R&G FINANCIAL CORP, S-4, 1996-10-01

R&G FINANCIAL CORP
S-4, 1996-10-01
ASSET-BACKED SECURITIES

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<PAGE>

As filed with the Securities and Exchange Commission on October 1, 1996

Registration No. 333-_____

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________

FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933

R&G FINANCIAL CORPORATION
----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

PUERTO RICO 6712 66-0532217
---------------- ------- --------------
(State or other juris- (Primary Standard (I.R.S. Employer
diction of incorporation Industrial Classification Identification No.)
or organization) Code No.)

280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
(787) 758-2424
--------------
(Address, including zip code and telephone number, including area code,
of Registrant's principal executive offices)

Victor J. Galan
Chairman of the Board and Chief Executive Officer
R&G Financial Corporation
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918
(787) 758-2424
--------------
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
with a copy to:

Norman B. Antin, Esq.
Jeffrey D. Haas, Esq.
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005
(202) 347-0300

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: At the
Effective Time as described in the accompanying Prospectus/Proxy Statement.

------------------------------------------
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. //
------------------------------------------

Calculation of Registration Fee

Title of Each Class of Proposed Maximum Proposed Maximum
Securities to be Amount to be Registered(1) Offering Price Per Aggregate Offering Amount of
Registered Share or Unit(2) Price(2) Registration Fee(2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
Class B, par value 300,962 shares $17.625 $5,304,455 $1,829
$0.01 per share

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

</TABLE>

(1) This Registration Statement covers the maximum number of Class B shares of
common stock of the Registrant issuable to minority stockholders of the
Registrant's subsidiary in connection with the Registrant's acquisition
of the remaining outstanding stock of the subsidiary pursuant to a merger
and acquisition agreement.

(2) Estimated solely for the purpose of calculation of the registration fee.
Pursuant to Rules 457(f)(1) and 457(c) under the Securities Act of 1933,
the registration fee is based on the average of the high and low prices
of the Registrant's Class B Common Stock as reported on the Nasdaq Stock
Market's National Market on September 23, 1996, and computed based on the
maximum number of shares that may be exchanged for the securities being
registered.

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.

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

<PAGE>

R&G FINANCIAL CORPORATION

CROSS-REFERENCE SHEET

ITEM OF FORM S-4 LOCATION IN PROSPECTUS
---------------- ----------------------

1. Forepart of Registration Facing Page; Cross Reference Sheet; Outside
Statement and Outside Front Front Cover Page of Prospectus/Information
Cover Page of Prospectus Statement

2. Inside Front and Outside Inside Front Cover Page of
Back Cover Pages of Prospectus/Information Statement; Table of
Prospectus Contents; Available Information

3. Risk Factors, Ratio of Summary; Market for Class B Shares and Bank
Earnings to Fixed Charges Common Stock and Dividends
and Other Information

4. Terms of the Transaction Summary; The Merger; Description of R&G
Financial Capital Stock; Comparison of the
Rights of Stockholders

5. Pro Forma Financial Not Applicable
Information

6. Material Contracts With Not Applicable
the Company Being Acquired

7. Additional Information Not Applicable
Required for Reoffering by
Persons and Parties
Deemed to be Underwriters

8. Interests of Named Experts Not Applicable
and Counsel

9. Disclosure of Commission Not Applicable
Position on Indemnification
for Securities Act
Liabilities

10. Information with Respect to Not Applicable
S-3 Registrants

11. Incorporation of Certain Not Applicable
Information by Reference

12. Information with Respect to Not Applicable
S-2 or S-3 Registrants

13. Incorporation of Certain Not Applicable
Information by Reference

14. Information with Respect to Selected Consolidated Financial and Other
Registrants Other than Data of R&G Financial; Market for Class B
S-2 or S-3 Registrants Shares and Dividends; R&G Financial;
Management's Discussion and Analysis of
Financial Condition and Results of Operation
of R&G Financial; Business of R&G Financial;
Index to R&G Financial Consolidated
Financial Statements

15. Information with Respect to Not Applicable
S-3 Companies

16. Information with Respect to Not Applicable
S-2 or S-3 Companies

<PAGE>

ITEM OF FORM S-4 LOCATION IN PROSPECTUS
---------------- ----------------------

17. Information with Respect to Summary; R&G Financial; Market for
Companies other than S-2 or Class B Shares and Bank Common Stock and
S-3 Companies Dividends; Selected Financial and Other
Data of R-G Premier Bank; Management's
Discussion and Analysis of Financial
Condition and Results of Operation of the
Bank; Index to R-G Premier Financial
Statements

18. Information if Proxies, Not Applicable
Consents or Authorizations
are to be Solicited

19. Information if Proxies, Front Cover Page of Prospectus/Information
Consents or Authorizations are Statement; Summary; The Special Meeting;
not to be Solicited, or in an The Merger; Beneficial Ownership of
Exchange Offer Securities; Management

<PAGE>

R-G PREMIER BANK OF PUERTO RICO
R-G PLAZA
280 JESUS T. PINERO AVENUE
HATO REY, SAN JUAN, PUERTO RICO 00918

Dear Stockholder,

You are cordially invited to attend a Special Meeting of Stockholders of
R-G Premier Bank of Puerto Rico (the "Bank") at ___:___ __.m., on December
___, 1996, at R-G Plaza, Board of Directors' Conference Room, 280 Jesus T.
Pinero Avenue, Hato Rey, San Juan, Puerto Rico 00918 (the "Special Meeting").

At the Special Meeting, you will be asked to consider and vote upon an
Amended and Restated Agreement and Plan of Merger dated September 27, 1996
(the "Agreement") between the Bank, R&G Financial Corporation ("R&G
Financial"), a Puerto Rico corporation, which is the holding company for the
Bank and R&G Mortgage Corp., and R-G Interim Premier Bank ("Interim"), an
interim bank and wholly-owned subsidiary of R&G Financial which was formed
solely to facilitate the transactions provided for in the Agreement. The
Agreement provides for the acquisition by R&G Financial (i) from Mr. Victor
J. Galan, the Chairman of the Board and Chief Executive Officer of R&G
Financial and the Bank, of his 100% ownership interest in the common stock of
R&G Mortgage and his approximately 88.1% interest in the common stock of the
Bank, in return for shares of Class A common stock of R&G Financial, which
transaction has been completed; and (ii) the merger of Interim with and into
the Bank, with the Bank as the surviving corporation (the "Merger"). Subject
to the proper exercise of appraisal rights, if the Agreement is approved as
anticipated, as described below, each of the remaining outstanding shares of
the Bank not owned by R&G Financial shall be exchanged, by operation of law,
into 1.21 shares of Class B common stock of R&G Financial, par value $0.01
per share (the "Class B Shares"). Stockholders will also be asked to
consider such other business as may properly come before the Special Meeting.
Except with respect to procedural matters incident to the conduct of the
Special Meeting, management is not aware of any other matters which could
come before the Special Meeting.

As you are aware, pursuant to prior notice, a special meeting of the
Bank stockholders was held on July 30, 1996. At such meeting, an Agreement
and Plan of Merger between R&G Financial, the Bank and Interim was approved
by over 93% of the votes eligible to be cast, with no stockholders electing
to exercise dissenters' rights which are available under Puerto Rico law.
Due to an unanticipated position of the Securities and Exchange Commission
("SEC") which was communicated very late in its review of R&G Financial's
Registration Statement with respect to its initial public offering, it became
necessary to separate the transaction contemplated by such Agreement from R&G
Financial's Registration Statement which was declared effective by the SEC on
August 12, 1996 with respect to the public offering of its Class B Shares.
The Bank has accordingly rescinded the results from the special meeting held
on July 30, 1996 and has scheduled a new Special Meeting to be held on
December ___, 1996.

<PAGE>

After careful consideration, your Board of Directors has determined the
Merger to be fair to and in the best interests of the Bank and its
stockholders and has approved the Agreement and the transactions contemplated
thereby, including the Merger. Consummation of the Merger will permit R&G
Financial to fully consolidate its ownership of the Bank and will give Bank
stockholders an ownership interest in R&G Financial, for which a public
trading market now exists.

Enclosed are a Notice of Special Meeting of Stockholders and a
Prospectus/Information Statement which describes the Merger, its effects, the
background of the transaction and provides information on R&G Financial and
the Bank. A copy of the Agreement is included as Annex I to the enclosed
Prospectus/Information Statement.

Stockholders of record at the close of business on November ___, 1996
are entitled to notice of and to vote at the Special Meeting.

