mortgage  originated
approximately 27.9% of all single-family  residential loans originated in Puerto
Rico,  which has resulted in  significant  growth in its servicing  portfolio as
well as facilitated rapid expansion of the Bank's franchise and operations.  R&G
Mortgage's servicing portfolio has increased 307.8% since December 31, 1991 and,
at December 31, 1998, R&G Mortgage serviced  approximately  95,946 accounts with
an aggregate loan

                                        1
<PAGE>
balance of $4.8 billion.  The Bank's asset size,  which amounted to $1.4 billion
at December 31, 1998,  has increased by $1.36 billion since R&G Mortgage  became
affiliated  with the Bank in February 1990,  while the branch office network had
increased from two to 20 offices.

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

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

         R&G  Mortgage.  R&G Mortgage  was  originally  organized  in 1972.  R&G
Mortgage is engaged  primarily in the business of  originating  first and second
mortgage loans on single family  residential  properties  secured by real estate
which are  either  insured  by the  Federal  Housing  Administration  ("FHA") or
guaranteed  by the  Veterans  Administration  ("VA").  To a lesser  extent,  R&G
Mortgage   is   also   engaged   in   the   origination   of    subprime--credit
quality--residential mortgage loans through a wholly owned subsidiary ("Champion
Mortgage Corporation") which commenced operations in October 1997. Approximately
20%  of  loan  originations  made  by  Champion  Mortgage  consist  of  subprime
residential  mortgage loans. Pursuant  to  agreements  entered  into between R&G
Mortgage and the Bank,  non-conforming  conventional  single-family  residential
loans and  consumer  loans  secured by real  estate are also  originated  by R&G
Mortgage  for   portfolio   retention   by  the  Bank.   The  Bank  retains  the
non-conforming  conventional single-family residential loans because these loans
generally  do not satisfy  resale  guidelines  of  purchasers  in the  secondary
mortgage market, primarily because of size or other underwriting  technicalities
at the time of  origination.  Jumbo  loans may be packaged  into  collateralized
mortgage   obligations   ("CMOs")   and  sold  while  loans  with   underwriting
technicalities  may be cured through payment  experience and subsequently  sold.
During the years ended December 31, 1998, 1997 and 1996, R&G Mortgage originated
a total  of  $914.1  million,  $598.2  million  and  $448.1  million  of  loans,
respectively.  These  aggregate  originations  include  loans  originated by R&G
Mortgage  directly  for the Bank of $450.6  million,  $285.8  million and $211.3
million during such respective periods, or 49.3%, 47.8% and 47.2%, respectively,
of total originations.

         R&G Mortgage pools FHA/VA loans into  mortgage-backed  securities which
are guaranteed by the Government National Mortgage Association  ("GNMA"),  which
securities are sold to

                                        2
<PAGE>
securities broker dealers and other investors.  Conventional loans may either be
sold  directly to agencies  such as the Federal  National  Mortgage  Association
("FNMA") and the Federal Home Loan Mortgage Corporation  ("FHLMC") or to private
investors,  or which may be pooled  into FNMA- or  FHLMC-backed  mortgage-backed
securities  which are  generally  sold to  investors.  During  the  years  ended
December  31, 1998,  1997 and 1996,  R&G Mortgage  sold $493.0  million,  $246.1
million  and  $244.8  million  of  loans  respectively,  which  includes  loans
securitized  and sold but does not include loans  originated  for the Bank.  R&G
Mortgage  generally  retains the  servicing  function  with respect to the loans
which have been  securitized and sold. R&G Mortgage is subject to regulation and
examination  by the FHA,  FNMA,  FHLMC,  GNMA, VA, the Department of Housing and
Urban  Development  ("HUD")  and the  Office of the  Commissioner  of  Financial
Institutions ("OCFI") of Puerto Rico.

         R-G Premier Bank. The Bank's principal  business consists of attracting
deposits from the general public and  tax-advantaged  funds from eligible Puerto
Rico  corporations  and using such  deposits,  together with funds obtained from
other  sources,  to originate  (through R&G Mortgage) and purchase loans secured
primarily  by   residential   real  estate  in  Puerto  Rico,  and  to  purchase
mortgage-backed  and other  securities.  To a lesser extent but with  increasing
emphasis  over the past few  years,  the Bank also  originates  consumer  loans,
commercial  business  loans and loans  secured by commercial  real estate.  Such
loans offer higher  yields,  are generally for shorter terms and  facilitate the
Bank's  provision of a full range of financial  services to its  customers.  The
Bank also  offers  trust  services  through  its Trust  Department.  Total  loan
originations by the Bank during the years ended December 31, 1998, 1997 and 1996
amounted to $129.1 million, $89.0 million and $122.8 million,  respectively. The
Bank's  deposits  are  insured  by the  Federal  Deposit  Insurance  Corporation
("FDIC")  and it is regulated  and  examined by the FDIC as its primary  federal
regulatory agency as well as by the OCFI.

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

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

                                        3
<PAGE>
companies.

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

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

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

                           Mortgage Banking Activities

         Loan Originations, Purchases and Sales. During the years ended December
31,  1998,  1997 and 1996,  R&G Mortgage  originated a total of $914.1  million,
$598.2  million  and $448.1  million  of loans,  respectively.  These  aggregate
originations  include loans originated by R&G Mortgage  directly for the Bank of
$450.6  million,  $285.8  million  and $211.3  million  during  the years  ended
December  31,  1998,  1997  and  1996,  respectively,   or  49%,  48%  and  47%,
respectively,  of total  originations.  The loans originated by R&G Mortgage for
the Bank are comprised  primarily of  conventional  residential  loans and, to a
lesser extent, consumer loans secured by real estate.

                                        4
<PAGE>
         R&G Mortgage is engaged to a significant  extent in the  origination of
FHA-insured  and  VA-guaranteed   single-family   residential  loans  which  are
primarily   securitized  into  GNMA  mortgage-backed   securities  and  sold  to
institutional and/or private investors in the secondary market. During the years
ended December 31, 1998, 1997 and 1996, R&G Mortgage  originated $255.6 million,
$280.1  million  and  $222.0  million,  respectively,  of  FHA/VA  loans,  which
represented  28.0%,  46.8% and 49.5%,  respectively,  of total loans  originated
during such respective periods.

         R&G Mortgage also  originates  conventional  single-family  residential
loans which are either insured by private mortgage insurers or do not exceed 80%
of the  appraised  value of the  mortgaged  property.  During  the  years  ended
December 31, 1998, 1997 and 1996, R&G Mortgage originated $610.4 million, $265.9
million  and  $204.9  million,   respectively,   of  conventional  single-family
residential   mortgage   loans.   Substantially   all  conforming   conventional
single-family  residential  loans  are  securitized  and  sold in the  secondary
market,  while  substantially  all  non-conforming   conventional  single-family
residential  loans  are  originated  by R&G  Mortgage  on behalf of the Bank and
either held by the Bank in its  portfolio  or  subsequently  securitized  by R&G
Mortgage and sold in the secondary market. All non-conforming conventional loans
originated  by R&G  Mortgage  through  Champion  Mortgage  are held by  Champion
Mortgage in its portfolio or subsequently sold in the secondary market.

         Non-conforming  loans  generally  consist  of  loans  which,  primarily
because of size or other underwriting  technicalities which may be cured through
seasoning,  do not satisfy the  guidelines for resale of FNMA,  FHLMC,  GNMA and
other private secondary market investors at the time of origination.  Management
believes  that  these  loans  are  essentially  of the same  credit  quality  as
conforming  loans.  During the years ended  December  31,  1998,  1997 and 1996,
non-conforming  conventional  loans represented  approximately 44%, 39% and 42%,
respectively,  of R&G  Mortgage's  total  volume of mortgage  loans  originated,
substantially  all of which were  originated  by R&G  Mortgage  on behalf of the
Bank. During the years ended December 31, 1998, 1997 and 1996, 85.5%,  77.5% and
88.9% of loans  originated  by R&G  Mortgage on behalf of the Bank  consisted of
single-family  residential  loans during such respective  periods.  R&G Mortgage
originates  single-family  residential,  construction and commercial real estate
loans  on  behalf  of the Bank  pursuant  to the  terms  of a Master  Production
Agreement  between R&G Mortgage and the Bank.  See "- Lending  Activities of the
Bank - Origination, Purchase and Sale of Loans."

         While R&G Mortgage makes available a wide variety of mortgage  products
designed to respond to consumer needs and competitive  conditions,  it currently
emphasizes  15-year and 30-year  conventional  first  mortgages  and 15-year and
30-year  FHA loans and VA loans.  Substantially  all of such  loans  consist  of
fixed-rate  mortgages.  The  average  loan size for  FHA/VA  mortgage  loans and
         conventional mortgage loans is approximately $78,000 and $70,000,
respectively.

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

                                        5
<PAGE>
on the property.

         R&G  Mortgage's  loan  origination  activities are conducted out of its
offices and mortgage banking centers. Residential mortgage loan applications are
attributable  to walk-in  customers,  existing  customers  and  advertising  and
promotion,  referrals from real estate brokers and builders, loan solicitors and
mortgage  brokers.   At  December  31,  1998,  R&G  Mortgage  employed  65  loan
originators who are compensated in part on a commission basis.

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

         R&G Mortgage also  purchases FHA loans and VA loans from other mortgage
bankers for resale to institutional investors and other investors in the form of
GNMA  mortgage-backed  securities.  R&G  Mortgage's  strategy is to increase its
servicing  portfolio primarily though internal  originations  through its branch
network and, to a lesser  extent,  purchases  from third  parties.  Purchases of
loans from other  mortgage  bankers in the  wholesale  loan market is  generally
limited to FHA loans and VA loans and such purchases provide R&G Mortgage with a
source of low cost  production  that allows R&G Mortgage to continue to increase
the size of its servicing  portfolio.  R&G Mortgage  purchased  $207.1  million,
$158.5  million and $45.6 million of loans from third  parties  during the years
ended December 31, 1998, 1997 and 1996, respectively.



                                        6
<PAGE>
         The following table sets forth loan  originations,  purchases and sales
by R&G Mortgage for the periods indicated.
<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                              ------------------------------------------ 
                                                 1998             1997           1996
                                              ----------      ----------      ---------- 
                                                        (Dollars in Thousands)
<S>                                           <C>             <C>             <C>       
Loans Originated For the Bank:
  Conventional loans(1):
    Number of loans                                4,918           3,390           2,756
    Volume of loans                           $  402,447      $  233,488      $  190,072
  FHA/VA loans:
    Number of loans                                 --              --              --
    Volume of loans                                 --              --              --
  Consumer loans(2):
    Number of loans                                2,268           2,318           1,004
    Volume of loans                           $   48,155      $   52,287      $   21,208
  Total loans:
    Number of loans                                7,186           5,708           3,760
    Volume of loans                           $  450,602      $  285,775      $  211,280
    Percent of total volume                           40%             35%             43%
For Third Parties:
  Conventional loans(1):
    Number of loans                                2,989             444             214
    Volume of loans                           $  207,937      $   32,419      $   14,835
  FHA/VA loans:
    Number of loans                                3,298           4,107           3,117
    Volume of loans                           $  255,601      $  280,053      $  221,967
  Total loans:
    Number of loans                                6,287           4,551           3,331
    Volume of loans                           $  463,538      $  312,472      $  236,802
    Percent of total volume                           41%             39%             48%
                                              ----------      ----------      ----------
      Total loan originations                 $  914,140      $  598,247      $  448,082
                                              ==========      ==========      ==========
Loans Purchased For R&G Mortgage:
  Number of loans                                  2,506           2,052             583
  Volume of loans (3)                         $  207,070      $  158,456      $   45,604
  Percent of total volume                             19%             20%              9%
GNMA Pools Purchased for R&G Mortgage:
  Volume of loans                             $     --        $   51,537      $      --
  Percent of total volume                           --                 6%            --
                                              ----------      ----------      ----------
    Total loan originations and purchases     $1,121,210      $  808,240      $  493,686
                                              ==========      ==========      ==========
</TABLE>

                                        7
<PAGE>
<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                 ------------------------------------------------
                                                                    1998                 1997             1996
                                                                 -----------           --------          --------
                                                                                (Dollars in Thousands)  
<S>                                                               <C>                 <C>               <C>     
Loans Sold To Third Parties(3):
  Conventional loans(1):
    Number of loans..................................                  2,513                429               178
    Volume of loans..................................               $194,909            $39,495          $ 12,560
  FHA/VA loans:
    Number of loans..................................                  4,413              2,775             3,564
    Volume of loans .................................               $298,108           $206,643          $232,254
  Total loans:
    Number of loans..................................                  6,926              3,204             3,742
    Volume of loans..................................               $493,017           $246,138          $244,814
    Percent of total volume..........................                     44%                30%               50%
                                                                 -----------           --------          --------
Adjustments:
  Loans originated for the Bank......................              ($450,602)         $(285,775)        $(211,280)
  Loans amortization.................................                 (1,479)            (5,086)           (7,224)
                                                                  -----------          --------          --------
Increase in loans held for sale......................              $ 176,112           $271,241         $  30,368
                                                                    ========            =======          ========
Average Initial Loan Origination Balance:
  The Bank:
    Conventional loans(1)............................              $      82          $      69         $      69
    FHA/VA loans.....................................                     --                 --                --
  Third Parties:
    Conventional loans(1)............................              $      70          $      73         $      69
    FHA/VA loans.....................................                     78                 68                71
  Total Average Initial Balance:
    Conventional loans(1)............................              $      77          $      69         $      69
    FHA/VA loans.....................................                     78                 68                71
Refinancings(5):
  The Bank...........................................                     74%                70%               67%
  Third Parties......................................                     44%                31%               24%

</TABLE>
<PAGE>

(1)  Includes non-conforming loans.
(2)  All such loans were secured by real estate except for $1.6 million in 1996.
(3)  Includes loans converted into mortgage-backed securities.
(4)  As a percent of the total dollar volume of mortgage loans originated by R&G
     Mortgage for the Bank (excluding  consumer loans) or third parties,  as the
     case  may be.  In the case of the  Bank,  refinancings  do not  necessarily
     represent refinancings of loans previously held by the Bank.

                                       8
<PAGE>
         All loan  originations,  regardless of whether  originated  through R&G
Mortgage or purchased from third  parties,  must be  underwritten  in accordance
with R&G Mortgage's  underwriting criteria,  including  loan-to-appraised  value
ratios, borrower income qualifications, debt ratios and credit history, investor
requirements,  necessary  insurance  and property  appraisal  requirements.  R&G
Financial's  underwriting standards also comply with the relevant guidelines set
forth by HUD, VA, FNMA,  FHLMC,  bank regulatory  authorities,  private mortgage
investment conduits and private mortgage insurers, as applicable. R&G Mortgage's
underwriting   personnel,   while  operating  out  of  its  loan  offices,  make
underwriting  decisions  independent of R&G Mortgage's mortgage loan origination
personnel.

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

         R&G Mortgage  customarily  sells most of the loans that it  originates,
except  for  those  originated  on  behalf of the Bank  pursuant  to the  Master
Production  Agreement.  See  "-Lending  Activities  of the  Bank -  Origination,
Purchases and Sales of Loans." The loans  originated by R&G Mortgage  (including
FHA loans, VA loans and conventional loans) are secured by real property located
in Puerto Rico and constitute "eligible  investments" which results in favorable
tax treatment  under U.S. and Puerto Rico tax laws. See "- Puerto Rico Secondary
Mortgage  Market and Favorable Tax  Treatment."  During the years ended December
31, 1998,  1997 and 1996, R&G Mortgage sold $493.0  million,  $246.1 million and
$244.8 million of loans, respectively, which includes loans securitized and sold
but does not include  loans  originated  by R&G  Mortgage on behalf of the Bank.
With  respect to such loan sales,  $298.1  million or 60.5%,  $206.6  million or
83.9% and $232.3 million or 94.9% consisted of  GNMA-guaranteed  mortgage-backed
securities  of FHA loans or VA loans  packaged  into pools of $1 million or more
($2.5  million  to $5  million  for  serial  notes as  described  below).  These
securities were sold primarily to securities  broker-dealers and other investors
in Puerto Rico.