Under the Puerto Rico Banking Law, any stockholder of a bank involved in
a merger may object to the consideration offered to him in exchange for his
shares. If he so objects and attempts to seek an alternative consideration,
the stockholder must strictly follow the procedures outlined in Section 15(d)
of the Puerto Rico Banking Law, a copy of which is included as Annex III to
the enclosed Prospectus/Information Statement. Failure to strictly adhere to
the procedures set forth in Section 15(d) of the Puerto Rico Banking Law may
result in the invalidation of any claim against the Bank.

A vote of 75% of the aggregate number of issued and outstanding common
and preferred stock of the Bank is required to approve the Agreement and the
transactions contemplated thereby. STOCKHOLDERS ARE ADVISED THAT THE
AGREEMENT IS EXPECTED TO BE APPROVED BECAUSE R&G FINANCIAL HAS INDICATED AN
INTENTION TO VOTE FOR THE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING THE MERGER. For this reason, the Board of Directors of
the Bank is not soliciting proxies in connection with the Special Meeting.
However, stockholders who attend the Special Meeting and desire to vote will
be provided with ballots in order to vote on the matters under consideration
at the Special Meeting.

Very truly yours,

/s/ Victor J. Galan
------------------------------------
Victor J. Galan
President and Chief Executive Officer

<PAGE>

R-G PREMIER BANK OF PUERTO RICO
R-G Plaza
280 Jesus T. Pinero Avenue
Hato Rey, San Juan, Puerto Rico 00918

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER ___, 1996

NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of R-G
Premier Bank of Puerto Rico (the "Bank"), will be held at R-G Plaza, Board of
Directors' Conference Room, 280 Jesus T. Pinero Avenue, Hato Rey, San Juan,
Puerto Rico, on December ___, 1996, at __:__ __.m. for the following purposes:

(1) To consider and vote upon an Amended and Restated Agreement
and Plan of Merger dated September 27, 1996 (the
"Agreement") between the Bank, R&G Financial Corporation
("R&G Financial"), a Puerto Rico corporation, which is the
holding company for the Bank and R&G Mortgage Corp., and R-G
Interim Premier Bank ("Interim"), an interim bank and
wholly-owned subsidiary of R&G Financial which was formed
solely to facilitate the transactions provided for in the
Agreement.

The Agreement provides for the acquisition by R&G Financial
(i) from Mr. Victor J. Galan, the Chairman of the Board and
Chief Executive Officer of R&G Financial and the Bank, of
his 100% ownership interest in the common stock of R&G
Mortgage and his approximately 88.1% interest in the common
stock of the Bank, in return for shares of Class A common
stock of R&G Financial, which transaction has been
completed; and (ii) the merger of Interim with and into the
Bank, with the Bank as the surviving corporation (the
"Merger"), and subject to the proper exercise of appraisal
rights, described below, each of the remaining outstanding
shares of the Bank not owned by R&G Financial shall be
exchanged, by operation of law, into 1.21 shares of Class B
common stock of R&G Financial, par value $0.01 per share
(the "Class B Shares").

(2) To transact such other business as may properly come before
the Special Meeting. Except with respect to procedural
matters incident to the conduct of the Special Meeting,
management is not aware of any other matters which could
come before the Special Meeting.

Stockholders of record at the close of business on November ___, 1996
are entitled to notice of and to vote at the Special Meeting.

<PAGE>

Prospectus/Information Statement. Failure to strictly adhere to the
procedures set forth in Section 15(d) of the Puerto Rico Banking Law may
result in the invalidation of any claim against the Bank.

A vote of 75% of the aggregate number of issued and outstanding common
and preferred stock of the Bank is required to approve the Agreement and the
transactions contemplated thereby, including the Merger. STOCKHOLDERS ARE
ADVISED THAT THE AGREEMENT IS EXPECTED TO BE APPROVED BECAUSE R&G FINANCIAL,
WHICH OWNS APPROXIMATELY 88.1% OF THE BANK'S OUTSTANDING COMMON STOCK AND
100% OF THE BANK'S OUTSTANDING PREFERRED STOCK (BOTH OF WHICH REPRESENT, IN
THE AGGREGATE, 90.0% OF THE BANK'S OUTSTANDING STOCK), HAS INDICATED AN
INTENTION TO VOTE FOR THE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.

BY ORDER OF THE BOARD OF DIRECTORS

/s/ Victor J. Galan
----------------------------------
Victor J. Galan
Chairman of the Board

San Juan, Puerto Rico
November ___, 1996

YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING

<PAGE>

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT IS
DECLARED EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.

PROSPECTUS INFORMATION STATEMENT
---------- ---------------------

R&G FINANCIAL CORPORATION R-G PREMIER BANK OF PUERTO RICO
______________ ______________

CLASS B COMMON STOCK SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER ___, 1996

This Prospectus/Information Statement is being furnished in
connection with a special meeting of stockholders of R-G Premier Bank of
Puerto Rico (the "Bank") to be held on December ___, 1996 (the "Special
Meeting"). At the Special Meeting, stockholders of the Bank will be asked to
consider and vote upon an Amended and Restated Agreement and Plan of Merger
dated September 27, 1996 (the "Agreement") between the Bank, R&G Financial
Corporation ("R&G Financial"), a Puerto Rico corporation, which is the
holding company for the Bank and R&G Mortgage Corp., a Puerto Rico mortgage
banking company (R&G Mortgage"), and R-G Interim Premier Bank ("Interim"), an
interim bank and wholly-owned subsidiary of R&G Financial which was formed
solely to facilitate the transactions provided for in the Agreement. The
Agreement provides for the acquisition by R&G Financial (i) from Mr. Victor
J. Galan, the Chairman of the Board and Chief Executive Officer of R&G
Financial and the Bank, of his 100% ownership interest in the common stock of
R&G Mortgage and his approximately 88.1% interest in the common stock of the
Bank, in return for shares of Class A common stock of R&G Financial, which
transaction has been completed; and (ii) the merger of Interim with and into
the Bank, with the Bank as the surviving corporation (the "Merger"). Subject
to the proper exercise of appraisal rights, if the Agreement is approved as
anticipated, as described below, each of the remaining outstanding shares of
the Bank not owned by R&G Financial shall be exchanged, by operation of law,
into 1.21 shares of Class B common stock of R&G Financial, par value $0.01
per share (the "Class B Shares"). The exchange ratio was determined based on
an independent valuation of the Bank dated as of September 27, 1996. As of
September 26, 1996, the day prior to the valuation of the Bank, the closing
price of the Class B Shares on the Nasdaq Stock Market's National Market
("NASDAQ") was $17.75. No assurance can be given as to the market price of
the Class B Shares as of the effective date of the Merger, which may be
higher or lower than such price as of September 26, 1996. The transactions
subject to the Agreement are hereinafter referred to as the "Bank Stockholder
Exchange Transaction." Stockholders will also be asked to consider such
other business as may properly come before the Special Meeting. Except with
respect to procedural matters incident to the conduct of the Special Meeting,
management is not aware of any other matters which could come before the
Special Meeting.

The Agreement is expected to be approved because R&G Financial, which
owns approximately 88.1% of the Bank's outstanding common stock and 100% of
the Bank's preferred stock (both of which represent, in the aggregate, 90% of
the Bank's outstanding stock), has indicated an intention to vote FOR the
Agreement and the Merger contemplated thereby. A vote of 75% of the aggregate
number of issued and outstanding common and preferred stock of the Bank is
required to approve the Agreement and the Merger. As a consequence, the Bank
is not soliciting proxies in connection with the Special Meeting. THE BANK
IS NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND THE BANK A
PROXY.

This Prospectus/Information Statement also constitutes a prospectus
of R&G Financial relating to the Class B Shares which are issuable to holders
of Bank common stock (other than R&G Financial) upon consummation of the
Merger.

_______________________________________________________

THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS/INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_______________________________________________________

The date of this Prospectus/Information Statement is _____________ __, 1996

<PAGE>

AVAILABLE INFORMATION

R&G Financial is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (the "Exchange Act"), and, in accordance therewith, files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "SEC"). Reports, proxy statements and other information
filed by R&G Financial can be inspected and copied at Room 1024 of the SEC's
office at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's
Regional Offices at Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048, and copies of such material can be obtained from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The SEC maintains a World Wide Web site on
the Internet that contains reports, proxy and information statements and
other information regarding registrants such as R&G Financial that file
electronically with the SEC. The address of such site is:
http://www.sec.gov. The R&G Financial Class B Shares are quoted on the
NASDAQ. Consequently, reports, proxy statements and other information
relating to R&G Financial also may be inspected at the office of the National
Association of Securities Dealers, Inc. ("NASD") at 1735 K Street, N.W.,
Washington, D.C. 20006.

This Prospectus/Information Statement does not contain all of the
information set forth in the Registration Statement on Form S-4, of which
this Prospectus/Information Statement is a part, and exhibits thereto
(together with the amendments thereto, the "Registration Statement"), which
has been filed by R&G Financial with the SEC under the Securities Act of
1933, as amended, and the rules and regulations thereunder (the "Securities
Act"), certain portions of which have been omitted pursuant to the rules and
regulations of the SEC and to which reference is hereby made for further
information.

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS/INFORMATION
STATEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY R&G FINANCIAL OR THE BANK.
NEITHER THE DELIVERY OF THIS PROSPECTUS/INFORMATION STATEMENT NOR ANY
DISTRIBUTION OF THE SECURITIES TO WHICH THIS PROSPECTUS/INFORMATION STATEMENT
RELATES SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF R&G FINANCIAL OR THE BANK SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE. THIS PROSPECTUS/INFORMATION STATEMENT DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL
OR SOLICITATION TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH AN
OFFER OR SOLICITATION IS NOT LAWFUL.

<PAGE>

TABLE OF CONTENTS

PAGE

Available Information. . . . . . . . . . . . . . . . . . . . . . . . i
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Market for Class B Shares and Bank Common Stock and Dividends. . . . 6
R&G Financial. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Selected Consolidated and Other Financial Data of R&G Financial . . 11
Management's Discussion and Analysis of Financial Condition and
Results of Operation of R&G Financial . . . . . . . . . . . . . 14
Business of R&G Financial. . . . . . . . . . . . . . . . . . . . . . 44
Selected Financial and Other Data of R-G Premier Bank. . . . . . . . 92
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
Beneficial Ownership of Securities . . . . . . . . . . . . . . . . . 118
General Information. . . . . . . . . . . . . . . . . . . . . . . . . 120
The Special Meeting. . . . . . . . . . . . . . . . . . . . . . . . . 120
Time and Place. . . . . . . . . . . . . . . . . . . . . . . . . 120
Matters to be Considered. . . . . . . . . . . . . . . . . . . . 120
Shares Outstanding and Entitled to Vote; Record Date. . . . . . 120
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . 121
Voting; No Solicitation of Proxies. . . . . . . . . . . . . . . 121
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Reasons for the Transaction; Background; Recommendation of
the Board of Directors . . . . . . . . . . . . . . . . . . . 122
Valuation Report of Independent Investment Banker . . . . . . . 123
Exchange of Bank Common Stock Certificates. . . . . . . . . . . 124
Conditions to the Merger. . . . . . . . . . . . . . . . . . . . 125
Effective Date of the Merger; Termination and Amendment . . . . 125
Interests of Certain Persons in the Merger. . . . . . . . . . . 125
Resale of Class B Shares. . . . . . . . . . . . . . . . . . . . 125
Certain Tax Consequences. . . . . . . . . . . . . . . . . . . . 126
Accounting Treatment of the Merger. . . . . . . . . . . . . . . 127
Appraisal Rights. . . . . . . . . . . . . . . . . . . . . . . . 128
Description of R&G Financial Capital Stock . . . . . . . . . . . . . 128
Comparison of the Rights of Stockholders . . . . . . . . . . . . . . 131
Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Index to R&G Financial Consolidated Financial Statements . . . . . . F-1
Index to R-G Premier Bank Financial Statements . . . . . . . . . . . F-53

<PAGE>

ANNEXES:

Annex I - Amended and Restated Agreement and Plan of Merger, dated as
of September 27, 1996, by and between R&G Financial, the
Bank and Interim

Annex II - Opinion of Friedman, Billings, Ramsey & Co., Inc. dated as
of September 27, 1996

Annex III - Section 15(d) of the Puerto Rico Banking Law

iii

<PAGE>

SUMMARY

THE FOLLOWING SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS/INFORMATION STATEMENT AND IN THE DOCUMENTS INCORPORATED HEREIN BY
REFERENCE IS NOT INTENDED TO BE A COMPLETE STATEMENT OF THE MATTERS DESCRIBED
HEREIN OR THEREIN. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY, THE MORE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS/INFORMATION STATEMENT AND IN THE ANNEXES ATTACHED HERETO, INCLUDING
THE AGREEMENT, A COPY OF WHICH IS ATTACHED HERETO AS ANNEX I, AND THE
INFORMATION INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS ARE URGED TO
CAREFULLY READ ALL SUCH INFORMATION.

THE SPECIAL MEETING

The Special Meeting will be held at __:__ __.m., on December ___, 1996, at
R-G Plaza, Board of Directors' Conference Room, 280 Jesus T. Pinero Avenue, Hato
Rey, San Juan, Puerto Rico, on November ___, 1996. Only the holders of record
of outstanding shares of the Bank Common Stock at the close of business on
November ___, 1996 (the "Record Date") are entitled to notice of and to vote at
the Special Meeting and any adjournment or adjournments thereof. On the Record
Date, 2,089,653 shares of the Bank common stock were outstanding and entitled to
be voted at the Special Meeting.

At the Special Meeting, shareholders of the Bank will (i) consider and vote
upon a proposal to approve the Agreement, and (ii) consider and act upon such
other matters as may properly come before the Special Meeting. A vote of 75% of
the aggregate number of issued and outstanding common and preferred stock of the
Bank is required to approve the Agreement and the transactions contemplated
thereby. STOCKHOLDERS ARE ADVISED THAT THE AGREEMENT IS EXPECTED TO BE APPROVED
BECAUSE R&G FINANCIAL, WHICH OWNS APPROXIMATELY 88.1% OF THE BANK'S OUTSTANDING
COMMON STOCK AND 100% OF THE BANK'S OUTSTANDING PREFERRED STOCK (BOTH OF WHICH
REPRESENT, IN THE AGGREGATE, 90.0% OF THE BANK'S OUTSTANDING STOCK), HAS
INDICATED AN INTENTION TO VOTE FOR THE AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING THE MERGER. For this reason, the Board of
Directors of the Bank is not soliciting proxies in connection with the Special
Meeting. However, stockholders who attend the Special Meeting and desire to
vote will be provided with ballots in order to vote on the matters under
consideration at the Special Meeting.

PARTIES TO THE AGREEMENT

R&G FINANCIAL. R&G Financial, which had $965.6 million in assets at
June 30, 1996, is the holding company for R&G Mortgage and the Bank. 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 17 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

1
<PAGE>

by single-family residential properties in Puerto Rico. During
the two year period ended June 30, 1996, R&G Mortgage originated 20% of all
single-family residential loans originated in Puerto Rico, which has resulted in
significant growth in its servicing portfolio as well as facilitated rapid
expansion of the Bank's franchise and operations. R&G Mortgage's servicing
portfolio has increased by 56.3% since December 31, 1991 and, at June 30, 1996,
R&G Mortgage serviced approximately 50,069 accounts with an aggregate loan
balance of $2.5 billion. The Bank's asset size, which amounted to $742.1
million at June 30, 1996, has increased by $685.7 million since R&G
Mortgage became affiliated with the Bank in February 1990, while the branch
office network has increased from two to 14 offices. Management estimates that
at June 30, 1996, 22% of R&G Mortgage's customers have established a banking
relationship with the Bank. R&G Financial on a consolidated basis had net
income of $6.1 million and $10.4 million for the six months ended June 30, 1996
and the year ended December 31, 1995, respectively. On August 27, 1996, R&G
Financial closed its initial public offering in which it sold 2,415,000 Class B
Shares at an initial public offering price per share of $14.50. R&G Financial's
principal executive offices are located at 280 Jesus T. Pinero Avenue, Hato Rey,
San Juan, Puerto Rico 00918 and its telephone number is (787) 758-2424.

For additional information concerning R&G Financial, its business,
financial condition and results of operations, see "Selected Consolidated
Financial Data of R&G Financial," "Management's Discussion and Analysis of
Financial Condition and Results of Operation of R&G Financial" and "Business of
R&G Financial."

THE 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 a variety of consumer
loans, commercial business loans and loans secured by commercial real estate.
The Bank offers trust services through its trust department. Total loan
originations by the Bank during the six months ended June 30, 1996 and the years
ended December 31, 1995, 1994 and 1993 amounted to $182.6 million, $124.6
million, $57.9 million and $40.7 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 well as by the Office of the Commissioner
of Financial Institutions of Puerto Rico ("OCFI"). For the six months ended
June 30, 1996 and the year ended December 31, 1995, the Bank on an
unconsolidated basis (which does not reflect certain items of revenue and
expense which are eliminated upon consolidation) had net income of $3.7 million
and $6.2 million, respectively. The Bank's principal executive office is
located at 280 Jesus T. Pinero Avenue, Hato Rey, San Juan, Puerto Rico 00918 and
its telephone number is (787) 758-2424.