         Certain GNMA-guaranteed mortgage-backed securities sold by R&G Mortgage
are in the

                                        9
<PAGE>
form of GNMA serial notes which permit the investor to receive  interest monthly
and to select among several expected  maturity dates of the notes included in an
issue, with each maturity having a specific yield. GNMA serial notes are sold in
pools of $2.5 million to $5 million.  GNMA serial  notes are sold to  securities
broker-dealers  in  packages   consisting  of  notes  of  different  yields  and
maturities,  which range from one to 30 years and have an average maturity of 12
years,  taking  into  account  historical  experience  with  prepayments  of the
underlying mortgages. The rates on the serial notes or GNMA pools must be 1/2 of
1% less than the rates on the mortgages  comprising the pool. Upon completion of
the necessary  processing,  the GNMA-guaranteed  mortgage-backed  securities are
either  offered to the public  directly  through the Bank's Trust  Department or
indirectly  through securities  broker-dealers.  During the years ended December
31, 1998,  1997 and 1996, R&G Mortgage  issued GNMA  mortgage-backed  securities
totaling  approximately  $371.1  million,  $397.2  million  and $236.4  million,
respectively,  including $160.0 million,  $335.5 million and $235.5 million GNMA
serial notes, respectively.

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

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

         Each CMO normally  consists of several  classes of senior,  subordinate
and residual certificates. The residual certificates evidence a right to receive
payments on the  mortgage  loans after  payment of all  required  amounts on the
senior and subordinate  certificates then due. Some form of credit  enhancement,
such as an insurance policy,  letter of credit or subordination,  will generally
be used to increase  the credit  rating of the senior  certificates  and thereby
improve  their  marketability.  R&G  Mortgage and the Bank have made no sales of
CMOs  in  securitization  transactions  during  1996  through  1998.  When  such
transactions  are made,  either the Bank or R&G Mortgage  generally  retains the
residual certificates issued by the respective trusts as well as the subordinate
certificates issued in such transactions.  As of December 31, 1998, R&G Mortgage
held residual certificates issued in CMO transactions involving R&G Mortgage and
the Bank  with a fair  value of $7.1  million.  In  addition,  the Bank held CMO
subordinated  certificates and residual certificates from one of its issues with
a  fair  value  of  $9.7  million  at  December  31,  1998.  See  "- 


                                       10
<PAGE>
Investment  Activities."  Currently a liquid secondary market for subordinate or
residual  certificates  does not exist in  Puerto  Rico.  The value of  residual
certificates  is subject to substantial  fluctuations  as a result of changes in
prevailing interest rates.  However, such residuals often exhibit elasticity and
convexity  characteristics  which  R&G  Financial  can  utilize  to hedge  other
components  of its  portfolio.  See  "Management's  Discussion  and  Analysis of
Financial Condition and Results of Operation"  incorporated by reference in Item
7 hereof.
 
         While R&G Mortgage's exchanges of mortgage loans into agency securities
and sales of mortgage  loans are generally  made on a  non-recourse  basis,  R&G
Mortgage  also  engages in the sale or exchange of mortgage  loans on a recourse
basis.  In the past,  recourse sales often  involved the sale of  non-conforming
loans to FNMA, FHLMC and local financial  institutions.  R&G Financial estimates
the fair value of the retained  recourse  obligation at the time mortgage  loans
are sold.  Normally,  the fair  value of any  retained  recourse  is  immaterial
because  R&G  Mortgage  is able to resell  repurchased  loans for at least their
carrying costs. Accordingly, as of December 31, 1998, R&G Financial did not deem
it necessary to establish  reserves for possible  losses related to its recourse
obligations.  At December  31, 1998,  R&G  Mortgage  had loans in its  servicing
portfolio with provisions for recourse in the principal  amount of approximately
$507.4 million,  as compared to $374.4 million and $290.9 million as of December
31, 1997 and 1996, respectively.  Of the recourse loans existing at December 31,
1998,  approximately  $416.1 million in principal amount consisted of loans sold
to  FNMA  and  FHLMC  and  converted  into  mortgage-backed  securities  of such
agencies,  and  approximately  $91.3  million in principal  amount  consisted of
non-conforming loans sold to other private investors.

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

         Loan  Servicing.  R&G Mortgage  acquires  servicing  rights through its
mortgage loan  originations  (including  originations on behalf of the Bank) and
purchases from third parties.  When R&G Mortgage sells the mortgage loans it has
originated or purchased,  it generally  retains the rights to service such loans
and receives the related  servicing  fees.  Loan servicing  includes  collecting
principal  and  interest and  remitting  the same to the holders of the mortgage
loans or mortgage-backed securities to which such mortgage loan relates, holding
escrow  funds for the  payment  of real  estate  taxes and  insurance  premiums,
contacting  delinquent  borrowers,  supervising  foreclosures  in the  event  of
unremedied defaults and generally administering the loans. R&G Mortgage receives
annual loan servicing fees ranging from 0.25% to 0.50% of the declining

                                       11
<PAGE>
outstanding  principal  balance of the loans serviced plus any late charges.  In
general,  R&G Mortgage's servicing agreements are terminable by the investor for
cause without penalty or after payment of a termination fee ranging from 0.5% to
1.0% of the outstanding principal balance of the loans being serviced.

R&G Mortgage's servicing portfolio has grown significantly over the past several
years.  At December 31, 1998, R&G Mortgage's  servicing  portfolio  totaled $4.8
billion and consisted of a total of 95,946 loans.  These amounts  include a $1.1
billion  servicing  portfolio  acquired from another  financial  institution  in
November 1998 comprised of approximately 32,400 loans. At December 31, 1998, R&G
Mortgage's servicing portfolio included $754.6 million of loans serviced for the
Bank  or  15.6%  of the  total  servicing  portfolio.  Substantially  all of the
mortgage  loans in R&G  Mortgage's  servicing  portfolio  are  secured by single
(one-to-four)  family  residences.  All of  R&G  Mortgage's  mortgage  servicing
portfolio is comprised  of  mortgages  secured by real estate  located in Puerto
Rico.

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

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


                                       12
<PAGE>
         The following table sets forth certain information  regarding the total
loan servicing portfolio of R&G Mortgage for the periods indicated.
<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                         ------------------------------------------ 
                                                            1998             1997           1996
                                                         ----------      ----------     ----------- 
                                                                   (Dollars in Thousands)
<S>                                                      <C>             <C>             <C>       
Composition of Servicing Portfolio at End of Period:
  Conventional and other mortgage loans(1)               $2,105,290      $1,148,739      $  971,327
  FHA/VA loans                                            2,722,508       1,852,149       1,578,842
                                                         ----------      ----------      ----------
    Total servicing portfolio(2)                         $4,827,798      $3,000,888      $2,550,169
                                                         ==========      ==========      ==========
Activity in the Servicing Portfolio:
  Beginning servicing portfolio                          $3,000,888      $2,550,169      $2,298,200
  Add: Loan originations and purchases                    1,285,570         778,126         506,696
         Servicing of portfolio loans acquired (3)        1,109,825           5,301          36,478
  Less: Sale of servicing rights                               --              --            42,080
         Run-offs(4)                                        568,485         332,708         249,125
                                                         ----------      ----------      ----------
  Ending servicing portfolio                             $4,827,798      $3,000,888      $2,550,169
                                                         ==========      ==========      ==========
  Number of loans serviced(5)                                95,946          56,442          50,979
  Average loan size(5)                                   $       50      $       53      $       50
  Average servicing fee rate(5)                               0.526%          0.532%          0.532%
</TABLE>
--------------

(1)      Includes non-conforming loans.

(2)      At the dates shown, included $754.6 million,  $448.9 million and $323.8
         million of loans serviced for the Bank, respectively, which constituted
         15.6%, 15.0% and 12.70% of the total servicing portfolio, respectively.

(3)      Includes a $1.1  billion  servicing  portfolio  acquired  from  another
         financial  institution  in Puerto Rico in November  1998  comprised  of
         approximately 32,400 loans.

(4)      Run-off  refers  to  regular  amortization  of loans,  prepayments  and
         foreclosures.  Includes transfers in 1998 and 1997 of $67.7 million and
         $49.0   million,   respectively,   of  mortgage   loans  to   financial
         institutions  who  acquired certain commercial  banks whose  loans were
         being serviced by R&G Mortgage.

(5)      At December 31, 1998,  R&G Mortgage was servicing  10,285 loans for the
         Bank with an  average  loan  size of  approximately  $73,000  and at an
         average  servicing  rate of  0.263%.  Amounts  include  late and  other
         miscellaneous charges.


                                       13
<PAGE>
         The following table sets forth certain information at December 31, 1998
regarding the number of, and aggregate  principal balance of, the mortgage loans
serviced by R&G Mortgage for the Bank and for third parties at various  mortgage
interest rates.
<TABLE>
<CAPTION>
                                                                  At December 31, 1998
                             ------------------------------------------------------------------------------------------------- 
                                   Loans Serviced                       Loans Serviced                        Total Loans
                                    for the Bank                       for Third Parties                        Serviced
                             --------------------------------     ------------------------------       ----------------------- 
                             Number of          Aggregate          Number of          Aggregate         Number of      Aggregate    
     Mortgage Interest Rate   Loans        Principal Balance        Loans        Principal Balance      Loans      Principal Balance
                               -----        -----------------        -----        -----------------      -----       ---------------
                                   (Dollars in Thousands)             (Dollars in Thousands)              (Dollars in Thousands)
<S>                            <C>              <C>                <C>               <C>                <C>             <C>        
Less than 7.00%............      182            $   19,476           5,756           $   401,867         5,938          $   421,343
7.00% - 7.49%..............    3,077               260,333          18,223               969,935        21,300            1,230,268
7.50% - 7.99%..............    4,219               310,808          22,091             1,205,890        26,310            1,516,698
8.00% - 8.49%..............    1,183                89,362          13,455               667,753        14,638              757,115
8.50% - 8.99%..............      777                45,544          13,319               484,507        14,096              530,051
9.00% - 9.49%..............      293                12,798           4,578               131,498         4,871              144,296
9.50% - 9.99%..............      169                 6,572           3,781                95,970         3,950              102,542
10.00% - 10.49%............      116                 3,151           1,520                41,498         1,636               44,649
10.50% - 10.99%............      141                 3,442             929                24,198         1,070               27,640
11.00% or more.............      128                 3,137           2,009                50,059         2,137               53,196
                              ------             ---------         -------           -----------        ------           -----------
                              10,285             $ 754,623          85,661           $ 4,073,175        95,946           $4,827,798
                              ======             =========          ======           ===========        ======           ==========
</TABLE>
         The amount of principal  prepayments  on mortgage loans serviced by R&G
Mortgage was $96.5 million,  $87.2 million and $72.5 million for the years ended
December 31, 1998, 1997 and 1996, respectively.  This represented  approximately
2.6%, 2.9% and 2.8% of the aggregate principal amount of mortgage loans serviced
during  such  periods.  The  primary  means used by R&G  Mortgage  to reduce the
sensitivity  of its servicing  fee income to changes in interest and  prepayment
rates is the  development of a strong internal  origination  capability that has
allowed R&G Mortgage to continue to increase the size of its servicing portfolio
even in times of high prepayments.

         Servicing   agreements  relating  to  the  mortgage-backed   securities
programs of FNMA,  FHLMC and GNMA,  and  certain  other  investors,  require R&G
Mortgage to advance funds to make  scheduled  payments of  principal,  interest,
taxes and insurance, if such payments have not been received from the borrowers.
During the years ended  December 31, 1998,  1997 and 1996,  the monthly  average
amount of funds  advanced by R&G Mortgage  under such  servicing  agreements was
$2.1 million, $1.4 million and $1.3 million, respectively. Funds advanced by R&G
Mortgage pursuant to these arrangements are generally  recovered by R&G Mortgage
within 30 days.

         In connection  with its loan servicing  activities,  R&G Mortgage holds
escrow funds for the payment of real estate taxes and  insurance  premiums  with
respect to the mortgage  loans it services.  At December 31, 1998,  R&G Mortgage
held $116.6 million of such escrow funds, $109.9 million of which were deposited
in the Bank and $6.7  million  of which  were  deposited  with  other  financial
institutions. The escrow funds deposited with the Bank lower its overall cost of
funds and is a means of compensating it for processing mortgages checks received
by  R&G  Mortgage,  while  the  escrow  funds  deposited  with  other  financial
institutions serve as part of R&G Mortgage's compensating

                                       14
<PAGE>
balances  which  permit R&G  Mortgage  to borrow  funds  from such  institutions
(pursuant  to  certain  warehouse  lines of credit) at rates that are lower than
would otherwise apply. See "- Sources of Funds - Borrowings."

         The degree of risk associated with a mortgage loan servicing  portfolio
is  largely  dependent  on the  extent  to  which  the  servicing  portfolio  is
non-recourse or recourse. In non-recourse  servicing,  the principal credit risk
to the  servicer  is the  cost of  temporary  advances  of  funds.  In  recourse
servicing,  the  servicer  agrees  to share  credit  risk  with the owner of the
mortgage loans such as FNMA or FHLMC or with an insurer or guarantor.  Losses on
recourse  servicing  occur  primarily  when  foreclosure  sale  proceeds  of the
property  underlying  a defaulted  mortgage  are less than the then  outstanding
principal  balance and accrued  interest of such  mortgage  loan and the cost of
holding and disposing of such  underlying  property.  At December 31, 1998,  R&G
Mortgage was  servicing  mortgage  loans with an aggregate  principal  amount of
$507.4 million on a recourse basis. During the last three years, losses incurred
due to recourse servicing have not been significant.

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

         The market value of, and earnings from,  R&G  Mortgage's  mortgage loan
servicing portfolio may be adversely affected if mortgage interest rates decline
and mortgage loan prepayments  increase. In a period of declining interest rates
and accelerated prepayments,  income generated from R&G Mortgage's mortgage loan
servicing  portfolio may also decline.  Conversely,  as mortgage  interest rates
increase,  the market value of R&G Mortgage's  mortgage loan servicing portfolio
may be positively affected.  See Note 1 to R&G Financial's Notes to Consolidated
Financial  Statements  for a  discussion  of SFAS No. 125 and the  treatment  of
servicing rights, incorporated by reference into Item 8 hereof.


                                       15
<PAGE>
         Mortgage Loan Delinquencies and Foreclosures. The following table shows
the delinquency  statistics for R&G Mortgage's  servicing portfolio at the dates
indicated.
<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                               -------------------------------------------------------------------------------------
                                                          1998                         1997                          1996
                                               --------------------------   --------------------------    --------------------------
                                                              Percent of                   Percent of                   Percent of
                                               Number of      Servicing     Number of      Servicing      Number of       Servicing
                                                Loans          Portfolio       Loans        Portfolio        Loans       Portfolio
                                                -----          ---------       -----        ---------        -----       ---------
<S>  <C>                                        <C>               <C>         <C>             <C>           <C>            <C>  
Loans delinquent for:
  30-59 days..........................          6,276             6.54%       2,531           4.48%         2,775           5.44%
  60-89 days..........................          1,545             1.61          572           1.01            533           1.05
  90 days or more.....................          1,696             1.77          778           1.38            646           1.27
                                                -----             ----        -----           ----          -----           ----
    Total delinquencies(1)............          9,517             9.92%       3,881           6.87%         3,954           7.76%
                                                =====             ----        =====           ====          =====           ====
Foreclosures pending(2)...............            993             1.03%         681           1.21%           693           1.36%
                                               ======             ----        =====           ====          =====           ====
</TABLE>
-----------------            

(1)      Includes  at  December  31,  1998,  an  aggregate  of $66.4  million of
         delinquent loans serviced for the Bank, or 1.38% of the total servicing
         portfolio and $9.7 million of delinquent  loans held in R&G  Mortgage's
         own portfolio.

(2)      At  December  31,  1998,  the Bank had  foreclosures  pending  on $11.4
         million of loans being  serviced  by R&G  Mortgage,  which  constituted
         0.24% of the servicing portfolio. R&G Mortgage had foreclosures pending
         on $2.7  million  of loans it is  servicing  for its own  portfolio  at
         December 31, 1998.