For additional information concerning the Bank, its business, financial
condition and results of operations, see "Selected Financial and Other Data of
the Bank," "Management's Discussion and Analysis of Financial Condition and
Results of Operation of R&G Financial" and "Business of R&G Financial."

<PAGE>

INTERIM. Interim is a Puerto Rico-chartered commercial bank and a wholly-
owned subsidiary of R&G Financial created solely for the purpose of consummating
the transactions contemplated by the Agreement. The only activity to be
conducted by Interim will be to merge with and into the Bank. Except for the
activities related to the Agreement, Interim will not engage in any operations.
Upon consummation of the Merger, the separate corporate existence of Interim
shall cease. Interim's executive office is located at 280 Jesus T. Pinero
Avenue, Hato Rey, San Juan, Puerto Rico 00918 and its telephone number is (787)
758-2424.

THE MERGER

In accordance with the terms of and subject to the conditions set forth in
the Agreement, Interim will be merged with and into the Bank, with the Bank as
the surviving corporation of the Merger. The Agreement provides that at the
effective date of the Merger, each outstanding share of Bank common stock (other
than (i) shares held by any objecting stockholders who seek appraisal rights
under the Puerto Rico Banking Law and (ii) any shares held by R&G Financial)
will be converted into the right to receive 1.21 Class B Shares of R&G
Financial. The exchange ratio was determined based on an independent valuation
of the Bank as of September 27, 1996. No fractional Class B Shares will be
issued in the Merger. In lieu thereof, each holder of shares of Bank common
stock entitled to a fraction of a Class B Share shall be entitled to receive an
amount of cash determined by multiplying such holder's fractional interest by
the closing bid price of the Class B Shares on the Nasdaq Stock Market as of the
close of business on the day prior to the Effective Date. As of September 26,
1996, the day prior to the valuation of the Bank, the closing price of the Class
B Shares on the NASDAQ was $17.75. No assurance can be given as to the market
price of the Class B Shares as of the effective date of the Merger, which may be
higher or lower than such price as of September 26, 1996. See "The Merger."

RECOMMENDATIONS OF THE BOARD OF DIRECTORS OF THE BANK

The Board of Directors of the Bank (the "Bank Board") has determined the
Merger to be fair to and in the best interests of the Bank and its stockholders
and has approved the Agreement and the transactions contemplated thereby,
including the Merger. Consummation of the Merger will permit R&G Financial to
fully consolidate its ownership of the Bank and will give Bank stockholders an
ownership interest in R&G Financial, for which a public trading market now
exists. See "The Merger - Reasons for the Transaction; Background;
Recommendation of the Board of Directors."

VALUATION REPORT OF INDEPENDENT INVESTMENT BANKER

Friedman, Billings, Ramsey & Co., Inc. ("FBR") has delivered to the Bank
Board its written valuation report dated September 27, 1996, to the effect that,
as of the date of such valuation report, each outstanding share of Bank common
stock would be exchanged for 1.21 Class B Shares in the Merger. For information
on the assumptions made, matters considered and limits of the valuation report
by FBR, see "The Merger - Valuation Report of Independent

<PAGE>

Investment Banker." FBR's valuation report is attached as Annex II to this
Prospectus/Information Statement.

CONDITIONS TO THE MERGER

The Agreement provides that consummation of the Merger is subject to the
satisfaction of certain conditions at or before the Effective Date. The
Agreement provides that the Merger shall not become effective until: (i) the
Merger has received the approval of the FDIC and the OCFI and all applicable
waiting periods have expired; (ii) R&G Financial, the Bank and Interim shall
have obtained all other consents, permissions and approvals and taken all
actions required by law or agreement or deemed necessary by such parties prior
to the consummation of the Agreement; (iii) the SEC and any applicable state
securities commission shall have declared effective this Registration Statement;
(iv) the parties shall have received a satisfactory opinion of counsel or tax
ruling with respect to the Puerto Rico income tax consequences of the Merger;
and (v) the Agreement shall have been approved by the requisite vote of the
Bank's stockholders and by R&G Financial, as the sole stockholder of Interim.

EFFECTIVE DATE OF THE MERGER

The Merger shall become effective upon the filing of the Agreement with the
Secretary of State of the Commonwealth of Puerto Rico (the "Effective Date").
The Agreement will be filed only after the holding of the Special Meeting and
approval of the Agreement by the requisite vote of the stockholders of the Bank
and the satisfaction or waiver of all other conditions to the Merger set forth
in the Agreement.

CERTAIN TAX CONSEQUENCES

It is intended that the Merger will be treated as a tax-free exchange, and
that the July 19, 1996 transfer by Victor J. Galan of his shares of common stock
in the Bank and in R&G Mortgage for the shares of Class A common stock of R&G
Financial will be deemed to be a tax-free exchange for Puerto Rico income tax
purposes. However, it is not clear whether the exchange by stockholders of the
Bank, other than Victor J. Galan, of the remaining common stock for the Bank for
Class B Shares of R&G Financial will constitute a tax-free exchange for Puerto
Rico income tax purposes. The Bank and R&G Mortgage have filed a request for a
ruling determination with the Secretary of Treasury of Puerto Rico on July 1,
1996 with respect to this and certain other matters. See "Certain Tax
Consequences." The Company expects to complete the Merger irrespective of the
tax determination of the Secretary of the Treasury of the tax consequences to
Bank stockholders other than Victor J. Galan.

BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF EACH BANK STOCKHOLDER, EACH SUCH STOCKHOLDER IS
URGED TO CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE APPLICABLE
CONSEQUENCES OF THE MERGER IN HIS OR HER PARTICULAR CIRCUMSTANCES.

<PAGE>

ACCOUNTING TREATMENT OF THE MERGER

R&G Financial intends to account for the Merger under the purchase method
for accounting and financial reporting purposes. See "The Merger - Accounting
Treatment of the Merger."

INTEREST OF CERTAIN PERSONS IN THE MERGER

No director or executive officer of the Bank has any direct or indirect
material interest in the Merger, except insofar as ownership of Bank common
stock might be deemed such an interest. See "The Merger - Interest of Certain
Persons in the Merger."

DESCRIPTION OF R&G FINANCIAL CAPITAL STOCK

Subject to the rights of the holders of any class of preferred stock of R&G
Financial if and when outstanding, the holders of R&G Financial common stock
(the "R&G Financial Common Stock") possess exclusive voting rights in R&G
Financial, are entitled to such dividends as may be declared from time to time
by the Board of Directors of R&G Financial and would be entitled to receive all
assets of R&G Financial available for distribution in the event of any
liquidation, dissolution or winding up of R&G Financial. Holders of R&G
Financial Common Stock do not have any preemptive rights with respect to any
shares which may be issued by R&G Financial in the future. R&G Financial has
two classes of Common Stock outstanding. The Class A shares of Common Stock,
par value $0.01 per share ("Class A Shares"), all of which are held by Victor J.
Galan, the Company's Chairman of the Board and Chief Executive Officer, are
entitled to two votes per share on all matters submitted to common stockholders
for consideration, while the Class B Shares are entitled to one vote per share
on all of such matters. Upon receipt by R&G Financial of certificates
evidencing the shares of Bank common stock surrendered in exchange for Class B
Shares of R&G Financial pursuant to the Merger, each Class B Share offered
hereby will be fully paid and nonassessable. See "Description of R&G Financial
Capital Stock."

DIFFERENCES IN STOCKHOLDERS' RIGHTS

Upon consummation of the Merger, stockholders of the Bank will become
stockholders of R&G Financial and their rights as stockholders of R&G Financial
will be governed by R&G Financial's Certificate of Incorporation, as amended,
and Bylaws and the Puerto Rico General Corporation Law of 1995. See "Comparison
of the Rights of Stockholders" for a discussion of the similarities and
differences in these rights.

RESALE OF CLASS B SHARES

The Class B Shares to be issued in connection with the Merger will be
freely tradeable by the holders of such shares, except for those shares held by
persons who may be deemed to be "affiliates" of R&G Financial under applicable
federal securities laws. See "The Merger - Resale of Class B Shares."

<PAGE>

APPRAISAL RIGHTS

If the Merger is consummated as anticipated, under Puerto Rico law, holders
of Bank common stock who vote against the Agreement have the right to petition
the Puerto Rico Superior Court to have the Bank common stock appraised and to
receive payment equal to the value of their shares of Bank common stock as so
determined. The procedures which must be followed in connection with the
exercise of appraisal rights are described herein under "The Merger - Appraisal
Rights." and in Section 15(d) of the Puerto Rico Banking Law, a copy of which is
attached as Annex III to this Prospectus/Information Statement. Failure to take
any required step in connection with the exercise of such rights may result in
termination or waiver thereof.

MARKET FOR CLASS B SHARES AND BANK COMMON STOCK AND DIVIDENDS

The Class B Shares of R&G Financial are traded on Nasdaq Stock Market under
the symbol "RGFC." Application will be made to list the Class B Shares to be
issued in connection with the Merger on the Nasdaq Stock Market. As of the
Record Date, there were 2,435,000 Class B Shares outstanding, which were held by
approximately _________ stockholders of record. Such numbers of stockholders do
not reflect the number of individuals or institutional investors holding stock
in nominee name through banks, brokerage firms and others. As of the Record
Date, there were 2,089,653 shares of Bank common stock outstanding which were
held by _______ shareholders of record. No established public trading market
exists for the Bank common stock.

The Class B Shares began trading on the Nasdaq National Market on August
22, 1996 in connection with the initial public offering of R&G Financial.
Through ___________, 1996, the high and low market prices per share of the Class
B Shares as reported on Nasdaq were $_____ and $_____, respectively. R&G
Financial informed Bank stockholders of its intention to enter into the Bank
Stockholder Exchange Transaction prior to its becoming a publicly traded
company.

R&G Financial did not declare any dividends on the Class B Shares during
this period. (On September 30, 1996, R&G Financial declared a cash dividend of
$.0625 per share on the R&G Financial Common Stock, payable on November 15, 1996
to stockholders of record as of October 15, 1996.)

The Bank does not have access to information on the prices at which the
Bank common stock has been bought and sold during the last few years. Trading
in Bank common stock has been very limited and sporadic in privately negotiated
transactions between willing buyers and sellers.

<PAGE>
R&G FINANCIAL

GENERAL. R&G Financial, which had $965.6 million in assets at June 30,
1996, is the newly established holding company for R&G Mortgage and the Bank.
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 17 locations. Puerto Rico,
the fourth largest of the Caribbean Islands, is a commonwealth of the United
States and is approximately 100 miles long and 35 miles wide. The population of
Puerto Rico as of June 30, 1995 was estimated at approximately 3.7 million. 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 two year period ended June 30, 1996, R&G Mortgage originated
20% of all single-family residential loans originated in Puerto Rico, which has
resulted in significant growth in its servicing portfolio as well as facilitated
rapid expansion of the Bank's franchise and operations. R&G Mortgage's
servicing portfolio has increased by 56.3% since December 31, 1991 and, at June
30, 1996, R&G Mortgage serviced approximately 50,069 accounts with an aggregate
loan balance of $2.5 billion. The Bank's asset size, which amounted to $742.1
million at June 30, 1996, has increased by $685.7 million since R&G
Mortgage became affiliated with the Bank in February 1990, while the branch
office network had increased from two to 14 offices. R&G Financial on a
consolidated basis had net income of $6.1 million and $10.4 million for the six
months ended June 30, 1996 and the year ended December 31, 1995, respectively.

Mr. Victor J. Galan, the Chairman of the Board, Chief Executive Officer and
controlling shareholder of R&G Financial, originally organized R&G Mortgage in
1972. In February 1990, R&G Mortgage acquired a 74.7% interest in a two branch
federal savings and loan association with total assets of $52.9 million, which
was re-named R&G Federal Savings Bank. Recognizing the complementary
operational aspects and cross selling opportunities that are inherent in
operating both a mortgage bank and banking institution, during 1990 Mr. Galan
successfully integrated both the Bank's and R&G Mortgage's operations, which
structure has since been emulated in Puerto Rico. Embarking on a retail branch
expansion strategy, the Bank in 1993 acquired a two branch savings and loan
association with total assets of $78.6 million and, in June 1995, acquired from
a commercial bank $77.2 million in deposits and, after consolidation, six branch
offices. In November 1994, the Bank converted to a Puerto Rico-chartered
commercial bank and took its present name. In connection with the
reorganization of R&G Mortgage and the Bank into the bank holding company form
of organization, R&G Financial in July 1996 acquired the approximately 88.1%
ownership interest of the Bank held by Mr. Galan. (The remaining common stock
of the Bank, which amounts to approximately 11.9% of the outstanding common
stock is being exchanged for Class B Shares in the Bank Stockholder Exchange
Transaction.)

BUSINESS STRATEGY. 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

7
<PAGE>

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. R&G Financial attempts to control
its overall operating expenses, notwithstanding R&G Financial's recent growth
and expansion activities.

R&G Financial's principal executive offices are located at 280 Jesus T.
Pinero Avenue, Hato Rey, Puerto Rico, and its telephone number is (787)
758-2424.

R&G MORTGAGE. R&G Mortgage is engaged primarily in the business of
originating first mortgage loans secured by single-family residential properties
which are either insured by the FHA or guaranteed by the VA and originating
second mortgage loans which are neither insured nor guaranteed. R&G Mortgage
also originates conforming conventional single-family residential loans which
are neither insured by the FHA nor guaranteed by the VA. Pursuant to agreements
entered into between R&G Mortgage and the Bank, non-conforming conventional
single-family residential loans and consumer loans, most of which are 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 CMOs and sold while loans with underwriting technicalities may
be cured through payment experience and subsequently sold. During the six
months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993,
R&G Mortgage originated a total of $226.4 million, $322.7 million, $488.1
million and $834.7 million of loans, respectively. These aggregate originations
include loans originated by R&G Mortgage directly for the Bank of $116.1
million, $156.3 million, $142.6 million and $180.8 million during such
respective periods, or 51.3%, 48.4%, 29.2% and 21.7%, respectively, of total
originations.

R&G Mortgage pools FHA/VA loans into mortgage-backed securities which are
guaranteed by the GNMA, which securities are sold to securities broker dealers
and other investors. Conventional loans may either be sold directly to agencies
such as the FNMA and the FHLMC or to private investors, or may be pooled into
FNMA- or FHLMC-backed mortgage-backed securities which are generally sold to
investors. During the six months ended June 30, 1996 and the years ended
December 31, 1995, 1994 and 1993, R&G Mortgage sold $91.8 million, $232.4
million, $368.1 million and $604.1 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,

8
<PAGE>

HUD and the OCFI. For the six months ended June 30, 1996 and the year ended
December 31, 1995, R&G Mortgage on an unconsolidated basis (which does not
reflect certain items of revenue and expense which are eliminated upon
consolidation) had net income of $2.8 million and $6.7 million, respectively.

THE 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 a variety of consumer
loans, commercial business loans and loans secured by commercial real estate.
The Bank offers trust services through its Trust Department. Total loan
originations by the Bank during the six months ended June 30, 1996 and the years
ended December 31, 1995, 1994 and 1993 amounted to $182.6 million, $124.6
million, $57.9 million and $40.7 million, respectively. The Bank's deposits are
insured by the FDIC and it is regulated and examined by the FDIC as well as by
the OCFI. For the six months ended June 30, 1996 and the year ended December
31, 1995, the Bank on an unconsolidated basis (which does not reflect certain
items of revenue and expense which are eliminated upon consolidation) had net
income of $3.7 million and $6.2 million, respectively.

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 (the "Data Processing 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 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

<PAGE>

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 "Business of R&G Financial --
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 "Business of R&G Financial -- 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 "Business of R&G Financial -- Mortgage Banking Activities --
Loan Originations, Purchases and Sales of Loans." For additional information on
affiliated transactions, see "Management-Transactions with Certain Related
Persons."

<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF R&G FINANCIAL

The following table presents selected consolidated financial and other data
of R&G Financial for the six months ended June 30, 1996 and 1995, and for each
of the five years in the period ended December 31, 1995. The selected
consolidated financial data should be read in conjunction with the Consolidated
Financial Statements of R&G Financial, including the accompanying Notes,
presented elsewhere herein. The financial information presented for the six
months ended June 30, 1996 and 1995 is unaudited. In the opinion of management,
this information reflects all adjustments, consisting only of normal recurring
accruals and adjustments, necessary for a fair presentation.