         While delinquency rates in Puerto Rico are generally higher than in the
mainland  United States,  these rates are not  necessarily  indicative of future
foreclosure  rates or losses on  foreclosures.  Real estate owned as a result of
foreclosures  ("REO") related to R&G Mortgage's  mortgage banking business arise
primarily  through  foreclosure  on mortgage  loans  repurchased  from investors
either  because  of breach of  representations  or  warranties  or  pursuant  to
recourse arrangements. As of December 31, 1998, 1997 and 1996, R&G Mortgage held
REO with a book value of approximately $128,000,  $165,000 and $0, respectively.
Sales of REO  resulted in gains to R&G  Mortgage of $26,000 and $145,000 for the
years  ended  December  31, 1998 and 1997,  respectively,  and a net loss to R&G
Mortgage of $57,000 for the year ended  December  31,  1996.  There is no liquid
secondary market for the sale of R&G Mortgage's REO.
<PAGE>
         With respect to mortgage loans securitized  through GNMA programs,  R&G
Mortgage is fully insured as to principal by the FHA and VA against  foreclosure
loans. As a result of these  programs,  foreclosure on these loans had generated
no loss of  principal as of December 31, 1998.  R&G  Mortgage,  however,  incurs
about $3,000 per loan  foreclosed in interest and legal charges  during the time
between payment by R&G Mortgage and FHA or VA reimbursement. For the years ended
December  31, 1998,  1997 and 1996,  total  expenses  related to FHA or VA loans
foreclosed amounted to $286,000, $189,000 and $323,000,  respectively.  Although
FNMA and FHLMC are

                                       16
<PAGE>
obligated to reimburse R&G Mortgage for principal and interest payments advanced
by R&G Mortgage as a servicer  (except for recourse  servicing),  the funding of
delinquent  payments or the exercise of foreclosure rights involves costs to R&G
Mortgage which may not be recouped.  Such nonrecouped expenses have to date been
immaterial.

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

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

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

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

                                       17
<PAGE>
their  grants  under the 1998 TIA,  an amount of IDI equal to the IDI derived in
the taxable  year  preceding  the change to the 1998 TIA (or,  if  greater,  the
average  annual IDI by taking the three years,  out of the previous  five years,
where the highest  amount of IDI is derived)  will continue to be subject to the
tax treatment,  including Tollgate Taxes,  provided in the Industrial  Incentive
Act under which their grant was originally issued.

         Most Exempt Companies are United States  corporations  which operate in
Puerto  Rico  under  Section  936 of the Code.  Corporations  that meet  certain
requirements and elect the benefits of Section 936 ("Section 936  Corporations")
are  entitled to credit  against  their  United  States  corporate  income tax a
portion of such tax  attributable  to income  derived from  sources  outside the
United States from the active conduct of a trade or business  within Puerto Rico
or from the sale or  exchange  of  substantially  all assets  used in the active
conduct of such trade or business ("Active Business Income").

         The tax  credit  available  under  Section  936 (the "936  Credit")  is
limited by the amount of credit allowed with respect to Active  Business  Income
under one of two  alternatives  to be  selected  at the option of the  taxpayer.
Under the first  alternative,  the limit is equal to a fixed  percentage  of the
amount of tax credit allowable under prior law (the "Fixed Percentage  Method").
This fixed  percentage  commenced at 60% for taxable years beginning in 1994 and
was reduced by 5% per year until 1998.  For taxable years  beginning on or after
January 1, 1998,  such  percentage  is 40%.  Under the second  alternative  (the
"Economic Activity  Method"),  which is based on the amount of economic activity
conducted by the  taxpayer in Puerto Rico,  the credit may not exceed the sum of
the following three  components:  (i) 60% of the qualified  possession wages and
the allocable fringe benefits paid by the taxpayer,  (ii) applicable percentages
of certain  depreciation  deductions  claimed for  regular  tax  purposes by the
taxpayer with respect to qualified  tangible property and (iii) a portion of the
possession  income taxes paid by the taxpayer except where the taxpayer uses the
profit-split method for determining its income.

         The SBJPA repealed  Section 936, but provided  grandfather  rules under
which a Section 936 Corporation that had elected the benefits of the Section 936
Credit and which was engaged in active trade or business  within  Puerto Rico on
October 13,  1995 (an  "Existing  Claimant")  would be eligible to claim the 936
Credit  attributable  to Active Business  Income during a transition  period.  A
corporation  may also  qualify as an Existing  Claimant  if it acquires  all the
assets of a trade or business of a  corporation  that meets the active  trade or
business requirement and the election requirement is satisfied.

         The  amount  and  computation  method  of the  936  Credit  during  the
transition  period  depends upon whether a Section 936  Corporation is using the
Economic  Activity  Method  or  the  Fixed  Percentage  Method.  A  Section  936
Corporation that is an Existing  Claimant and uses the Economic  Activity Method
may continue to determine its 936 Credit  attributable to Active Business Income
as under present law for taxable  years  beginning  after  December 31, 1995 and
before January 1, 2002. For taxable years  beginning after December 31, 2001 and
before  January 1, 2006,  a Section 936  Corporation's  Active  Business  Income
eligible for the 936 Credit is subject to a cap,  described below. A Section 936
Corporation  that is an  Existing  Claimant  and is using the  Fixed  Percentage
Method may continue to determine its 936 Credit  attributable to Active Business
Income under the existing rules for taxable years  beginning  after December 31,
1995 and before January 1, 1998. For

                                       18
<PAGE>
taxable years  beginning after December 31, 1997 and before January 1, 2006, the
Section 936  Corporation's  Active  Business Income that is eligible for the 936
Credit is also subject to a cap. For taxable years  beginning after December 31,
2005, the 936 Credit attributable to Active Business Income is terminated. Under
the cap rules for both the  Economic  Activity  Method and the Fixed  Percentage
Method,  the income eligible for the 936 Credit is limited to the "adjusted base
period income" of the Section 936 Corporation. Computation of the "adjusted base
period income" involves three steps: (i) the Section 936 Corporation base period
years  are  determined  (which  are,   generally,   three  of  the  Section  936
Corporation's five most recent years ending before October 14, 1995,  determined
by disregarding the taxable years in which the Section 936 Corporation's  Active
Business Income was the highest and the lowest);  (ii) Active Business Income of
the Section 936  Corporation  in each of the base period  years is adjusted  for
inflation;  and (iii) the  income in the base  period  years,  as  adjusted  for
inflation, is averaged.

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

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

         In the absence of the 936 Credit and as a means of  continuing to defer
U.S. income taxation,  subsidiaries of multi-national  companies operating under
Section 936 of the Code may transfer their operations to a corporation organized
under  Puerto Rico law,  or under the laws of foreign  countries.  Generally,  a
non-U.S.  corporation is not subject to United States income taxes to the extent
it does not derive U.S.  source income and may be entitled to defer U.S.  income
taxation until dividends are repatriated to the United States. Under Section 954
of the Code,  foreign  subsidiaries  of  multi-national  companies  whose parent
corporation is incorporated in the U.S. are not subject to federal income tax on
profits on products which they manufacture. Though a Puerto Rico corporation, or
a foreign corporation  operating in Puerto Rico, is subject to local Puerto Rico
taxes,  the benefits under the Industrial  Incentives  Acts and the 1998 TIA for
companies that manufacture

                                       19

<PAGE>
or provide services in Puerto Rico, would continue to be available. In addition,
under  Section  901 and 902 of the Code and subject to certain  limitations  and
exceptions,  U.S.  shareholders  of a Puerto Rico or other non-U.S.  corporation
would be allowed to claim a foreign tax credit  with  respect to income tax paid
in Puerto Rico.  United States  shareholders  are also not required to recognize
income  attributable  to  manufacturing  operations  of a  Puerto  Rico or other
non-U.S.  corporation  as a general rule under  Subpart F of the Code.  However,
under Section 367 of the Code,  multi-national  corporations  may be required to
recognize  income  upon the  transfer  of  operations  to a Puerto Rico or other
non-U.S.  corporation,  depending  upon the  nature  and  value of the  property
transferred. Several multi-national 936 Corporations have taken such steps since
the  legislation  with respect to Section 936 was first  introduced  in the U.S.
Congress.

         In July 1997,  the  Government  of Puerto Rico amended the tax law that
provided  Puerto Rico income tax exemption on interest  income  generated by FHA
and VA  loans  secured  by real  estate  property  located  in  Puerto  Rico and
mortgage-backed  securities secured by such mortgage loans ("GNMAs").  Under the
amended law, FHA and VA loans closed prior to August 1, 1997 will continue to be
exempt.  The interest income on FHA and VA mortgage loans originated on or after
August 1,  1997 for  purposes  other  than to  finance  the  acquisition  of new
housing,  and GNMAs secured by such loans, are no longer exempt, and are taxable
at a preferential  17% tax rate to individuals and certain  taxpayers other than
corporations. FHA and VA loans to finance the purchase of new housing, and GNMAs
secured by such  loans,  continue  to be exempt.  Individuals  who are bona fide
residents of Puerto Rico are also not subject to United  States  federal  income
tax on income from Puerto Rico sources,  including  interest income derived from
mortgage  loans  originated  in Puerto Rico whose  mortgagors  are  residents of
Puerto Rico. The exemption for interest earned on qualifying FHA loans, VA loans
and GNMA  certificates  tends to increase the demand for these  products and the
price R&G Financial may obtain upon their sale.  There can be no assurance  that
the tax exempt  treatment  of  interest  on FHA and VA loans will not be further
reviewed or modified in the future.

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


                         Lending Activities of the Bank

         General.  At December 31, 1998, R&G Financial's loans  receivable,  net
totaled $1.1 billion, which represented 52.5% of R&G Financial's $2.0 billion of
total  assets.  At December 31, 1998,  $1.1 billion or 99.9% of R&G  Financial's
loans receivable,  net were held by the Bank. The principal category of loans in
R&G  Financial's  portfolio  are  conventional  loans which are secured by first
liens on single-family  residences.  Conventional  residential real estate loans
are loans which are neither  insured by the FHA nor partially  guaranteed by the
VA. At December  31,  1998,  $734.8  million or 99.9% of R&G  Financial's  first
mortgage  single-family  residential loans consisted of conventional  loans. The
other principal  categories of loans in R&G Financial's  loans  receivable,  net
portfolio are second mortgage residential real estate loans, construction loans,
commercial real estate loans, commercial business loans and consumer loans.


                                       20
<PAGE>
         Loan  Portfolio  Composition.   The  following  table  sets  forth  the
composition  of R&G  Financial's  loan  portfolio  by type of loan at the  dates
indicated.  Except as noted in the footnotes to the table,  all of the loans are
held in the Bank's loan portfolio.
<TABLE>
<CAPTION>
                                                                                       December 31,
                                                      ---------------------------------------------------------------------------
                                                               1998                        1997                     1996        
                                                      ----------------------     ----------------------   -----------------------
                                                                                                          
                                                       Amount       Percent       Amount        Percent     Amount       Percent   
                                                       ------       -------       ------        -------     ------       -------   
                                                                          (Dollars in Thousands)
<S>                                                  <C>             <C>         <C>             <C>       <C>           <C>
Residential real  estate - first                                                
  mortgage(1)............................                                                     
Residential real estate - second                     $ 735,795        66.87%     $476,729         61.25%   $370,876       60.75%   
  mortgage...............................                                                                                          
Residential construction.................               18,634         1.69        17,831          2.29      15,757        2.58    
Commercial construction and land                        23,280         2.12        13,367          1.72       5,351         .88    
  acquisition............................                                                                                          
Commercial real estate...................               15,353         1.39         5,785           .74       5,700         .93    
Commercial business......................              117,151        10.65        81,722         10.50      69,514       11.39    
Consumer loans:                                         46,532         4.23        39,128          5.03      31,063        5.09    
  Loans secured by deposits..............                                                                                          
  Real estate secured consumer loans.....               17,225         1.56        12,472          1.60       9,409        1.54    
  Unsecured consumer loans...............               85,055         7.73        81,252         10.44      42,893        7.03    
                                                        41,381         3.76        50,103          6.43      59,864        9.81 
                                                     ---------       ------       -------        ------     -------      ------ 
    Total loans receivable...............            1,100,406       100.00%      778,389        100.00%    610,427      100.00%
                                                     ---------       ------       -------        ------     -------      ------ 
                                                                                                                                
Less:                                                        
  Allowance for loan losses..............               (8,055)                    (6,772)                   (3,332)            
  Loans in process.......................              (18,170)                    (6,218)                   (2,430)            
  Deferred loan fees.....................                 (166)                       172                        41             
  Unearned interest......................                 (347)                      (512)                     (955)    
                                                    ----------                   --------                   --------          
                                                       (26,738)                   (13,330)                   (6,676)  
                                                    ----------                   --------                   --------            
                                                                                                                
  Loans receivable, net(2)...............           $1,073,668                   $765,059                   $603,751  
                                                    ==========                   ========                   ========  
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                    December 31,
                                                 -------------------------------------------------
                                                           1995                     1994
                                                 ----------------------     ----------------------
                                                   Amount      Percent      Amount         Percent
                                                   ------      -------      ------         -------
<S>                                               <C>            <C>       <C>                <C>     
Residential real  estate - first         
  mortgage(1)............................         $282,498       58.23%    $194,707           62.14%  
Residential real estate - second                                                                      
  mortgage...............................           14,372        2.96       13,298            4.24   
Residential construction.................           15,046        3.10       12,039            3.84   
Commercial construction and land                                                                      
  acquisition............................            5,523        1.14        1,062            0.34   
Commercial real estate...................           61,862       12.74       43,029           13.73   
Commercial business......................           27,816        5.74       14,102            4.51   
Consumer loans:                                                                                       
  Loans secured by deposits..............            7,497        1.55        5,829            1.86   
  Real estate secured consumer loans.....           33,381        6.88       29,279*           9.34*  
  Unsecured consumer loans...............           37,180        7.66             *               *  
                                                   -------      ------      --------       --------   
    Total loans receivable...............          485,175      100.00%      313,345         100.00%  
                                                   -------      ------      --------       --------   
Less:                                                                                                 
  Allowance for loan losses..............           (3,510)                  (2,887)                  
  Loans in process.......................           (5,727)                  (5,945)                  
  Deferred loan fees.....................             (266)                    (424)                  
  Unearned interest......................           (1,831)                  (2,475)                  
                                                   -------                 --------                          
                                                   (11,334)                 (11,731)                  
                                                   -------                 --------                   
  Loans receivable, net(2)...............         $473,841                 $301,614                   
                                                   =======                 ========                   
                                                 
</TABLE>

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

(2)  Does not  include  mortgage  loans held for sale of $117.1  million,  $46.9
     million,  $54.5  million,  $21.3  million and $22.0 million at December 31,
     1998, 1997, 1996, 1995 and 1994, respectively.

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

                                       21
<PAGE>
         Contractual  Principal  Repayments  and Interest  Rates.  The following
table sets forth certain  information  at December 31, 1998 regarding the dollar
amount of loans maturing in R&G  Financial's  total loan portfolio  based on the
contractual terms to maturity. Loans having no stated schedule of repayments and
no stated maturity are reported as due in one year or less.
<TABLE>
<CAPTION>
                                                      Due 1-5 years   Due 5 or more                   
                                                          after        years after                          
                                         Due 1 year    December 31,   December 31,                          
                                          or less          1998           1998          Total(1)   
                                         ----------     ----------     ----------     ----------
                                                               (In Thousands)
<S>                                      <C>            <C>            <C>            <C>       
Residential real estate                  $      197     $    4,711     $  749,521     $  754,429
Residential construction                     23,269             11           --           23,280
Commercial real estate(2)                    32,671         60,581         39,252        132,504
Commercial business                          17,763         23,327          5,442         46,532
Consumer:
  Loans on savings                           12,013          4,915            297         17,225
  Real estate secured consumer loans          2,309          6,904         75,842         85,055
  Unsecured consumer loans                   12,318         25,278          3,785         41,381
                                         ----------     ----------     ----------     ----------
Total(3)                                 $  100,540     $  125,727     $  874,139     $1,100,406
                                         ==========     ==========     ==========     ==========
</TABLE>

(1)  Amounts have not been reduced for the allowance  for loan losses,  loans in
     process, deferred loan fees or unearned interest.

(2)  Includes  $15.4 million of  commercial  construction  and land  acquisition
     loans. (3) Does not include mortgage loans held for sale.


                                       22

<PAGE>
         The  following  table sets forth the dollar  amount of total  loans due
after one year from December 31, 1998, as shown in the  preceding  table,  which
have fixed interest rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
                                                                                 Floating or
                                                         Fixed rate            adjustable-rate               Total
                                                         ----------            ---------------               -----
                                                                               (In Thousands)
<S>                                                       <C>                       <C>                      <C>     
Residential real estate.....................              $754,429                  $     --                 $754,429
Construction................................                23,280                        --                   23,280
Commercial real estate(1)...................                49,119                    83,385                  132,504
Commercial business.........................                39,091                     7,441                   46,532
Consumer:
  Loans on savings..........................                17,225                        --                   17,225
  Real estate secured consumer loans........                85,055                        --                   85,055
  Unsecured consumer loans..................                38,964                     2,417                   41,381
                                                        ----------                   -------              -----------
   Total....................................            $1,007,163                   $93,243               $1,100,406
                                                        ==========                   =======              = =========
</TABLE>
---------------

(1)  Includes  $15.4 million of  commercial  construction  and land  acquisition
     loans.


         Scheduled  contractual  amortization  of  loans  does not  reflect  the
expected term of R&G Financial's  loan  portfolio.  The average life of loans is
substantially less than their contractual terms because of prepayments and, with
respect to  conventional  loans  originated  for the Bank after  February  1994,
due-on-sales  clauses,   which  give  R&G  Financial  the  right  to  declare  a
conventional loan immediately due and payable in the event,  among other things,
that the borrower  sells the real property  subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when current
mortgage  loan  rates are  higher  than rates on  existing  mortgage  loans and,
conversely,  decrease  when  rates on  existing  mortgage  loans are lower  than
current  mortgage  loan  rates  (due  to  refinancing  of  adjustable-rate   and
fixed-rate loans at lower rates).  Under the latter  circumstance,  the weighted
average  yield on  loans  decreases  as  higher-yielding  loans  are  repaid  or
refinanced at lower rates.


                                       23
<PAGE>
         Origination,  Purchase  and Sales of Loans.  The  following  table sets
forth  loan  originations,  purchases  and  sales by the  Bank  for the  periods
indicated.
<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                ------------------------------------------------- 
                                                                    1998               1997                 1996    
                                                                 ---------           --------            --------
 <S>                                                             <C>                  <C>                 <C>          
                                                                          (Dollars in Thousands)
Loan originations:
Loans originated by R&G Mortgage:
  Residential mortgages................................          $  385,416           $221,451            $187,845
  Commercial mortgages.................................                 265                555                  --
  Residential construction.............................              16,766             11,482               2,227
  Consumer loans.......................................              48,155             52,287              21,208
    Total loans originated by R&G Mortgage.............             450,602            285,775             211,280
Other loans originated:
  Commercial real estate...............................              54,426             37,129              36,140
  Commercial business..................................              26,191             15,393              33,318
  Construction and development.........................              11,365                 --                  --
Consumer loans:
  Loans on deposit.....................................              27,172             19,711              13,988
  Real estate secured consumer loans...................                  --                 --                  80
  Unsecured consumer loans.............................               9,970             16,742              39,312
    Total other loans originated.......................             129,124             88,975             122,838
  Loans purchased(1)...................................             175,735             60,646               8,047
    Total loans originated and purchased...............             755,461            435,396             342,165
  Loans sold...........................................            (282,005)          (118,234)            (49,726)
  Loan principal reductions............................            (142,560)          (134,166)           (114,792)
  Net increase before other items, net.................             330,896            182,996             177,647
  Loans securitized and transferred to
    mortgage-backed securities.........................                  --                 --             (43,673)
  Net increase in loan portfolio.......................           $ 330,896           $182,996            $133,974
</TABLE>
--------------

(1)      Comprised of conventional,  commercial real estate and secured consumer
         loans purchased from other financial  institutions  aggregating  $164.4
         million, $8.7 million and $2.6 million, respectively, in the year ended
         December 31, 1998, and conventional, commercial real estate and secured
         consumer loans purchased from other financial institutions  aggregating
         $54.0 million, $4.6 million and $2.0 million, respectively, in the year
         ended December 31, 1997, and conventional  loans of $8.1 million in the
         year ended December 31, 1996.

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

                                       24
<PAGE>
         Pursuant to the Master Production  Agreement,  R&G Mortgage will assist
the Bank in  meeting  its loan  production  targets  and goals by,  among  other
things,  (i)  advertising,  promoting and marketing to the general public;  (ii)
interviewing  prospective borrowers and conducting the initial processing of the
requisite loan applications, consistent with the Bank's underwriting guidelines;
and (iii)  providing  personnel and facilities  with respect to the execution of
loan agreements  approved by the Bank. R&G Mortgage  performs the foregoing loan
origination  services on behalf of the Bank with respect to residential mortgage
loans,  some commercial real estate loans and  construction  loans. R&G Mortgage
receives from the Bank 75% of the applicable  loan  origination fee with respect
to loans  originated by R&G Mortgage on behalf of the Bank pursuant to the terms
of the Master  Production  Agreement.  During the years ended December 31, 1998,
1997 and 1996,  R&G  Mortgage  received  $7.5  million,  $5.2  million  and $4.5
million, respectively, of loan origination fees with respect to loans originated
by R&G  Mortgage  on behalf  of the Bank  pursuant  to the  terms of the  Master
Production  Agreement.  These  fees  are  eliminated  in  consolidation  in  R&G
Financial's Consolidated Financial Statements.  See also "- General - Affiliated
Transactions" and "Regulation - R&G Financial - Limitations on Transactions with
Affiliates."

         The Bank  originates  commercial real estate,  commercial  business and
consumer loans. Applications for commercial real estate, commercial business and
unsecured  consumer  loans are taken at all of the Bank's branch offices and may
be approved by various lending  officers of the Bank within  designated  limits,
which are  established and modified from time to time to reflect an individual's
expertise  and  experience.  All loans in excess of an  individual's  designated
limits are referred to an officer with the requisite authority. In addition, the
Management  Credit  Committee is  authorized  to approve all loans not exceeding
$2.5  million,  and  the  Executive  Committee  of the  Board  of  Directors  is
authorized to approve all loans exceeding $2.5 million.  All loans originated or
purchased by the Bank must be approved by one of the three  committees set forth
above.  Management of the Bank believes that its relatively centralized approach
to  approving  loan   applications   ensures  strict  adherence  to  the  Bank's
underwriting   guidelines   while  still  allowing  the  Bank  to  approve  loan
applications on a timely basis.

         The Bank also  purchases  conventional  loans secured by first liens on
single-family  residential  real estate from unrelated  financial  institutions.
Such loan purchases are underwritten by the Bank pursuant to the same guidelines
as direct loan  originations.  Loans purchased by the Bank are from time to time
securitized  by R&G  Mortgage  and sold by the  Bank.  During  the  years  ended
December 31, 1998,  1997 and 1996,  the Bank  purchased  $175.7  million,  $60.6
million and $8.1 million of loans, respectively.

         During the years ended December 31, 1998,  1997 and 1996, the Bank sold
$282.0 million,  $118.2 million and $49.7 million of loans.  These loans,  which
were primarily  nonconforming  loans at the time of origination,  were generally
sold in packages in privately negotiated transactions with FNMA and FHLMC.

         Pursuant  to the  Master  Purchase  Agreement,  the  Bank  sells to R&G
Mortgage the servicing  rights to all first and second mortgage loans secured by
residential properties which are or will

                                       25

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

         At December 31,1998, R&G Financial's five largest loans-to-one borrower
and their related entities amounted to $9.4 million, $4.8 million, $3.9 million,
$3.0 million and $2.1 million.  The largest loan  concentration is a loan with a
maximum  amount  outstanding  of $5.0  million to a developer  of 188 low income
residential  units in Caguas,  with a balance of $3.6 million as of December 31,
1998.  The second  largest  loan  concentration  consists of a  commercial  loan
participation  with a commercial  bank for the financing of an income  producing
office  building  in the San Juan  metropolitan  area.  The third  largest  loan
concentration  is a commercial  loan for the purchase of an office  building for
the headquarters of a local  contractor.  The fourth largest loan  concentration
represents a refinancing  of various income  producing  properties for fast food
businesses.  The fifth  largest  loan is a loan to a developer of a new shopping
center in Carolina which is in the final stages of completion.

         Single-Family  Residential Real Estate Loans. The Bank has historically
concentrated its lending activities on the origination of loans secured by first
mortgage  liens on existing  single-family  residences.  At December  31,  1998,
$735.8  million or 66.9% of R&G  Financial's  total  loans  held for  investment
consisted  of such  loans,  $734.8  million  or  99.9%  of  which  consisted  of
conventional  loans. The Bank's first mortgage  single-family  residential loans
consist  exclusively of fixed-rate  loans with terms of between 15 and 30 years.
As evidenced by this statistic,  the Puerto Rico residential mortgage market has
not been receptive to long-term adjustable rate mortgage loans.

         The Bank's first mortgage single-family  residential loans typically do
not exceed 80% of the  appraised  value of the  security  property.  Pursuant to
underwriting guidelines adopted by the Board of Directors,  the Bank can lend up
to 95%  of the  appraised  value  of the  property  securing  a  first  mortgage
single-family  residential  loan  provided  the Bank  obtains  private  mortgage
insurance with respect to the top 25% of the loan.

         The  Bank  also  originates   loans  secured  by  second  mortgages  on
single-family  residential  properties.  At December 31, 1998,  $18.6 million or
1.7% of R&G  Financial's  total loans held for  investment  consisted  of second
mortgage loans on  single-family  residential  properties.  The Bank offers such
second  mortgage  loans in  amounts up to  $125,000  for a term not to exceed 15
years. The loan-to-value  ratio of second mortgage loans generally is limited to
75% of the property's appraised value (including the first mortgage).

                                       26
<PAGE>
         Construction  Loans.  In  recent  years,  the Bank has been  active  in
originating  loans to construct  single-family  residences.  These  construction
lending  activities  generally are conducted  throughout  Puerto Rico,  although
loans are  concentrated  in areas  contiguous to Bank branches.  At December 31,
1998,  residential  construction loans amounted to $23.3 million or 2.12% of R&G
Financial's total loans held for investment,  while commercial  construction and
land  acquisition  loans  amounted to $15.4 million or 1.39% of total loans held
for investment.

         The Bank primarily offers  construction  loans to individual  borrowers
for the purpose of constructing  single-family residences.  Substantially all of
the  Bank's   construction   lending  to   individuals   is   originated   on  a
construction/permanent  mortgage  loan basis.  Construction/permanent  loans are
made to individuals who hold a contract with a general contractor  acceptable to
the Bank to construct their personal  residence.  The construction  phase of the
loan  provides  for monthly  payments on an interest  only basis at a designated
fixed rate for the term of the  construction  period,  which  generally does not
exceed nine months. Thereafter, the permanent loan is made at then market rates,
provided  that such rate  shall not be more  than 2%  greater  than the  interim
construction  rate. R&G Mortgage's  construction  loan  department  approves the
proposed contractors and administers the loan during the construction phase. The
Bank's  construction/permanent  loan  program  has  been  successful  due to its
ability to offer borrowers a single closing and, consequently, reduced costs. At
December  31,  1998,  the  Bank's   construction  loan  portfolio  included  242
construction/permanent  loans  with an  aggregate  principal  balance  of  $23.3
million.

         The Bank also  originates  construction  loans to developers to develop
single  family  residential  properties.  During 1998,  the Company  organized a
Construction Loan Department to work primarily with real estate  developers.  At
December 31, 1998, the Bank had two residential  construction  loans outstanding
to develop single-family residences with an aggregate principal balance of $11.1
million.  Commitments for future funding approximate $7.4 million. The loans are
performing in accordance with their terms at December 31, 1998.

         In addition to the foregoing,  at December 31, 1998, the Bank had eight
land  acquisition  loans with  outstanding  balances  ranging  from  $190,000 to
$1,236,000,  and an  aggregate  balance  of $4.2  million,  which  were  made in
connection with projects to construct single-family residences. The Bank and the
financial institution which made the interim construction loan have entered into
an  agreement  pursuant  to  which  the Bank is to be paid a  percentage  of the
proceeds from each home as it is released upon  construction  and sale. The Bank
expects to make the permanent  construction loan on some of these projects.  The
Bank does not expect to be active in this business.

         The  Bank   intends  to  continue  to  increase  its   involvement   in
single-family  residential  construction lending. Such loans afford the Bank the
opportunity  to increase the interest rate  sensitivity  of its loan  portfolio.
Construction  lending is generally  considered to involve a higher level of risk
as  compared  to  permanent  single-family   residential  lending,  due  to  the
concentration  of principal in a limited  number of loans and  borrowers and the
effects of general economic  conditions on real estate  developers and managers.
Moreover,  a  construction  loan can  involve  additional  risks  because of the
inherent difficulty in estimating both a property's value at completion

                                       27
<PAGE>
of the project and the estimated costs (including  interest) of the project. The
nature of these loans is such that they are generally more difficult to evaluate
and monitor.  The Bank has taken steps to minimize the foregoing risks by, among
other  things,  limiting  its  construction  lending  primarily  to  residential
properties.  In addition,  the Bank has adopted  underwriting  guidelines  which
impose stringent  loan-to-value  (80% with respect to single-family  residential
real estate),  debt service and other  requirements for loans which are believed
to involve higher elements of credit risk and by working with builders with whom
it has established  relationships  or knowledge  thereof.  At December 31, 1998,
$441,000 of the Bank's construction loans were classified as non-performing.

         Commercial Real Estate Loans.  The Bank also originates  mortgage loans
secured by  commercial  real estate.  At December 31,  1998,  $117.2  million or
10.65% of R&G  Financial's  total loans held for  investment  consisted  of such
loans.  As of such date,  the  Bank's  commercial  real  estate  loan  portfolio
consisted  of  approximately  942 loans  with an  average  principal  balance of
$124,000. At December 31, 1998, $6.5 million of R&G Financial's  commercial real
estate loans were classified as nonperforming.

         Commercial  real  estate  loans  originated  by the Bank are  primarily
secured by office  buildings,  retail  stores,  warehouses  and general  purpose
industrial  space.  Although terms vary,  commercial real estate loans generally
are  amortized  over a period of 7-15 years and have  maturity  dates of five to
seven  years.  The Bank will  originate  these loans with  interest  rates which
adjust monthly in accordance with a designated  prime rate plus a margin,  which
generally is negotiated at the time of origination. Such loans will have a floor
but no ceiling on the amount by which the rate of  interest  may adjust over the
loan term.  Loan-to-value  ratios on the Bank's commercial real estate loans are
currently  limited to 80% or lower.  As part of the  criteria  for  underwriting
commercial real estate loans, the Bank generally  requires a debt coverage ratio
(the ratio of net cash from  operations  before  payment of debt service to debt
service)  of  1.30 or  more.  It is  also  the  Bank's  general  policy  to seek
additional  protection to mitigate any weaknesses identified in the underwriting
process.  Additional  coverage  may  be  provided  through  mortgage  insurance,
secondary  collateral  and/or  personal  guarantees  from the  principals of the
borrower.

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

         Commercial   Business   Loans.   Beginning  in  1991,  the  Bank  began
emphasizing  commercial  business  loans,  including  working  capital  lines of
credit, inventory and accounts receivable loans,

                                       28
<PAGE>
equipment financing (including equipment leases), term loans, insurance premiums
loans and loans  guaranteed by the Small Business  Administration.  Depending on
the collateral pledged to secure the extension of credit,  maximum loan to value
ratios are 75% or less,  with  exceptions  permitted  to a maximum of 80%.  Loan
terms  may vary  from one to 15  years.  The  interest  rates on such  loans are
generally  variable and are indexed to a designated  prime rate,  plus a margin.
The Bank also generally  obtains personal  guarantees from the principals of the
borrowers.  At December 31, 1998,  commercial  business  loans amounted to $46.5
million or 4.2% of total loans held for investment.  Although the Bank has begun
to increase its emphasis on commercial  business  lending,  management  does not
currently  anticipate that its portfolio of commercial  business loans will grow
significantly as a percentage of the total loan portfolio.

         Consumer Loans. The Bank has begun to emphasize the origination of real
estate  secured  consumer  loans in order to provide a full  range of  financial
services to its  customers and because such loans  generally  have shorter terms
and higher  interest  rates than other  mortgage  loans.  At December  31, 1998,
$143.7  million or 13.1% of R&G  Financial's  total  loans  held for  investment
consisted  of consumer  loans.  This amount is  comprised  mostly of real estate
secured consumer loans (which are originated by R&G Mortgage), but the Bank also
offers loans  secured by deposit  accounts,  credit card loans and other secured
and unsecured  consumer loans. Most of the Bank's consumer loans are secured and
have been primarily obtained through newspaper  advertising,  although loans are
also obtained from existing and walk-in  customers.  Although the Bank has begun
to increase its emphasis on collateralized consumer lending, management does not
currently   anticipate   that  its   portfolio  of  consumer   loans  will  grow
significantly as a percentage of the total loan portfolio.