<TABLE>
<CAPTION>
At or for the Six
Months Ended
June 30, At or For the Year Ended December 31,
------------------- ------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets(1) $965,552 $748,691 $853,206 $622,499 $538,069 $294,115 $185,397
Loans receivable, net 598,182 370,374 473,841 301,614 216,620 117,428 96,680
Mortgage loans held for sale 18,320 27,926 21,318 22,021 174,221 106,401 31,302
Mortgage-backed and investment
securities held for trading 137,566 148,270 113,809 124,522 -- -- --
Mortgage-backed securities
available for sale 44,469 7,964 61,008 13,300 10,241 4,763 4,197
Mortgage-backed securities
held to maturity 39,473 81,600 41,731 84,122 39,122 15,557 12,119
Investment securities,
available for sale 23,107 3,280 3,280 1,878 -- -- --
Investment securities held to
maturity 8,685 1,753 2,046 2,182 4,957 2,267 1,605
Cash and cash equivalents(2) 57,377 79,208 104,195 45,622 66,958 25,677 22,989
Deposits 563,147 484,048 518,187 380,148 312,151 169,998 128,226
Securities sold under agreements
to repurchase 98,294 124,535 98,483 108,922 -- -- 1,800
Notes payable 142,883 44,111 81,130 45,815 133,913 76,372 20,286
Other borrowings(3) 69,056 17,459 67,315 18,092 14,479 212 1,316
Subordinated notes(4) 3,250 3,250 3,250 3,250 3,071 3,010 2,978
Minority interest in the Bank(5) 4,365 3,554 3,957 3,204 2,703 1,889 1,276
Stockholder's equity 70,469 60,730 66,385 55,970 49,531 32,344 23,747

SELECTED INCOME STATEMENT DATA:
Revenues:
Net interest income after provision
for loan losses $13,089 $9,164 $20,323 $19,137 $14,253 $8,782 $4,910
Loan administration and servicing
fees 6,496 5,235 11,030 11,046 9,326 9,242 8,520
Net gain on sale of investments 329 -- -- -- 394 -- --
Net gain on origination and sale of
loans and servicing rights 3,992 2,210 6,262 1,566 29,026 9,229 3,978
Unrealized gains (losses) on trading
securities (621) 2,295 2,122 (4,465) -- -- --
Other(6) 2,407 1,321 4,028 1,667 1,179 1,040 468
------- ------- ------- ------- ------- ------- -------
Total revenue 25,692 20,225 43,765 28,951 54,178 28,293 17,876
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Expenses:
Employee compensation and benefits 5,955 3,363 8,284 5,252 8,590 3,971 2,776
Office occupancy and equipment 2,895 2,010 4,711 4,488 3,395 1,425 1,063
Other administrative and general 6,516 6,378 13,731 13,269 14,561 8,424 6,929
------- ------- ------- ------- ------- ------- -------
Total expenses 15,366 11,751 26,726 23,009 26,546 13,820 10,768
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Income before minority interest in
the Bank and income taxes 10,326 8,474 17,039 5,942 27,632 14,473 7,108
Minority interest in the Bank's
earnings(5) 409 345 743 500 812 613 325
Income taxes 3,822 2,874 5,847 856 9,633 5,262 1,624
Cumulative effect of change in
accounting principle -- -- -- 867 -- -- --
------- ------- ------- ------- ------- ------- -------
Net income $6,095 $5,255 $10,449 $5,452 $17,187 $8,598 $5,159
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
SELECTED OPERATING DATA(7):
Performance Ratios and Other Data:
Mortgage loans originated(8) $216,093 $133,088 $306,775 $488,071 $834,680 $387,312 $287,844
Loan servicing portfolio 2,450,767 2,205,343 2,298,200 2,114,743 2,000,530 1,770,246 1,568,307
Return on average assets 1.38% 1.62% 1.47% 0.91% 4.07% 3.53% 2.87%
Return on average equity 17.82 18.12 17.08 10.34 41.98 31.01 24.14
Equity to assets at end of period 7.30 8.11 7.78 8.94 9.21 11.00 12.81
Interest rate spread(9) 2.91 2.83 2.93 3.24 3.66 3.61 2.73
Net interest margin(9) 3.19 3.05 3.26 3.48 3.92 4.00 3.11
Average interest-earning assets to
average interest-bearing liabilities 105.67 104.32 106.50 105.60 106.08 107.97 104.82
Total other expenses to average
total assets 3.47 3.62 3.80 3.84 6.29 5.67 5.99
Full-service Bank offices 14 8 14 8 8 5 3
R&G Mortgage offices(10) 11 12 12 12 13 12 12
</TABLE>

11
<PAGE>

- ------------------
(1) At June 30, 1996, R&G Mortgage and the Bank had total assets of $185.2
million and $742.1 million, respectively, before consolidation.

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

(3) Comprised of long-term debt, advances from the Federal Home Loan Bank
("FHLB") of New York and other secured borrowings. See "Business of R&G
Financial - Sources of Funds - Borrowings" and Notes 12 to 14 of R&G
Financial's Notes to Consolidated Financial Statements.

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

(5) Represents the approximately 11.9% interest in the Bank and in its
earnings held by stockholders other than R&G Financial, which is the
subject of the Bank Stockholder Exchange Transaction. See "The Merger."

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

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

<PAGE>

(8) Represents total originations by R&G Mortgage for the Bank as well
as loans originated and sold to third parties. See "Business of R&G
Financial - Mortgage Banking Activities - Loan Originations, Purchases
and Sales."

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

(10) R&G Mortgage maintains a total of 11 offices that are separate from
Bank branch offices. A total of seven of these offices are located in
the same building or facility as the Bank branch. The table does not
include an additional five Mortgage Banking Centers which are located in
the Bank's offices. See "Business of R&G Financial -- Offices and Other
Material Properties."

(11) Non-performing loans consist of R&G Financial's non-accrual loans
and non-performing assets consist of R&G Financial's non-performing
loans and real estate acquired by foreclosure or deed-in-lieu thereof.
See "Business of R&G Financial - Asset Quality."

(12) All of such ratios were in compliance with the applicable
requirements of the FDIC. Prior to 1994, the Bank operated as a savings
and loan association. As such, the Bank was subject to the capital
ratios of the Office of Thrift Supervision ("OTS") and not those of the
FDIC and was at all times in capital compliance therewith. For
definitions and further information relating to the regulatory capital
requirements of R&G Financial and the Bank, see "Regulation - R&G
Financial - Capital Requirements" and "- The Bank - Capital
Requirements."

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF R&G FINANCIAL

GENERAL

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

R&G Financial has generally sought to achieve long-term financial
strength and profitability by increasing the amount and stability of its net
interest income and other non-interest income. R&G Financial has sought to
implement this strategy by (i) establishing and emphasizing the growth of its
mortgage banking activities, including growing its loan servicing operation;
(ii) expanding its retail banking franchise (the Bank has expanded its branch
system from two offices at February 1990 to 14 offices at June 30, 1996) and,
without taking into consideration possible branch acquisition opportunities,
the Bank anticipates opening approximately two branches per year during the
next several years, all in order to achieve increased market presence and to
increase core deposits; (iii) enhancing R&G Financial's net interest income
by increasing R&G Financial's loans held for investment, particularly
single-family residential loans; (iv) developing new business relationships
through an increased emphasis on commercial real estate and commercial
business lending; (v) diversifying R&G Financial's retail products and
services, including an increase in consumer loan originations (such as credit
cards); (vi) meeting the banking needs of its customers through, among other
things, the offering of trust and investment services; and (vii) controlled
growth and the pursuit of a variety of acquisition opportunities when
appropriate. R&G Financial attempts to control its overall operating
expenses, notwithstanding R&G Financial's recent growth and expansion
activities.

ASSET AND LIABILITY MANAGEMENT

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

<PAGE>

demand for mortgages. To the extent that interest rates in future periods
were to increase substantially, R&G Financial would expect overall
originations to decline. A decrease in the volume of R&G Financial's
mortgage originations could result in a decrease in the amount of R&G
Mortgage's mortgage origination income and portfolio generated net interest
income to the Bank.

The principal objective of R&G Financial's asset and liability
management function is to evaluate the interest-rate risk included in certain
balance sheet accounts, determine the appropriate level of risk given R&G
Financial's business focus, operating environment, capital and liquidity
requirements and performance objectives, establish prudent asset
concentration guidelines and manage the risk consistent with Board approved
guidelines. Through such management, R&G Financial seeks to reduce the
vulnerability of its operations to changes in interest rates and to manage
the ratio of interest rate sensitive assets to interest rate sensitive
liabilities within specified maturities or repricing dates.

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

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

A more conventional but limited IRRBICO monitoring tool involves an
analysis of the extent to which assets and liabilities are "interest rate
sensitive" and measuring an institution's interest rate sensitivity "gap."
An asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The
interest rate sensitivity "gap" is defined as the difference between
interest-earning assets and interest-bearing liabilities maturing or
repricing within a given time period. A gap is considered positive when the
amount of interest rate sensitive assets exceeds the amount of

<PAGE>

interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds interest rate sensitive
assets. During a period of rising interest rates, a negative gap would tend
to adversely affect net interest income, while a positive gap would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would tend to result in an increase in net
interest income, while a positive gap would tend to affect net interest
income adversely. At June 30, 1996, R&G Financial's interest-bearing
liabilities which mature or reprice within one year exceeded R&G Financial's
interest-earning assets with similar characteristics by $5.4 million, or
0.56% of total assets. While a conventional gap measure may be useful, it is
limited in its ability to predict trends in future earnings. It makes no
presumptions about changes in prepayment tendencies, deposit or loan maturity
preferences or repricing time lags that may occur in response to a change in
the interest rate environment.

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

A mortgage-banking company is generally exposed to interest rate risk
from the time the interest rate on the customer's mortgage loan application
is established through the time the mortgage loan closes, and until the time
the company commits to sell the mortgage loan. In order to limit R&G
Mortgage's exposure to interest rate risk through the time the mortgage loan
closes, R&G Mortgage generally does not lock-in or guarantee the customer a
specific interest rate on such loans through the closing date but rather
offers customers an interest rate that will be based on a prevailing market
rate that adjusts weekly. Moreover, in order to limit R&G Mortgage's
exposure to interest rate risk through the time the loan is sold or committed
to be sold, R&G Mortgage may, depending upon market conditions, enter into
forward commitments to sell a portion of its mortgage loans to investors for
delivery at a future time. At June 30, 1996, R&G Mortgage had $15.5 million
of pre-existing commitments by third-party investors to purchase mortgage
loans. To the extent that R&G Mortgage originates or commits to originate
loans without pre-existing commitments by investors to purchase such loans or
is not otherwise hedged against changes in interest rates ("unhedged loans"),
R&G Mortgage will be subject to the risk of gains or losses through
adjustments to the carrying value of loans held for sale or on the actual
sale

16
<PAGE>

of such loans (the value of unhedged loans fluctuates inversely with changes
in interest rates).

Finally, R&G Mortgage carries an inventory of mortgage-backed and
related securities (primarily fixed-rate GNMA certificates). Generally, the
value of fixed-rate mortgage-backed securities declines when interest rates
rise and, conversely, increases when interest rates fall. At June 30, 1996,
R&G Mortgage held $136.6 million of mortgage-backed and related securities
(all of which carried fixed interest rates) which were classified as held for
trading and reported at fair value, with unrealized gains and losses included
in earnings. Accordingly, declines in the value of R&G Mortgage's securities
held for trading could have a negative impact on R&G Financial's earnings
regardless of whether any securities were actually sold.

In order to hedge the interest rate risk with respect to R&G Mortgage's
mortgage-backed and related securities portfolio, R&G Mortgage may utilize a
variety of interest rate contracts such as interest rate swaps, collars,
caps, options or futures (primarily Eurodollar certificates of deposit and
U.S. Treasury note contracts). R&G Mortgage will use such hedging
instruments based upon market conditions as well as the level of market rates
of interest. Since April 1996, R&G Mortgage's hedging activities have been
conducted through an outside investment adviser who is compensated based upon
the amount of its portfolio being hedged. In determining the amount of its
portfolio to hedge, R&G Mortgage will consider the volatility of prices of
its mortgage-backed and related securities (Puerto Rican GNMAs are generally
less volatile than their U.S. counterparts). At June 30, 1996, R&G Mortgage
was not a party to any interest rate swaps, collars, caps, floors, options or
futures.

THE BANK. The results of operations of the Bank are substantially
dependent on its net interest income, which is the difference between the
interest income earned on its interest-earning assets and the interest
expense paid on its interest-bearing liabilities. At June 30, 1996, the
Bank's interest-earning assets included a portfolio of loans receivable, net
(not including mortgage loans held for sale), of $545.4 million and a
portfolio of investment securities and mortgage-backed securities (both held
to maturity, held for trading and available for sale) of $117.9 million.
Because the Bank's interest-earning assets have longer effective maturities
than its interest-bearing liabilities, the yield on the Bank's
interest-earning assets generally will adjust more slowly than the cost of
its interest-bearing liabilities and, as a result, the Bank's net interest
income generally would be adversely affected by increases in interest rates
and positively affected by comparable declines in interest rates. In
addition to affecting net interest income, changes in interest rates also can
affect the value of the Bank's interest-earning assets, which are comprised
of fixed and adjustable-rate instruments. At June 30, 1996, $2.2 million or
1.8% of the Bank's mortgage-backed and investment securities were classified
as held for trading (which consisted solely of mortgage-backed and related
securities), and are reported at fair value, with unrealized gains and losses
included in earnings. Accordingly, declines in the value of the Bank's
securities held for trading could have a negative impact on R&G Financial's

<PAGE>

earnings regardless of whether any securities were actually sold by the Bank.
In addition, at June 30, 1996, $67.6 million or 57.3% of the Bank's
mortgage-backed and investment securities were classified as available for
sale and are reported at fair value, with unrealized gains and losses
excluded from earnings and reported net of taxes as a separate component of
stockholders' equity.

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

External hedging involves the use of interest rate swaps, collars, caps,
options and futures. The Bank utilizes the services of one outside
investment adviser who assists the Bank in the management of its investment
and mortgage-backed securities portfolio and who advises the Bank with
respect to the use of various financial instruments to reduce interest rate
risk. Such investment adviser, which has been engaged by the Bank to, among
other things, assist it in achieving the objectives established by the Bank's
IRRBICO, is compensated based upon both the total amount of assets under
management as well as the performance of the portfolio. At June 30, 1996,
Bank assets with an approximate fair value of $31.1 million ($19.0 million of
which is being utilized for hedging purposes and $12.1 million of which is
being utilized for trading purposes) were being managed by its independent
investment adviser and were invested in U.S. Government agency securities and
money market instruments. These assets are being hedged with financial
futures contracts and Eurodollars. Such firm also executes hedging
strategies on behalf of the Bank for U.S. Government and agency securities
available for sale and all mortgage-backed securities (excluding CMOs) which
are available for sale. At June 30, 1996, mortgage-backed securities
available for sale being hedged had a fair value of $55.6 million. See
"Business of R&G Financial -- Investment Activities."

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

<PAGE>

At June 30, 1996, the Bank was a party to 5 interest rate swap
agreements. An interest rate swap is an agreement where one party (generally
the Bank) agrees to pay a fixed-rate of interest on a notional principal
amount to a second party (generally a broker) in exchange for receiving from
the second party a variable-rate of interest on the same notional amount for
a predetermined period of time. No actual assets are exchanged in a swap of
this type and interest payments are generally netted. The Bank's existing
interest rate swap agreements have an aggregate notional amount of
approximately $35.0 million and expire from August 1996 to October 2000. With
respect to such agreements, the Bank makes fixed interest payments ranging
from 4.42% to 6.6% and receives payments based upon the three-month London
Interbank Offer Rate ("LIBOR"). The net expense (income) relating to the
Bank's fixed-pay interest rate swaps amounted to approximately $10,000,
$(187,000), $65,000 and $387,000 during the six months ended June 30, 1996
and the years ended December 31, 1995, 1994 and 1993, respectively. Such
interest rate contracts have reduced the imbalance between the Bank's
interest-earning assets and interest-bearing liabilities within shorter
maturities, thus, reducing the Bank's exposure to increases in interest rates
that may occur in the future.

As discussed above, the Bank may also enter into interest rate collars,
caps, options and futures. However, at June 30, 1996 and December 31, 1995
and 1994, the Bank was not a party to any such interest rate contracts. An
interest rate cap consists of a guarantee given by one party, referred to as
the issuer (i.e., a broker), to another party, referred to as the purchaser
(i.e., the Bank), in exchange for the payment of a premium, that if interest
rates rise above a specified rate on a specified interest rate index, the
issuer will pay to the purchaser the difference between the then current
market rate and the specified rate on a notional principal amount for a
predetermined period of time. No funds are actually borrowed or repaid.
Similarly, an interest rate collar is a combination of a purchased cap and a
written floor at different rates. Accordingly, an interest rate collar
requires no payments if interest rates remain within a specified range, but
will require the Bank to be paid if interest rates rise above the cap rate or
require the Bank to pay if interest rates fall below the floor rate.
Interest rate futures are commitments to either purchase or sell designated
instruments (such as Eurodollar certificates of deposit and U.S. Treasury
note contracts) at a future date for a specified price. Futures contracts
are generally traded on an exchange, are marked to market daily and subject
to initial and maintenance margin requirements. Options are contracts which
grant the purchaser the right to buy or sell the underlying asset by a
certain date for a specified price.