         The Bank  currently  offers loans  secured by deposit  accounts,  which
amounted  to $17.2  million at  December  31,  1998.  Such loans are  originated
generally  for up to  90% of the  account  balance,  with a hold  placed  on the
account restricting the withdrawal of the account balance.  The Bank offers real
estate  secured  loans  in  amounts  up to  75% of the  appraised  value  of the
property,  including the amount of any existing prior liens. Real estate secured
consumer loans have a maximum term of 10 years, which may be extended within the
sole  discretion of the Bank,  and an interest rate which is set at a fixed rate
based on market  conditions.  The Bank  secures  the loan with a first or second
mortgage on the property and will originate the loan even if another institution
holds the first  mortgage.  At December 31, 1998,  real estate secured  consumer
loans totaled $85.1  million.  In November  1995,  the Bank began issuing credit
cards in its own name.  At December 31, 1998,  credit card  receivables  totaled
$3.6 million.

         Consumer loans  generally have shorter terms and higher  interest rates
than mortgage  loans but generally  involve more credit risk than mortgage loans
because of the type and nature of the  collateral  and,  in certain  cases,  the
absence of collateral.  In addition,  consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss,  divorce,  illness and personal  bankruptcy.  In
many cases,  any repossessed  collateral for a defaulted  consumer loan will not
provide an adequate source of repayment of the outstanding  loan balance because
of improper  repair and  maintenance of the underlying  security.  The remaining
deficiency may not warrant further substantial collection efforts

                                       29
<PAGE>
against the borrower.  At December 31, 1998, $6.7 million of consumer loans were
classified as non-performing.

Asset Quality

         General.  When a borrower  fails to make a required  payment on a loan,
R&G Financial  attempts to cure the  deficiency  by contacting  the borrower and
seeking payment. Contacts are generally made between the 10th and 15th day after
a  payment  is  due.  In most  cases,  deficiencies  are  cured  promptly.  If a
delinquency extends beyond 15 days, the loan and payment history is reviewed and
efforts are made to collect the loan. While R&G Financial  generally  prefers to
work with borrowers to resolve such problems,  when the account  becomes 90 days
delinquent  in  the  case  of  mortgage  loans,  R&G  Financial  does  institute
foreclosure or other proceedings,  as necessary, to minimize any potential loss.
In the case of consumer  loans,  the Bank refers the file for collection  action
after 60 days.

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

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


                                       30
<PAGE>
         The  following  table  sets forth the  amounts  and  categories  of R&G
Financial's  non-performing assets at the dates indicated. R&G Financial did not
have any troubled debt restructurings at any of the periods presented. Except as
otherwise indicated in the footnotes to the table, the non-performing assets are
assets of the Bank.
<TABLE>
<CAPTION>
                                                                             December 31,
                                               ----------------------------------------------------------------------- 
                                                 1998             1997           1996          1995            1994
                                               --------          --------      -------        -------          ------- 
                                                                    (Dollars in Thousands)
<S>                                            <C>               <C>          <C>              <C>              <C>   
Non-accruing loans:
  Residential real estate(1)............        $32,973           $21,619      $12,991         $7,921           $4,963
  Residential construction..............            441               368          363             --               --
  Commercial real estate................          6,463             6,000        3,141          1,903              789
  Commercial business...................          3,224               765          823             --               --
  Consumer unsecured....................          1,358             1,217          686             40               --
  Other.................................             67               117          726             --               --
                                               --------           -------      -------         ------           ------
    Total...............................         44,526(2)         30,086       18,730          9,864            5,752
                                               --------           -------      -------         ------           ------
Accruing loans greater than 90 days
  delinquent:
  Residential real estate...............             --                --           --             --               --
  Residential construction..............             --                --           --            611               --
  Commercial real estate................             --                --           --             --               --
  Commercial business...................             61                54           22              8               10
  Consumer..............................            357               172          134             94               --
                                               --------           -------      -------         ------           ------
    Total accruing loans greater than
      90 days delinquent................            418               226          156            713               10
                                               --------           -------      -------         ------           ------
    Total non-performing loans..........         44,944            30,312       18,886         10,577            5,762
                                               --------           -------      -------         ------           ------
Real estate owned, net of reserves(3)...          4,041             1,715          834            654              722
Other repossessed assets................            237                85           31             --                -
                                               --------           -------      -------         ------           ------
                                                  4,278             1,800          865            654              722
                                               --------           -------      -------         ------           ------
    Total non-performing assets.........       $ 49,222           $32,112      $19,751        $11,231           $6,484
                                               ========           =======      =======        =======           ======
    Total non-performing loans as a                                       
      percentage of total loans.........           4.11%             3.89%        3.09%          2.18%            1.84%
                                                   ====              ====         ====           ====             ====
    Total non-performing assets as a                                     
      percentage of total assets........           2.41%             2.12%        1.90%          1.32%            1.04%
                                                   ====              ====         ====           ====             ====
</TABLE>
-------------
(1)      Includes residential real estate loans secured by both first and second
         mortgages  held by the Bank,  except for $4.3  million and $2.8 million
         held by R&G Mortgage at December 31, 1998 and 1997, respectively.  Also
         includes  $5.3  million,  $2.6  million,  $1.1  million,  $882,000  and
         $918,000  consumer  loans held by the Bank  secured by first and second
         mortgages on residential  real estate at December 31, 1998, 1997, 1996,
         1995 and 1994, respectively.

(2)      As of December 31, 1998,  comprised of 652 loans secured by residential
         real estate, 67 loans

                                       31
<PAGE>
         secured by commercial real estate, 7 construction loans, 109 commercial
         business loans and 183 consumer loans.

(3)      Includes  properties  held by R&G  Mortgage of  $128,000,  $165,000 and
         $43,000 as of December 31,  1998,  1997 and 1994,  respectively.  As of
         December  31,  1998,  the Bank  had 30  residential  properties  and 10
         commercial properties aggregating $3.9 million.


         While the level of total  non-performing  assets of R&G  Financial  has
increased on an absolute basis during the periods  presented,  from $6.5 million
at December 31, 1994 to $49.2 million at December 31, 1998, R&G  Financial's net
loans receivable portfolio has increased by 256% during this period, from $301.6
million at December 31, 1994 to $1.1 billion at December 31, 1998.  Thus,  total
non-performing  assets as a percent  of total  assets  increased  from  1.04% at
December 31, 1994 to 2.41% at December 31, 1998.

         Non-performing  residential  loans  increased by $11.4 million or 52.5%
from  December  31, 1997 to December  31,  1998.  The  average  loan  balance on
non-performing  mortgage  loans  amounted to $51,000 at December 31, 1998. As of
such date, 270 loans with an aggregate  balance of $14.0 million  (including 111
consumer loans secured by real estate with an aggregate balance of $2.6 million)
were in the process of foreclosure.  The total  delinquency ratio on residential
mortgages,  including loans past due less than 90 days,  slightly increased from
4.93% in 1997 to 5.49% in 1998. The Company's loss  experience on such portfolio
has been minimal over the last several years.

         Non-performing  commercial  real estate loans  increased by $463,000 or
7.7% from December 31, 1997 to December 31, 1998. The number of loans delinquent
over 90 days amounted to 67 loans at December 31, 1998,  with an average balance
of  $96,000.  The  largest  non-performing  commercial  real  estate  loan as of
December 31, 1998 had a balance of $385,000.

         Non-performing  commercial business loans consist of 23 loans which are
90% guaranteed by the Small Business Administration with an aggregate balance of
$2.1 million and 86 commercial  leases  amounting to $1.1  million.  These loans
have a combined  average  loan size of  $30,000.  The  majority of loans in this
portfolio  were  originated  during 1995 and 1996.  The  largest  non-performing
commercial business loan as of December 31, 1998 had a $445,000 balance.

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

                                       32
<PAGE>
considering  the current and anticipated  operating  conditions of the borrower.
Any recoveries are credited to the allowance.

         The following table sets forth an analysis of R&G Financial's allowance
for loan losses during the periods indicated,  which is maintained on the Bank's
loan portfolio.
<TABLE>
<CAPTION>
                                                             At and For the Year Ended December 31,
                                                 ----------------------------------------------------------------------- 
                                                   1998             1997            1996            1995           1994
                                                 --------         -------         -------         ------          ------
                                                                     (Dollars in Thousands)
<S>                                                <C>            <C>              <C>            <C>             <C>   
Balance at beginning of period.........            $6,772         $ 3,332          $3,510         $2,887          $3,029
                                                 --------         -------         -------         ------          ------
Charge-offs:
  Residential real estate..............                73              13              45             53              --
  Construction.........................                --              --              50             --              --
  Commercial real estate...............                --             170              --             --              --
  Commercial business..................             1,485             480             110             91               3
  Consumer.............................             4,455           3,953           1,922            365             139
  Other ...............................                --             761           2,535(1)          --              --
                                                 --------         -------         -------         ------          ------
    Total charge-offs..................             6,013           5,377           4,662            509             142
                                                 --------         -------         -------         ------          ------
Recoveries:
  Residential real estate..............                --              21              --              1              --
  Commercial real estate...............                --              50              --             --              --
  Commercial business..................                20              32              31             85              --
  Consumer.............................               312             344             195             96              --
  Other................................                --           2,000(2)           --             --              --
                                                       --             --              --
                                                 --------          ------          ------          -----           -----
    Total recoveries...................               332           2,447             226            182              --
                                                 --------          ------          ------          -----           -----
Net charge-offs........................             5,681           2,930           4,436            327             142
                                                 --------          ------          ------          -----           -----
Allowance for loan losses acquired from
 Fajardo Federal.......................               364              --              --             --              --
Provision for losses on loans..........             6,600           6,370           4,258            950(3)           --
                                                 --------          ------          ------          -----           -----

Balance at end of period...............          $  8,055          $6,772          $3,332         $3,510          $2,887
                                                 ========          ======          ======          =====          ======
Allowance for loan losses as a percent                    
                                                          
  of total loans outstanding...........               .74%            .87%            .55%          0.72%           0.92%
                                                 ========          ======          ======         ======          ======
Allowance for loan losses as a percent                    
  of non-performing loans..............             17.92%          22.34%          17.64%         33.19%          50.10%
                                                 ========          ======          ======         ======          ======
Ratio of net charge-offs to average                      
   loans outstanding....................              .55%           0.40%           0.75%          0.08%           0.05%
                                                 ========          ======          ======         ======          ======
</TABLE>
------------------
<PAGE>
(1)      Comprised  of $2.5  million of loans from the Bank  insurance  premiums
         financing  portfolio.  See  "Management's  Discussion  and  Analysis of
         Financial  Condition and Results of Operations -- Results of Operations
         --  Provision  for Loan  Losses"  incorporated  by  reference in Item 7
         hereof.

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

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


                                       33
<PAGE>
          The following table sets forth  information  concerning the allocation
of R&G Financial's  allowance for loan losses (which is maintained on the Bank's
loan portfolio) by loan category at the dates indicated.
<TABLE>
<CAPTION>
                                                                      December 31,
                                   ------------------------------------------------------------------------------   
                                         1998                           1997                          1996          
                                   ------------------------     -----------------------    --------------------- 
                                                                                                                    
                                                Percent of                  Percent of               Percent of     
                                                 Loans in                   Loans in                  Loans in      
                                                   Each                        Each                     Each        
                                               Category to                  Category to              Category to    
                                    Amount      Total Loans     Amount      Total Loans    Amount    Total Loans    
                                    ------      -----------     ------      -----------    ------    -----------    
                                                               (Dollars in Thousands)
<S>                                 <C>            <C>          <C>           <C>          <C>           <C>       
Residential real estate.....        $1,272         15.79%       $  593          8.76%      $  810        24.31%  
Construction................            46          0.57             7          0.10           51         1.53   
Commercial real estate......         2,655         32.96         1,386         20.47          489        14.68   
Commercial business.........         1,033         12.82           806         11.90          109         3.27   
Consumer....................         3,049         37.86         3,980         58.77        1,873        56.21   
                                     -----         -----        ------        ------        -----        -----   
Total.......................        $8,055        100.00%       $6,772        100.00%      $3,332       100.00%  
                                     =====        ======         =====        ======        =====       ======  
<CAPTION>
                                             1995                         1994   
                                     -----------------------     ------------------------   
                                                                                
                                                 Percent of                  Percent of          
                                                 Loans in                      Loans in           
                                                   Each                          Each             
                                                Category to                   Category to         
                                     Amount     Total Loans       Amount      Total Loans 
                                     ------     -----------       ------      -----------    
<S>                                  <C>           <C>           <C>              <C>           
Residential real estate.....         $2,094        59.66%        $1,962           67.95%        
Construction................             32         0.90             --           --            
Commercial real estate......             --           --             --           --            
Commercial business.........            782        22.28            403           13.96         
Consumer....................            602        17.16            522           18.09         
                                      -----       ------          -----          ------         
Total.......................         $3,510       100.00%        $2,887          100.00%        
                                      =====       ======          =====          ======         
                                                                
</TABLE>

                                       34
<PAGE>
                              Investment Activities

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

         As discussed  under "- Mortgage  Banking  Activities,"  R&G Mortgage is
primarily engaged in the origination of mortgage loans and the securitization of
such loans into  mortgage-backed  and related securities and the subsequent sale
of such  securities  to  securities  broker-dealers  and other  investors in the
secondary market. As a result of R&G Mortgage's securitization  activities,  R&G
Mortgage maintains a substantial  portfolio of GNMA mortgage-backed  securities.
At December 31, 1998, R&G Mortgage held GNMA  mortgage-backed  securities with a
fair value of $443.4  million  which are  classified  as held for trading.  Such
securities  generally remain in R&G Mortgage's  portfolio for between 90 and 180
days.  In  addition,  during 1994 and 1995,  R&G Mortgage  sold through  grantor
trusts $201.4  million and $38.1 million,  respectively,  of CMOs and retained a
portion of the residual  interests  related thereto.  In addition,  in 1995, R&G
Mortgage  purchased  from the Bank $4.6  million  of  mortgage-backed  residuals
relating  to the Bank's  1993  issuance  of CMOs.  At  December  31,  1998,  R&G
Mortgage's  CMO  residuals,  which are  classified  as held for trading,  had an
amortized cost and a fair value of $7.1 million.

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

         At December  31, 1998,  the Bank's  securities  portfolio  consisted of
$34.6 million of securities held for investments, consisting of $15.4 million of
tax-free  mortgage-backed  securities,  $12.8 million of other  mortgage  backed
securities,  and $5.9 million of Puerto Rico  Government  obligations  and other
Puerto Rico  securities,  $195,000 U.S.  Treasury  securities  and $204,000 U.S.
Government  obligations.  In  addition,  at December  31,  1998,  the Bank had a
securities  portfolio  classified  as  available  for sale with a fair  value of
$154.5  million,   consisting  of  $55.2  million  of  tax-free  mortgage-backed
securities,  $30.2 million of other mortgage-backed securities, $11.4 million of
FHLB stock,  $9.7 million of CMOs and CMO residuals,  $5.0 million U.S. Treasury
securities and $43.1 million of U.S. Government agency securities.

         The  Bank's  Treasury  Department  from time to time  conducts  certain
trading  activities  mainly  through  investments in U.S.  Treasury  securities.
However, at December 31, 1998 no securities for trading were held by the Bank.

                                       35
<PAGE>
         The  following  table  presents  certain   information   regarding  the
composition and period to maturity of R&G Financial's  securities portfolio held
to maturity as of the dates indicated  below.  All of such securities are assets
of the Bank.
<TABLE>
<CAPTION>

                                                                            December 31,
                                   -------------------------------------------------------------------------------------------------
                                                1998                             1997                              1996
                                   -------------------------------   -------------------------------   -----------------------------

                                                          Weighted                          Weighted                        Weighted
                                   Carrying     Market    Average    Carrying   Market     Average     Carrying    Market    Average
                                    Value       Value      Yield      Value     Value       Yield        Value     Value      Yield
                                    -----       -----      -----      -----     -----       -----        -----     -----      -----
                                                                           (Dollars in Thousands)
<S>                              <C>          <C>                   <C>         <C>           <C>       <C>        <C>       <C>   
Mortgage-backed securities:
  GMNA
    Due within one year..........$       --   $     --        --%   $    --     $   --           --%     $    --   $    --      --%
    Due from one-five years......        27         29     10.00         49          50       10.00           --        --      -- 
    Due from five-ten years......    13,025     12,752      6.04         --          --          --           97       100   10.00 
    Due over ten years...........     2,360      2,306      6.05     18,321      17,705        6.05       21,591    20,571    6.03 
FNMA                                                                                                                               
  Due within one year............        --         --     --            --          --          --           --        --      -- 
  Due from one-five years........        --         --     --            --          --          --           --        --      -- 
  Due from five-ten years........        --         --     --            --          --          --           --        --      -- 
  Due over ten years.............    12,608     12,944      7.13     14,675      15,164        7.17       15,895    16,124    7.18 
FHLMC                                                                                                                              
  Due within one year............        --         --     --            --          --          --           --       --       -- 
  Due from one-five years........        --         --     --            --          --          --           --       --       -- 
  Due from five-ten years........        --         --     --            --          --          --           --       --       -- 
  Due over ten years.............       236        230      6.15        281         266        6.00           317      309    5.50 
Investment Securities:                                                                                                             
  Puerto Rico Government                                                                                                           
    obligations                                                                                                                    
  Due within one year............        --         --     --         4,433       4,439        6.22         3,351    3,351    5.12 
  Due from one-five years........        --         --     --            --          --          --         1,035    1,012    6.25 
  Due from five-ten years........     5,945      5,979      5.80      5,920       5,910        5.85            --       --      -- 
  Due over ten years.............        --         --     --            30          30        8.37           574      567    5.11 
  U.S.Treasury and Government                                                                                                      
    Agency                                                                                                                         
  Due within one year............       399        400      5.27        310         311        6.13            --       --      -- 
  Due from one-five years........        --         --     --            --          --          --           310      311    6.13 
  Due from five-ten years........        --         --     --            --          --          --            --       --      -- 
  Due over ten years.............        --         --     --            --          --          --            --       --      -- 
Commercial paper:                                                                                                                  
  Due within one year............        --         --     --            --          --          --         2,982    2,982    5.55 
  Due from one-five years........        --         --     --            --          --          --            --       --      -- 
  Due from five-ten years........        --         --     --            --          --          --            --       --      -- 
  Due over ten years.............        --         --     --            --          --          --            --       --      -- 
    Total Securities held for                                                                                                      
      investment.................   $34,600    $34,640      6.39%   $44,019     $43,875        6.18%      $46,152  $45,327    6.34%
</TABLE>
                                       36
<PAGE>
The following table presents certain  information  regarding the composition and
period to maturity of R&G  Financial's  held for trading and  available for sale
mortgage-backed  and investment  securities  portfolio as of the dates indicated
below.
<TABLE>
<CAPTION>
                                                                                         December 31,
                                                       -----------------------------------------------------------------------------
                                                                     1998                                       1997
                                                       -------------------------------------     -----------------------------------
                                                                                    Weighted                                Weighted
                                                       Amortized       Fair         Average      Amortized        Fair      Average 
                                                         Cost          Value         Yield         Cost           Value      Yield 
                                                         ----          -----         -----         ----           -----      -----  
                                                                                 (Dollars in Thousands)
<S>                                                    <C>          <C>               <C>          <C>            <C>            <C>
Mortgage-Backed Securities Available for Sale(1):
GNMA
    Due within one year...........................      $    --      $    --           --%       $   --       $    --           --% 
    Due from one-five years.......................           --           --           --            --            --            -- 
    Due from five-ten years.......................           --           --           --            --            --            -- 
    Due over ten years............................       55,159       55,159         6.41            --            --            -- 
  FNMA mortgage-backed securities
    Due within one year...........................            -           --           --            --            --            -- 
    Due from one-five years.......................           --           --           --            --            --            -- 
    Due from five-ten years.......................           --           --           --            --            --            -- 
    Due over ten years............................        8,092        8,161         6.96         9,468         9,670          7.00 
  FHLMC mortgage-backed securities
    Due within one year...........................           --           --           --            --            --            -- 
    Due from one-five years.......................           89           91         9.00            71            70          9.00 
    Due from five-ten years.......................          240          244         9.37           360           368          9.38 
    Due over ten years............................       21,369       21,724         6.85        27,104        27,513          6.86 
  CMO residuals and other mortgage-backed
    securities (2)
    Due within one year...........................           --           --           --            --            --            -- 
    Due from one-five years.......................           --           --           --            --            --            -- 
    Due from five-ten years.......................           --           --           --            --            --            -- 
    Due over ten years............................        7,845        9,661        8.125         7,007         8,382         8.125 
Investment Securities Available for Sale(1)
  U.S. Treasury
    Due within one year...........................           --           --           --           773           772          5.22 
    Due from one-five years.......................        4,995        4,991         4.57        30,010        30,100          5.85 
    Due from five-ten years.......................           --           --           --            --            --            -- 
    Due over ten years............................           --           --           --            --            --            -- 
  U.S. Government Agency
    Due within one year...........................           --           --           --            --            --            -- 
    Due from one-five years.......................       38,100       38,106         5.61        35,145        35,105          6.06 
    Due from five-ten years.......................        5,010        5,000         6.73         5,023         4,981          6.73 
    Due over ten years............................           --           --           --            --            --            -- 
  FHLB stock......................................       11,405       11,405         7.21         4,906         4,906          6.61 
                                                         ------       ------         ----       -------       -------          ---- 
                                                       $152,304     $154,542        6.41%      $119,867      $121,867         6.59% 
                                                        =======      =======        ====        =======       =======         ====  
Securities held for trading(3):
  GNMA certificates...............................     $427,915     $443,399        6.69%      $367,177      $377,362         6.78% 
  CMO certificates................................           --           --           --        16,200        15,228          5.95 
  CMO residuals(4)................................        7,134        7,147         8.00         7,630         7,868          8.00 
  U.S. Treasury Bills.............................           --             --         --           581           581          5.23 
                                                         ------       ------         ----       -------       -------          ----
                                                      $ 435,049     $450,546        6.71%      $391,588      $401,039         6.77% 
                                                       ========      =======        ====        =======       =======         ====  
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                   Weighted      
                                                    Amortized        Fair          Average       
                                                       Cost          Value          Yield        
                                                       ----          -----          -----        
<S>                                                   <C>          <C>               <C>              
Mortgage-Backed Securities Available for Sale(1):
GNMA
    Due within one year                               $   --       $   --              -- %
    Due from one-five years                               --           --              --   
    Due from five-ten years                               --           --              --   
    Due over ten years                                    --           --              --   
  FNMA mortgage-backed securities
    Due within one year                                   --           --              --   
    Due from one-five years                               --           --              --   
    Due from five-ten years                               --           --              --   
    Due over ten years                                  10,563       10,293           6.99
  FHLMC mortgage-backed securities
    Due within one year                                   --           --               --   
    Due from one-five years                               --           --               --   
    Due from five-ten years                                530          547           9.30
    Due over ten years                                  32,547       31,806           6.87
  CMO residuals and other mortgage-backed
    securities (2)
    Due within one year                                   --           --              --   
    Due from one-five years                               --           --              --   
    Due from five-ten years                               --           --              --   
    Due over ten years                                   7,067        8,195          8.125
Investment Securities Available for Sale(1)
  U.S. Treasury
    Due within one year                                   --           --              --   
    Due from one-five years                               --           --              --   
    Due from five-ten years                               --           --              --   
    Due over ten years                                    --           --              --   
  U.S. Government Agency
    Due within one year                                  1,500        1,500           6.00
    Due from one-five years                             25,528       25,226           6.18
    Due from five-ten years                               --           --              --   
    Due over ten years                                    --           --              --   
  FHLB stock                                             4,247        4,247           6.30
                                                      --------     --------         ------
                                                      $ 81,982     $ 81,814           6.75%
                                                      ========     ========         ======
Securities held for trading(3):
  GNMA certificates                                   $ 83,848     $ 84,460         $ 6.53%
  CMO certificates                                      16,200       15,147           5.95
  CMO residuals(4)                                       8,489        8,539           8.00
  U.S. Treasury Bills                                    1,370        1,316           5.72
                                                      --------     --------         ------
                                                      $109,907     $109,462           6.55%
                                                      ========     ========         ======
</TABLE>
                                                   (Footnotes on following page)

                                       37
<PAGE>
---------------
(1)      All securities are held in the Bank's investment securities portfolio.

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

(3)      Except for GNMA certificates with a fair value of $1.7 million and $1.7
         million  as of  December  31,  1997 and  1996,  respectively,  and U.S.
         Treasury  Bills with a fair value of $770,000 at December 31, 1996, all
         of such securities are held in R&G Mortgage's securities portfolio.

(4)      Represents  residuals purchased from the Bank in 1995 from its 1993 CMO
         Grantor Trust, and from R&G Mortgage's CMO Grantor Trusts.


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

         The FHLMC is a public corporation  chartered by the U.S. Government and
owned  by  the  12  Federal  Home  Loan  Banks  and  federally-insured   savings
institutions.  The FHLMC issues participation certificates backed principally by
conventional mortgage loans. The FHLMC guarantees the timely payment of interest
and the  ultimate  return of  principal  within one year.  The FNMA is a private
corporation  chartered  by the U.S.  Congress  with a  mandate  to  establish  a
secondary market for conventional mortgage loans. The FNMA guarantees the timely
payment of principal and interest on FNMA securities.  FHLMC and FNMA securities
are not backed by the full faith and credit of the United  States,  but  because
the  FHLMC  and  the  FNMA  are  U.S.  Government-sponsored  enterprises,  these
securities  are  considered  to be among the highest  quality  investments  with
minimal  credit  risks.  The GNMA is a  government  agency  within  HUD which is
intended to help finance  government-assisted  housing programs. GNMA securities
are backed by FHA-insured  and  VA-guaranteed  loans,  and the timely payment of
principal and interest on GNMA  securities are guaranteed by the GNMA and backed
by the full faith and credit of the U.S. Government. Because the FHLMC, the FNMA
and the GNMA were  established  to provide  support  for low- and  middle-income
housing,  there are limits to the maximum  size of loans that  qualify for these
programs.  For  example,  the FNMA and the FHLMC  currently  limit  their  loans
secured by a single-family,  owner-occupied residence to $240,000 To accommodate
larger-sized  loans,  and loans that, for other  reasons,  do not conform to the
agency programs, a number of private

                                       38
<PAGE>
institutions have established their own home-loan origination and securitization
programs.

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

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

         Mortgage-backed  securities  generally  increase  the  quality  of  R&G
Financial's  assets by virtue of the insurance or guarantees that back them, are
more  liquid than  individual  mortgage  loans and may be used to  collateralize
borrowings or other  obligations of R&G Financial.  At December 31, 1998,  $42.9
million or 7.7% of R&G  Financial's  mortgage-backed  securities  was pledged to
secure various obligations of R&G Financial (excluding repurchase agreements).

         The FDIC has issued a statement  of policy  which  states,  among other
things,  that mortgage  derivative  products  (including CMOs and CMO residuals)
which possess  average life or price  volatility in excess of a benchmark  fixed
rate  30-year  mortgage-backed  pass-through  security are  "high-risk  mortgage
securities," are not suitable  investments for depository  institutions,  and if
considered "high risk" at purchase must be carried in the institution's  trading
account  or as assets  held for sale,  and must be marked to market on a regular
basis. In addition, if a security was not considered "high risk" at purchase but
was later  found to be "high  risk"  based on the  tests,  it may  remain in the
held-to-maturity  portfolio as long as the  institution  has positive  intent to
hold the security to maturity  and has a documented  plan in place to manage the
high risk. At December 31, 1998, the Bank's CMOs and CMO residuals,  which had a
fair value of $9.7 million,  were designated as "high-risk mortgage  securities"
and classified as available for sale.


                                       39
<PAGE>
                                Sources of Funds

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

         Deposits.  Deposits  are the  major  sources  of the  Bank's  funds for
lending and other  investment  purposes.  Consumer and  commercial  deposits are
attracted  principally  from within the Bank's  primary  market area through the
offering of a broad selection of deposit  instruments,  including passbook,  NOW
and Super NOW,  checking and  commercial  checking and  certificates  of deposit
ranging in terms from 7 days to 10 years.  Included among these deposit products
are $294.3 million of certificates of deposit with balances of $100,000 or more,
which  amounted to 29.1% of the Bank's  total  deposits at  December  31,  1998.
Deposit account terms vary according to the minimum balance  required,  the time
periods  the funds must  remain on deposit and the  interest  rate,  among other
factors.

         The Bank  attempts to price its  deposits  in order to promote  deposit
growth. The Bank regularly evaluates the internal costs of funds,  surveys rates
offered by competing institutions, reviews the Bank's cash flow requirements for
lending and  liquidity and executes  rate changes when deemed  appropriate.  The
Bank does not currently obtain funds through  brokers,  although at December 31,
1998 it held $15.1  million of deposits  acquired from money desks in the United
States.

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


                                       40
<PAGE>
         The following  table presents the average  balance of each deposit type
and the  average  rate paid one each  deposit  type of the Bank for the  periods
indicated.
<TABLE>
<CAPTION>
                                                                     December 31,
                                      ---------------------------------------------------------------------------
                                             1998                        1997                       1996
                                      ----------------------     ---------------------     ---------------------- 

                                      Average       Average      Average      Average      Average       Average
                                      Balance      Rate Paid     Balance     Rate Paid     Balance      Rate Paid
                                      -------      ---------     -------     ---------     -------      ---------
                                                                (Dollars in Thousands)

<S>                                    <C>           <C>       <C>              <C>      <C>               <C>  
Passbook......................         $88,754        3.75%    $  75,958         3.79%   $  73,216         3.77%
NOW and Super NOW
   accounts...................          99,336        3.93        86,843         3.84       78,183          3.85
Checking......................          39,052          --        23,859           --       20,451            --
Commercial checking(1)........          77,329          --        46,301           --       30,173            --
Certificates of deposit.......         522,016        5.98       435,743         6.02      359,525          6.05
                                       -------        ----     ---------         ----     ---------         ----
  Total deposits..............        $826,487        4.65%     $668,704         4.85%    $561,548          4.90%
                                       =======        ====       =======         ====      =======          ====
</TABLE>
----------------

(1)      Includes  $109.9  million,  $50.2  million and $10.6  million of escrow
         funds  of  R&G  Mortgage  at  December   31,   1998,   1997  and  1996,
         respectively, maintained with the Bank.


         The   following   table  sets  forth  the   maturities  of  the  Bank's
certificates of deposit having principal amounts of $100,000 or more at December
31, 1998.
<TABLE>
<CAPTION>

                                                                 Amount
                                                            ---------------
                                                             (In Thousands)
Certificates of deposit maturing:
<S>                                                             <C>     
Three months or less.....................................       $ 92,656
Over three through six months............................         51,621
Over six through twelve months...........................         42,534
Over twelve months.......................................         53,705
                                                                --------
  Total..................................................       $240,516
                                                                ========
</TABLE>
<PAGE>

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

                                       41

<PAGE>
agreed to repurchase  substantially identical securities,  the dealers may sell,
loan or otherwise dispose of R&G Financial's  securities in the normal course of
their operations;  however, such dealers or third party custodians safe-keep the
securities  which are to be specifically  repurchased by R&G Financial.  Reverse
repurchase  agreements  represent  a  competitive  cost  funding  source for R&G
Financial.  Nevertheless,  R&G  Financial is subject to the risk that the lender
may default at maturity and not return the collateral. The amount at risk is the
value of the collateral which exceeds the balance of the borrowing.  In order to
minimize this potential  risk, R&G Financial only deals with large,  established
investment  brokerage  firms  when  entering  into these  transactions.  Reverse
repurchase  transactions are accounted for as financing arrangements rather than
as sales of such  securities,  and the obligations to repurchase such securities
is  reflected  as  a  liability  in  R&G  Financial's   Consolidated   Financial
Statements. As of December 31, 1998, R&G Financial had $471.4 million of reverse
repurchase   agreements   outstanding,   $396.2  million  of  which  represented
borrowings of R&G Mortgage.  At December 31, 1998, the weighted average interest
rate on R&G Financial's reverse repurchase agreements amounted to 5.42%.

         R&G Mortgage's loan  originations  are also funded by borrowings  under
various  warehouse  lines of credit provided by two unrelated  commercial  banks
("Warehouse  Lines"). At December 31, 1998, R&G Mortgage was permitted to borrow
under such  Warehouse  Lines up to $209.0  million,  $107.6 million of which was
drawn upon and  outstanding as of such date. The Warehouse Lines are used by R&G
Mortgage to fund loan  commitments  and must generally be repaid within 180 days
after the loan is closed or when R&G Mortgage  receives payment from the sale of
the funded loan,  whichever occurs first.  Until such sale closes, the Warehouse
Lines  provide  that the  funded  loan is  pledged  to  secure  the  outstanding
borrowings.  The Warehouse Lines are also collateralized by a general assignment
of mortgage payments  receivable and an assignment of certain mortgage servicing
rights.  Certain of these warehousing lines of credit impose restrictions on R&G
Mortgage  with  respect to the  maintenance  of minimum  levels of net worth and
working  capital and  limitations  on the amount of  indebtedness  and dividends
which may be declared.

         The interest rate on funds borrowed  pursuant to the Warehouse Lines is
based upon a specified prime rate less a negotiated  amount or, if available,  a
designated  Puerto  Rico  Section  936 funds rate (which is lower than the prime
rate) plus a  negotiated  amount.  By  maintaining  compensating  balances,  R&G
Mortgage is able to borrow funds under the Warehouse  Lines at a lower  interest
rate than would otherwise apply. These compensating  balances are comprised of a
portion of the escrow  accounts  maintained  by R&G Mortgage for  principal  and
interest payments and related tax and insurance  payments on loans its services.
At December  31,  1998,  the weighted  average  interest  rate being paid by R&G
Mortgage under its Warehouse Lines amounted to 6.43%.

         The Warehouse Lines include various  covenants and  restrictions on R&G
Mortgage's operations,  including maintenance of minimum levels of net worth and
debt service, minimum levels and ratios with respect to outstanding indebtedness
and  restrictions  on the amount of dividends  which can be declared and paid by
R&G Mortgage on its common stock.  Management of R&G Financial  believes that as
of December  31,  1998,  it was in  compliance  with all of such  covenants  and
restrictions and does not anticipate that such covenants and  restrictions  will
limit its operations.

                                       42
<PAGE>
         Although the Bank's primary source of funds is deposits,  the Bank also
borrows funds on both a short and long-term  basis.  The Bank actively  utilizes
936 Notes as a primary  borrowing  source.  The 936 Notes have original terms to
maturity of between five and seven years and are payable  semiannually at either
a variable  interest rate (84% of the three-month LIBOR rate less .125%, and 96%
of the three month LIBID rate or a fixed  interest  rate  (ranging from 5.60% to
7.15%). The Bank is able to obtain such low cost funds by investing the proceeds
in eligible  activities as proscribed  under Puerto Rico law,  which provide tax
advantages  under Puerto Rico tax laws and under U.S.  federal tax laws for U.S.
corporations  which are  operating in Puerto Rico pursuant to Section 936 of the
Code.  See " - Mortgage  Banking  Activities  - Puerto Rico  Secondary  Mortgage
Market and Favorable Tax Treatment." At December 31, 1998,  $38.6 million of the
936 Notes were  secured by  marketable  securities,  while  $45.5  million  were
secured by standby  letters of credit issued by the FHLB of New York (which are,
in turn, secured by first mortgage loans, securities and cash deposits). The 936
Notes contain  certain  provisions  which indemnify the holders thereof from the
federal tax liability which would be incurred,  plus any penalties and interest,
if the Bank did not invest the proceeds as required in eligible activities,  and
also provide for a "gross up"  provision  which permits the Bank to continue the
obligation at an adjusted interest rate based on LIBOR in the event the interest
on the 936 Notes is subject in whole or in part to federal  and/or  Puerto  Rico
income  tax.  At  December  31,  1998,  the Bank had $84.1  million of 936 Notes
outstanding,  $23.6  million of which  matures in 1999,  $25.0  million of which
matures in 2000 and $35.5 million of which matures in 2001.

         The Bank obtains  both  fixed-rate  and  variable-rate  short-term  and
long-term advances from the FHLB of New York upon the security of certain of its
residential first mortgage loans, securities and cash deposits, provided certain
standards  related to the  credit-worthiness  of the Bank have been met. FHLB of
New York advances are available for general business  purposes to expand lending
and investing  activities.  Advances from the FHLB of New York are made pursuant
to several  different credit  programs,  each of which has its own interest rate
and range of  maturities.  At December 31,  1998,  the Bank had access to $533.5
million  in  advances  from  the FHLB of New  York,  and had 13 FHLB of New York
advances aggregating $121.0 million outstanding as of such date, which mature at
various dates  commencing in January 1999 through March 2008 and have a weighted
average  interest  rate of 5.25%.  In addition,  at December 31, 1998,  the Bank
maintained $51.3 million in standby letters of credit with the FHLB of New York,
which secured $45.5 million of outstanding 936 Notes payable and $4.1 million of
936 certificates of deposit. At December 31, 1998, the Bank had pledged specific
collateral aggregating $217.4 million to the FHLB of New York under its advances
program and to secure the letters of credit. The Bank maintains  collateral with
the FHLB of New York in excess of applicable requirements in order to facilitate
any necessary additional borrowings by the Bank in the future.



                                       43
<PAGE>
         The  following  table  sets forth  certain  information  regarding  the
short-term borrowings of R&G Financial at or for the dates indicated.
<TABLE>
<CAPTION>
                                                                         At or For the Year Ended
                                                                                  December 31,
                                                                -------------------------------------------- 
                                                                  1998              1997              1996
                                                                --------         ---------         --------- 
                                                                     (Dollars in Thousands)
R&G Mortgage:
Securities sold under agreements to repurchase:
<S>                                                             <C>              <C>               <C>     
  Average balance outstanding.......................            $354,786         $187,682          $ 93,653
  Maximum amount outstanding at any month-end
    during the period...............................             415,960          385,054           108,240
  Balance outstanding at end of period..............             415,960          385,054            97,444
  Average interest rate during the period...........               5.73%            6.03%             5.00%
  Average interest rate at end of period............               5.46%            5.85%             5.67%
Notes Payable:
  Average balance outstanding.......................            $102,047          $66,405           $40,805
  Maximum amount outstanding at any month-end
    during the period...............................             161,060           93,523            85,135
  Balance outstanding at end of period..............             107,648           24,353            40,342
  Average interest rate during the period...........               7.07%            6.03%             5.32%
  Average interest rate at end of period............               6.43%            5.85%             4.97%
The Bank:
FHLB of New York advances:
  Average balance outstanding.......................             $94,025          $23,524           $ 6,366
  Maximum amount outstanding at any month-end
    during the period...............................             160,100           42,200            15,000
  Balance outstanding at end of period..............             121,000           42,200            15,000
  Average interest rate during the period...........               5.55%            5.80%             5.84%
  Average interest rate at end of period............               5.25%            6.03%             5.75%
Securities sold under agreements to repurchase:
  Average balance outstanding.......................             $55,915          $39,090           $ 6,954
  Maximum amount outstanding at any month-end
    during the period...............................              79,513           63,088            19,000
  Balance outstanding at end of period..............              75,222           48,080                --
  Average interest rate during the period...........               5.57%            5.55%             4.74%
  Average interest rate at end of period............               5.35%            5.56%               --%
Notes Payable:
  Average balance outstanding.......................             $84,100          $85,034           $85,365
  Maximum amount outstanding at any month-end
    during the period...............................              84,100           86,500           111,500
  Balance outstanding at end of period..............              84,100           84,100            86,500
  Average interest rate during the period...........               6.45%            6.60%             5.55%
  Average interest rate at end of period............               5.74%            5.97%             5.82%
</TABLE>
                          Trust and Investment Services

         R&G Financial also provides trust and investment  services  through the
Bank's Trust  Department.  Services  offered  include  custodial  services,  the
administration  of IRA accounts  and the sale to  investors  of  mortgage-backed
securities  guaranteed  by GNMA.  As of  December  31,  1998,  the Bank's  Trust
Department  administered  approximately  6,945 trust  accounts,  with  aggregate
assets of $28.2  million as of such  date.  In  addition,  during the year ended
December 31, 1998, the

                                       44
<PAGE>
Bank's Trust Department sold $47.9 million of GNMA  mortgage-backed  securities.
The Bank receives fees  dependent  upon the level and type of service  provided.
The  administration  of the Bank's  Trust  Department  is performed by the Trust
Committee of the Board of Directors of the Bank.


                                    Personnel

         As of December 31, 1998,  R&G Financial (on a  consolidated  basis) had
1,054  full-time  employees  and 39 part-time  employees.  The employees are not
represented by a collective bargaining agreement and R&G Financial believes that
it has good relations with its employees.


                                   Regulation

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

R&G Financial

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

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

         The  BHCA  also  prohibits  a  bank  holding   company,   with  certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from  engaging in any business  other than banking or managing
or controlling banks. Under the BHCA, the Federal

                                       45
<PAGE>
Reserve Board is authorized to approve the ownership of shares by a bank holding
company in any company,  the  activities of which the Federal  Reserve Board has
determined  to be so closely  related to banking or to managing  or  controlling
banks as to be a proper incident  thereto.  In making such  determinations,  the
Federal  Reserve Board is required to weigh the expected  benefit to the public,
such as  greater  convenience,  increased  competition  or gains in  efficiency,
against the possible adverse effects,  such as undue concentration of resources,
decreased  or unfair  competition,  conflicts  of  interest  or unsound  banking
practices.

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

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

         In addition,  Sections 22(h) and (g) of the Federal  Reserve Act places
restrictions   on  loans  to  executive   officers,   directors   and  principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater  than 10%  stockholder  of a  financial  institution,  and  certain
affiliated  interests  of  either,  may not  exceed,  together  with  all  other
outstanding loans to such person

                                       46
<PAGE>
and  affiliated  interests,  the financial  institution's  loans to one borrower
limit  (generally  equal  to 15% of the  institution's  unimpaired  capital  and
surplus).  Section  22(h)  also  requires  that  loans to  directors,  executive
officers and principal  stockholders be made on terms  substantially the same as
offered in comparable  transactions  to other persons  unless the loans are made
pursuant to a benefit or  compensation  program that (i) is widely  available to
employees of the  institution and (ii) does not give preference to any director,
executive officer or principal  stockholder,  or certain affiliated interests of
either,  over other  employees of the savings  institutions.  Section 22(h) also
requires  prior board  approval for certain  loans.  In addition,  the aggregate
amount of extensions of credit by a financial institution to all insiders cannot
exceed the institution's  unimpaired capital and surplus.  Furthermore,  Section
22(g) places additional restrictions on loans to executive officers.

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

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

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

                                       47
<PAGE>
         Financial  Support of Affiliated  Institutions.  Under Federal  Reserve
Board  policy,  R&G  Financial  will be expected to act as a source of financial
strength  to  the  Bank  and  to  commit   resources  to  support  the  Bank  in
circumstances  when it might not do so absent  such  policy.  The  legality  and
precise scope of this policy is unclear,  however,  in light of recent  judicial
precedent.  In  addition,  any  capital  loans by a bank  holding  company  to a
subsidiary  bank is  subordinate  in right of payment to deposits and to certain
other  indebtedness  of such  subsidiary  bank.  In the event of a bank  holding
company's  bankruptcy,  any commitment by the bank holding  company to a federal
bank  regulatory  agency to maintain  the capital of a  subsidiary  bank will be
assumed by the bankruptcy trustee and entitled to a priority of payment.

The Bank

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

         FDIC Insurance  Premiums.  The Bank  currently  pays deposit  insurance
premiums to the FDIC based on a risk-based  assessment system established by the
FDIC for all Savings Association Insurance Fund ("SAIF") and Bank Insurance Fund
("BIF") member  institutions.  Under  applicable  regulations,  institutions are
assigned to one of three capital groups which is based solely on the level on an
institution's  capital  -  "well  capitalized,"   "adequately  capitalized"  and
"undercapitalized".  These three groups are then  divided  into three  subgroups
which  reflect  varying  levels of  supervisory  concern,  from those  which are
considered  to be healthy to those  which are  considered  to be of  substantial
supervisory  concern.  The matrix so created  results  in nine  assessment  risk
classifications,  with  rates  ranging  from .0% for well  capitalized,  healthy
institutions  to  .27%  for   undercapitalized   institutions  with  substantial
supervisory   concerns.   The  Bank  was  classified  as  a   "well-capitalized"
institution  as of December 31, 1998. An  additional  assessment is added to the
regular  SAIF-assessment  and the regular  BIF-assessment,  respectively,  until
December 31, 1999 in order to cover Financing Corporation debt service payments.
Such additional  assessments amount to 6.3 basis points and 1.3 basis points for
SAIF insured deposits and BIF insured deposits, respectively.

         The FDIC may terminate the deposit insurance of any insured  depository
institution,  including  the Bank,  if it  determines  after a hearing  that the
institution has engaged or is engaging

                                       49
<PAGE>
in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations,  or has  violated  any  applicable  law,  regulation,  order  or any
condition  imposed by an agreement  with the FDIC.  It also may suspend  deposit
insurance  temporarily during the hearing process for the permanent  termination
of  insurance,  if the  institution  has no tangible  capital.  If  insurance of
accounts  is  terminated,  the  accounts at the  institution  at the time of the
termination,  less  subsequent  withdrawals,  shall continue to be insured for a
period of six months to two years,  as  determined  by the FDIC.  Management  is
aware of no existing  circumstances  which would  result in  termination  of the
Bank's deposit insurance.

         Recapitalization  of SAIF.  Both the  SAIF  and the  BIF,  the  federal
deposit insurance fund that covers commercial bank deposits, are required by law
to attain and thereafter  maintain a reserve ratio of 1.25% of insured deposits.
Certain of the Bank's  deposits  were  required to continue to be insured by the
SAIF following its 1994 conversion from a federally  chartered savings bank to a
Puerto Rico  chartered  commercial  bank.  The  approximately  $77.2  million of
deposits acquired by the Bank in 1995 from a Puerto Rico commercial bank are BIF
insured and subject to deposit insurance assessments at BIF rates.

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

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

         The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an  additional  cushion  of at least 100 to 200 basis  points for all other
state-chartered,  non-member banks, which effectively increases the minimum Tier
I leverage ratio for such other banks to 4.0% to 5.0% or more.  Under the FDIC's
regulation,  the highest-rated  banks are those that the FDIC determines are not
anticipating or experiencing  significant growth and have well diversified risk,
including no undue interest rate risk exposure,  excellent  asset quality,  high
liquidity,  good earnings and, in general, which are considered a strong banking
organization and are rated composite 1 under the Uniform Financial Institutions

                                       49
<PAGE>
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.

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

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

                                       50
<PAGE>
depository institutions,  and (iv) acquiring or retaining the voting shares of a
depository  institution if certain requirements are met. In addition, an insured
state-chartered  bank may not,  directly,  or  indirectly  through a subsidiary,
engage as  "principal"  in any activity that is not  permissible  for a national
bank unless the FDIC has determined that such  activities  would pose no risk to
the insurance  fund of which it is a member and the bank is in  compliance  with
applicable  regulatory capital  requirements.  Any insured  state-chartered bank
directly or  indirectly  engaged in any  activity  that is not  permitted  for a
national bank must cease the impermissible activity.

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

    The Puerto Rico Banking Law requires  that at least ten percent (10%) of the
yearly net  income of the Bank be  credited  annually  to a reserve  fund.  This
apportionment  shall be done every year until the reserve fund shall be equal to
the sum of the Bank's paid-in common and preferred stock capital. As of December
31, 1998, the Bank had credited $3.5 million to such reserve fund.

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

         Under the Puerto Rico  Banking Law, the Bank is permitted to make loans
to any one person, firm,  partnership or corporation,  up to an aggregate amount
of fifteen  percent  (15%) of the paid-in  capital and reserve fund of the Bank,
plus 15% of 50% of undistributed  earnings for "well capitalized"  institutions.
As of  December  31,  1998,  the legal  lending  limit for the Bank under  these
provisions was  approximately  $16.3 million and its maximum extension of credit
to any one borrower was $9.4  million.  If such loans are secured by  collateral
worth at least  twenty-five  percent (25%) more than the amount of the loan, the
aggregate maximum amount may reach one-third of the paid-in capital of the Bank,
plus its  reserve  fund.  There are no  restrictions  on the  amount of loans to
subsidiaries of banks, or loans that are secured by mortgages by real estate, or
loans  that are wholly  secured  by bonds,  securities  and other  evidences  of
indebtedness of the United States or the Commonwealth, or by current debt bonds,
not in default,  of  municipalities  or  instrumentalities  of the Commonwealth.
Loans to non-banking  affiliates of the Bank are subject  however to the lending
limitations  set  forth in  Sections  23A and 23B of the  Federal  Reserve  Act.


                                       51
<PAGE>
         The Puerto Rico Banking Law also authorizes the Bank to conduct certain
financial and related activities  directly or through  subsidiaries.  The Puerto
Rico Banking Law also  prohibits  Puerto Rico banks from making loans secured by
their own stock,  and from purchasing  their own stock,  unless such purchase is
necessary to prevent  losses  because of a debt  previously  contracted  in good
faith.  The stock so  purchased  by the bank must be sold in a private or public
sale within one year from the date of purchase.  The Bank may repurchase its own
stock for the purpose of reducing  its  capital,  subject to the approval of the
OCFI.

         The rate of  interest  that the Bank may charge on  mortgage  and other
types of loans to  individuals  in Puerto Rico is subject to Puerto Rico's usury
laws. Such laws are administered by the Financing  Board,  which consists of the
Commissioner  of  Financial  Institutions,   the  President  of  the  Government
Development  Bank,  the  Chairman  of the  Planning  Board and the  Puerto  Rico
Secretaries of Commerce, Treasury and Consumer Affairs and three representatives
from the private  sector.  The Financing  Board  promulgates  regulations  which
specify  maximum rates on various types of loans to  individuals.  The Financing
Board  eliminated the regulations that set forth the maximum interest rates that
could be charged on consumer  loans,  mortgage loans and commercial  loans.  The
origination charges on residential  mortgage loans may not exceed 6% of the loan
amount.

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

R&G Mortgage

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


                                       52
<PAGE>
R&G Mortgage's  mortgage loan  production  activities are subject to the Federal
Truth-in-Lending   Act   and   Regulation   Z   promulgated   thereunder.    The
Truth-in-Lending  Act  contains  disclosure  requirements  designed  to  provide
consumers with uniform, understandable information with respect to the terms and
conditions of loans and credit transactions in order to give them the ability to
compare credit terms. The  Truth-in-Lending  Act provides  consumers a three day
right to cancel certain credit transactions, including any refinance mortgage or
junior mortgage loan on a consumer's primary residence.

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

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

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

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


                                       53
<PAGE>
As is the case with the Bank,  the rate of interest that R&G Mortgage may charge
on mortgage loans to  individuals  is subject to Puerto Rico's usury laws.  Such
laws are administered by the Financing Board which promulgates  regulations that
specify maximum rates on various types of loans to individuals.  Regulation 26-A
promulgated by the Financing  Board fixes the maximum rate (which is adjusted on
a weekly  basis)  which may be  charged on  residential  first  mortgage  loans.
Effective  April 1996, the Financing Board  eliminated the regulations  that set
forth the maximum interest rates that could be charged on non-federal government
guaranteed loans.



                                       54

<PAGE>
Item 2. Properties.

         The  Company's  principal  executive  office is located at 280 Jesus T.
Pinero Avenue,  Hato Ray, San Juan,  Puerto Rico 00918. The following table sets
forth the net book value  (including  leasehold  improvements and equipment) and
certain other  information  with respect to the offices and other  properties of
R&G Financial at December 31, 1998, all of which properties are leased.
<TABLE>
<CAPTION>
                                                                                         Net Book Value
    Description/Address                           Lease Term Expiration                    of Property
    -------------------                           ---------------------                    -----------
                                                                                          (In Thousands)
<S>                                             <C>                                            <C>   
The Bank:
Hato Rey Branch(1)(2)(3)                            December 31, 2003                           $1,547
280 Jesus T. Pinero Avenue                      One (1) five year option
Hato Rey, PR 00919

Los Jardines Branch                                 September 4, 1999                               97
Los Jardines de Guaynabo Shopping Center         One (1) ten year option
PR Road No. 20
Guaynabo, PR 00969

San Patricio Branch(4)                                June 30, 2013                                257
San Patricio Plaza
Ortegon Street
Guaynabo, PR 00969

Bayamon Branch(2)(3)                                  May 31, 2001                                 265
42-43 Betances Avenue                            One (1) ten year option
Urb. Hermanas Davila
Bayamon, PR 00959

Bayamon East Branch(4)                              January 10, 2001                               432
Road #174, Lot 100                              Two (2) five year options
Urb. Ind. Minillas
Bayamon, PR 00959

Arecibo Branch(3)                                   December 31, 2001                              110
Marginal Vista Azul                             Two (2) five year options
Corner San Daniel Avenue
Arecibo, PR 00612

Manati Branch(3)                                     August 8, 2009                                448
Plaza Puerta del Sol                           Four (4) five year options
PR Road No. 2, Km. 49.7
Manati, PR 00674
</TABLE>

                                       55
<PAGE>
<TABLE>
<CAPTION>
                                                                                         Net Book Value
    Description/Address                           Lease Term Expiration                    of Property
    -------------------                           ---------------------                    -----------
                                                                                          (In Thousands)
<S>                                             <C>                                            <C>   
Carolina Branch(4)                                     July 31, 2003                           349
65th Infantry Avenue
Corner San Marcos Street
Carolina, PR 00985

Trujillo Alto Branch(4)                              October 31, 2004                          101
Trujillo Alto Shopping Center
Trujillo Alto, PR 00976

Santurce Branch(4)                                    April 30, 1999                           323
1077 Ponce de Leon Avenue                       Three (3) six year options
Santurce, PR 00917

Laguna Gardens Branch(4)                              April 30, 1999                           119
Laguna Gardens Shopping Center                   One (1) five year option
Isla Verde
Carolina, PR 00979

Plaza Carolina Branch(4)                               May 31, 2000                            163
Plaza Carolina Mall
Carolina, PR 00985

Norte Shopping Branch(4)                              April 30, 2000                           128
Norte Shopping Center                            Two (2) five year options
Baldorioty de Castro Avenue
San Juan, PR 00907

Vega Baja Branch(4)                                    May 31, 2003                            332
Cabo Caribe Development                          One (1) five year option
PR Road No. 2, Marginal
Vega Baja, PR 00693

Mayaguez Branch(3)                                    April 30, 2002                           582
McKinley Street                                 Three (3) five year options
Corner Dr. Vady
Mayaguez, PR 00680

Fajardo I Branch(2)(4)                                March 15, 2003                           381
Garrido Morales Street                           Two (2) Five Year Options
Corner San Rafael
Fajardo, PR 00738

Martinez Nadal Branch(4)                               June 14, 2003                           627
Paradise Mall                                    Two (2) Five Year Options
Corner Jesus T. Pinero Ave.
Rio Piedras, PR 00925
</TABLE>
                                       56

<PAGE>
<TABLE>
<CAPTION>
                                                                                         Net Book Value
    Description/Address                           Lease Term Expiration                    of Property
    -------------------                           ---------------------                    -----------
                                                                                          (In Thousands)
<S>                                             <C>                                            <C>   
Ponce Branch(4)                                      March 31, 2000                               292
Lifetime Building Lot 5                          Three (5) Year Options
Urb. Industrial San Rafael
Ponce, PR 00731

Fajardo II Branch(4)                               September 30, 1999                              41
Celis Aguilera #161                             One (1) Seven Year Option
Fajardo, PR 00738

Plaza del Sol Branch(4)                             November 15, 2010                             724
Plaza del Sol Mall                              Two (2) Four Year Options
725 West Main Ave.
Bayamon, PR 00961

Operations Center(2)                                January 10, 2001                            2,443
Road #174, Lote 100                             Two (2) five year options
Urb. Ind. Minillas
Bayamon, PR 00959

Branch locations to be                                     --                                     609
                                                                                                  ---
opened in 1999

                                                                                               10,370
                                                                                               ------

Champion Mortgage:

Hato Rey Branch                                       June 30, 2003                                53
295 Jesus T. Pinero                             One (1) five year option
San Juan, PR 00918

Ponce Branch                                           May 1, 2003                                 26
                                                                                                   --
Las Americas Ave
Ext. Buena Vista #25
Ponce, PR 00731                                                                                    79
          -----                                                                                    --
</TABLE>
                                       57

<PAGE>
<TABLE>
<CAPTION>
<CAPTION>
                                                                                         Net Book Value
    Description/Address                           Lease Term Expiration                    of Property
    -------------------                           ---------------------                    -----------
                                                                                          (In Thousands)
<S>                                             <C>                                            <C>   
R&G Mortgage:


Caguas Office                                         July 31, 2000                                  8
D-9 Degetau Street                              One (1) five year option
Urb. San Alfonso
Caguas, PR 00725

Los Jardines Office(5)                               August 1, 2006                                 18
Los Jardines de Guaynabo Shopping Center        One (1) five year option
PR Road No. 20
Guaynabo, PR 00969

Hato Rey Office(2)(3)                               December 31, 2002                            2,364
280 Jesus T. Pinero Avenue                      Two (2) five year options
Hato Rey, PR 00919

Bayamon Office(2)(3)                                  May 30, 2001                                  78
42-43 Betances Avenue                            One (1) ten year option
Urb. Hermanas Davila
Bayamon, PR 00959

Arecibo Office(3)                                    January 1, 2002                                 7
Marginal Vista Azul                             Two (2) five year options
Corner San Daniel Avenue
Arecibo, PR 00612

Manati Office(3)(6)                                 October 30, 2003                                12
Plaza Puerta del Sol                            One (1) five year option
PR Road No. 2, Km. 49.7
Manati, PR 00674
</TABLE>
                                       58
<PAGE>
<TABLE>
<CAPTION>
<CAPTION>
                                                                                         Net Book Value
    Description/Address                           Lease Term Expiration                    of Property
    -------------------                           ---------------------                    -----------
                                                                                          (In Thousands)
<S>                                             <C>                                            <C>   
Mayaguez Office(3)(6)                               October 30, 2003                                26
                                                                                                 -----
McKinley Street                                 One (1) five year option
Corner Dr. Vady
Mayaguez, PR 00680
                                                                                                 2,513
                                                                                               $12,962

</TABLE>
(1)      Also serves as the main office of R&G Financial.

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

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

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

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


Item 3.  Legal Proceedings.

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


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

         Not applicable.


                                       59
<PAGE>
PART II.

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

         The information  required herein is incorporated by reference from page
75 of the Registrant's 1998 Annual Report.

Item 6.  Selected Financial Data.

         The information required herein is incorporated by reference from pages
25 to 27 of the Registrant's 1998 Annual Report.

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

         The information required herein is incorporated by reference from pages
28 to 40 of the Registrant's 1998 Annual Report.

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

         The information required herein is incorporated by reference from pages
31 to 32 of the Registrant's 1998 Annual Report.

Item 8.  Financial Statements and Supplementary Data.

         The information required herein is incorporated by reference from pages
41 to 74 of the Registrant's 1998 Annual Report.

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

         Not applicable.


PART III.

Item 10.  Directors and Executive Officers of the Registrant.

         The information required herein is incorporated by reference from pages
3 to 8 of  the  Registrant's  Proxy  Statement  dated  March  30,  1999  ("Proxy
Statement").

Item 11.  Executive Compensation.

         The information required herein is incorporated by reference from pages
12 to 15 of the Registrant's Proxy Statement.

                                       60
<PAGE>
Item 12.  Security Ownership of Certain Beneficial Owners and Management.

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

Item 13.  Certain Relationships and Related Transactions.

         The information required herein is incorporated by reference from pages
16 to 18 of the Registrant's Proxy Statement.

PART IV.

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

         (a)  Documents Filed as Part of this Report

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

                  Independent Auditors' Report.

                  Consolidated  Statements of Financial Condition as of December
                   31, 1998 and 1997.

                  Consolidated Statements of Income for the Years Ended December
                     31, 1998, 1997 and 1996.

                  Consolidated  Statements  of Cash  Flows for the  Years  Ended
                     December 31, 1998, 1997 and 1996.

                  Consolidated Statements of Changes in Stockholders' Equity for
                     the Years Ended December 31, 1998, 1997 and 1996.

                  Notes to Consolidated Financial Statements.


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


                                       61
<PAGE>
         (3) The  following  exhibits  are filed as part of this Form 10-K,  and
this list includes the Exhibit Index.
<TABLE>
<CAPTION>
No.                                                          Description
------------     -------------------------------------------------------------------------------------------------
<S>              <C>                                                                              
2.0              Amended and Restated Agreement and Plan of Merger by and between R&G Financial
                      Corporation, the Bank and R-G Interim Premier Bank, dated as of September 27,
                      1996.(1)
3.1              Certificate of Incorporation of R&G Financial Corporation.(2)
3.2              Certificate of Amendment to Certificate of Incorporation of R&G Financial
                      Corporation.(2)
3.3              Bylaws of R&G Financial Corporation.(2)
3.4              Form of Certificate of Resolutions designating the terms of the Series A Preferred Stock
                 (defined below).(3)
4.0              Specimen of Stock Certificate of R&G Financial  Corporation.(2)
4.1              Form of Series A Preferred Stock (defined below) Certificate of R&G Financial
                 Corporation.(3)
10.1             Master Purchase, Servicing and Collection Agreement between R&G Mortgage and the
                      Bank dated February 16, 1990, as amended on April 1, 1991, December 1, 1991,
                      February 1, 1994 and July 1, 1994.(2)
10.2             Master Custodian Agreement between R&G Mortgage and the Bank dated February 16,
                      1990, as amended on June 27, 1996.(2)
10.3                  Master  Production  Agreement between R&G Mortgage and the
                      Bank dated  February  16,  1990,  as amended on August 30,
                      1991 and March 31, 1995.(2)
10.4             Data Processing Computer Service Agreement between R&G Mortgage and R-G
                      Premier Bank dated December 1, 1994.(2)
10.5             Securitization Agreement by and between R&G Mortgage and the Bank, dated as of July
                      1, 1995.(2)
10.6             R&G Financial Corporation Stock Option Plan.(2)(*)
13.0             1998 Annual Report to Stockholders.
21.0             Subsidiaries of the Registrant - Reference is made to "Item 1. Business" for the required
                      information.
27.0             Financial Data Schedule.
99.1             Valuation Report on Minority Interest of Bank Stockholders, prepared by Friedman,
                      Billings, Ramsey & Co., Inc., dated June 13, 1996.(2)
99.2             Update to Valuation on Minority Interest of Bank Stockholders, prepared by Friedman,
                      Billings, Ramsey & Co., Inc., dated September 27, 1996.(1)
</TABLE>

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

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

(3)      Incorporated by reference from the Registrant's  Registration Statement
         on Form S-3 (Registration No.  333-60923),  as amended,  filed with the
         SEC on August 7, 1998.

(*)  Management contract or compensatory plan or arrangement.

                                       62
<PAGE>



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

                  None.

                                       63

<PAGE>



                                   SIGNATURES


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

                                   R&G FINANCIAL CORPORATION


March 30, 1999                     By:    /s/ Victor J. Galan
                                          -------------------
                                          Victor J. Galan
                                          Chairman of the Board, President and
                                            Chief Executive Officer


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



/s/ Victor J. Galan                                       March 30, 1999
------------------- 
Victor J. Galan
Chairman of the Board, President and
 Chief Executive Officer
 (principal executive officer)


/s/ Joseph R. Sandoval                                    March 30, 1999
---------------------- 
Joseph R. Sandoval
Senior Vice President and Chief Financial
  Officer (principal financial and
  accounting officer)


/s/ Ana M. Armendariz                                     March 30, 1999
--------------------- 
Ana M. Armendariz
Director and Treasurer



/s/ Ramon Prats                                           March 30, 1999
Ramon Prats
Executive Vice President and Director



<PAGE>
/s/ Enrique Umpierre-Suarez                               March 30, 1999
Enrique Umpierre-Suarez
Director and Secretary


/s/ Victor L. Galan Fundora                               March 30, 1999
----------------------------
Victor L. Galan Fundora
Director


/s/ Juan J. Diaz                                          March 30, 1999
---------------- 
Juan J. Diaz
Director


/s/ Pedro Ramirez                                         March 30, 1999
-----------------                                                       
Pedro Ramirez
Director


/s/ Laureno Carus Abarca                                  March 30, 1999
------------------------ 
Laureno Carus Abarca
Director


/s/ Eduardo McCormack                                     March 30, 1999
---------------------                                     
Eduardo McCormack
Director


/s/ Gilberto Rivera-Arrega                                March 30, 1999
--------------------------                                
Gilberto Rivera-Arreaga
Director


/s/ Benigno R. Fernandez                                  March 30, 1999
------------------------ 
Benigno R. Fernandez
Director

/s/Ileana M. Colon-Carlo                                  March 30, 1999
------------------------
Ileana M. Colon-Carlo
Director

/s/Roberto Gorbea                                         March 30, 1999
-----------------
Roberto Gorbea