<PAGE>

The following table summarizes the anticipated maturities or repricing
of R&G Financial's interest-earning assets and interest-bearing liabilities
as of June 30, 1996, based on the information and assumptions set forth in
the notes below.

<TABLE>
<CAPTION>
Four to More Than More Than
Within Three Twelve One Year to Three Years Over Five
Months Months Three Years to Five Years Years Total
------------ --------- ------------ -------------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable:
Residential real estate loans............ $ 15,396 $ 50,467 $ 91,156 $ 66,450 $168,224 $391,693
Construction loans....................... 1,154 4,042 -- -- -- 5,196
Commercial real estate loans............. 64,306 4,458 205 254 2,555 71,778
Consumer loans........................... 13,581 32,017 37,878 13,412 3,081 99,969
Commercial business loans................ 26,267 7,023 -- -- -- 33,290
Mortgage loans held for sale............... 4,514 13,806 -- -- -- 18,320
Mortgage-backed securities(2)(3)........... 14,163 165,123 10,432 7,919 24,022 221,659
Investment securities(3)................... 23,088 16,410 2,328 65 454 42,345
Other interest-earning assets(4)........... 25,250 1,500 -- -- -- 26,750
-------- -------- -------- -------- ------- --------
Total.................................. $187,719 $294,846 $141,999 $ 88,100 $198,336 $911,000
-------- -------- -------- -------- ------- --------
-------- -------- -------- -------- ------- --------
Interest-bearing liabilities:
Deposits(5):
NOW and Super NOW accounts(6)............ $ 3,939 $ 11,031 $ 12,128 $ 9,824 $ 41,884 $ 78,806
Passbook savings accounts(6)............. 1,887 5,469 12,587 10,195 43,465 73,603
Checking and commercial checking(6)...... 2,598 7,276 7,998 6,478 27,621 51,971
Certificates of deposit.................. 103,077 170,049 40,533 39,244 4,460 357,363
FHLB advances.............................. 11,000 -- -- -- -- 11,000
Reverse repurchase agreements.............. 98,294 -- -- -- -- 98,294
Other borrowings(7)........................ 42,241 51,075 2,357 106,116 2,400 204,159
-------- -------- -------- -------- ------- --------
Total.................................. 263,036 244,900 75,603 171,857 119,830 875,226
-------- -------- -------- -------- ------- --------
Effect of hedging instruments.............. (25,000) 5,000 10,000 10,000 -- --
-------- -------- -------- -------- ------- --------
$238,036 $249,900 $ 85,603 $181,857 $119,830 $875,857
-------- -------- -------- -------- ------- --------
-------- -------- -------- -------- ------- --------
Excess (deficiency) of
interest-earning assets over
interest-bearing liabilities............ $(50,317) $ 44,946 $ 56,396 $(93,757) $ 78,506
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities............. $(50,317) $ (5,371) $ 51,025 $(42,732) $ 35,774
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Cumulative excess (deficiency) of
interest-earning assets over
interest-bearing liabilities as a
percent of total assets................. (5.21)% (0.56)% 5.28% (4.43)% 3.71%
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
</TABLE>

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

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

20
<PAGE>

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

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

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

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

(7) Comprised of warehousing lines and notes payable.

Although "gap" analysis is a useful measurement device available to
management in determining the existence of interest rate exposure, its static
focus as of a particular date makes it necessary to utilize other techniques
in measuring exposure to changes in interest rates. For example, gap
analysis is limited in its ability to predict trends in future earnings and
makes no presumptions about changes in prepayment tendencies, deposit or loan
maturity preferences or repricing time lags that may occur in response to a
change in the interest rate environment. As a result, R&G Financial, through
simulation models, also analyzes on a monthly basis the estimated effects on
net interest income and equity under multiple rate scenarios, including
increases and decreases in interest rates amounting to 400, 300, 200 and 100
basis points. The IRRBICO regularly review interest rate risk by forecasting
the impact of alternative interest rate scenarios on net interest income and
on R&G Financial's MVPE, which is defined as the net present value of an
institution's existing assets, liabilities and off-balance sheet instruments,
and by evaluating such impact against the maximum potential changes in net
interest income and MVPE.

<PAGE>

The following table sets forth at June 30, 1996 the estimated percentage
change in R&G Financial's MVPE based on the indicated changes in interest
rates.

MVPE(2)
------------------------------------------------
CHANGE IN CHANGE AS A
INTEREST RATES PERCENTAGE PERCENTAGE
(IN BASIS POINTS)(1) AMOUNT OF CHANGE CHANGE OF ASSETS
- -------------------- ---------------------- ---------- ------------
(DOLLARS IN THOUSANDS)

+400 $(23,299) (21.77)% (2.4)%
+300 (18,146) (16.96) (1.9)
+200 (12,513) (11.69) (1.3)
+100 (6,369) (5.95) (0.7)
-
-100 11,098 10.37 1.14
-200 23,220 21.70 2.39
-300 40,031 37.41 4.12
-400 71,576 66.89 7.38

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

(2) Based on R&G Financial's pre-tax MVPE of $107.0 million at June 30,
1996, which is approximately $36.5 million in excess of R&G Financial's
stockholder's equity calculated in accordance with generally accepted
accounting principles as of such date.

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

CHANGES IN FINANCIAL CONDITION

GENERAL. At June 30, 1996, R&G Financial's total assets amounted to
$965.6 million, as compared to $853.2 million and $622.5 million at December
31, 1995 and 1994, respectively. The $112.4 million or 13.2% increase in
total assets during the six months ended June 30, 1996 was primarily the
result of a $124.3 million or 26.2% increase in loans receivable, net, which
is attributable to the origination of $262.9 million of loans, primarily

22
<PAGE>

single-family residential loans, before reduction for repayments and sales
and a $23.8 million or 20.9% increase in mortgage-backed and investment
securities held for trading, which is the result of securitization of
mortgage loans into mortgage-backed securities, net of sales.

The $230.7 million or 37.1% increase in total assets during 1995 was
primarily due to the cash received in connection with the Bank's acquisition
in June 1995 of $77.2 million in deposits and six branch offices (after
closing and consolidating one branch office) from another commercial bank and
the deployment of such cash into interest-earning assets. See "R&G
Financial." R&G Financial expects to continue its strategy of growing both
the Bank's operations and R&G Mortgage's servicing portfolio.

CASH AND MONEY MARKET INVESTMENTS. Cash and money market investments
(consisting of securities purchased under agreements to resell certificates
of deposit with other financial institutions and federal funds sold) amounted
to $57.4 million, $104.2 million and $45.6 million as of ended June 30, 1996
and December 31, 1995 and 1994, respectively. The significant amount of cash
and money market investments at December 31, 1995 reflected the Bank's June
1995 branch acquisition and the $75.6 million in cash received in connection
therewith. By June 30, 1996, the Bank had deployed substantially all of such
cash into mortgage loans, a substantial portion of which were securitized and
subsequently sold.

LOANS RECEIVABLE AND MORTGAGE LOANS HELD FOR SALE. At June 30, 1996,
R&G Financial's loans receivable, net amounted to $598.2 million or 62.0% of
total assets, as compared to $473.8 million or 55.5% and $301.6 million or
48.5% as of December 31, 1995 and 1994, respectively. The growth in R&G
Financial's loans receivable, net reflects R&G Financial's strategy of
increasing its loans held for investment, including residential mortgage,
construction, commercial real estate, commercial business and consumer loans.
During the six months ended June 30, 1996 and the years ended December 31,
1995, 1994 and 1993, total loans originated and purchased by the Bank
(including loans originated by R&G Mortgage on behalf of the Bank) amounted
to $182.8 million, $281.7 million, $212.3 million and $223.1 million.

At June 30, 1996, R&G Financial's allowance for loan losses (all of
which is maintained in the Bank's loan portfolio) totalled $3.2 million,
which represented a $308,000 or 8.77% decrease and a $315,000 or 10.9%
increase from the levels maintained at December 31, 1995 and 1994,
respectively. At June 30, 1996, R&G Financial's allowance represented
approximately 0.53% of the total loan portfolio and 23.88% of total
non-performing loans, as compared to 0.72% and 33.19% at December 31, 1995
and 0.92% and 50.10% at December 31, 1994. While R&G Financial's allowance
for loan losses as a percentage of both total loans and total non-performing
loans has declined since 1994, management of R&G Financial believes that its
allowance for loan losses at June 30, 1996 was adequate, based upon, among
other things, the significant level of single-family residential loans within
R&G Financial's portfolio (as compared to commercial real estate, commercial
business and consumer loans, which are considered by management to carry a

<PAGE>

higher degree of credit risk) and the low level of loan charge-offs with
respect to R&G Financial's loan portfolio. However, there can be no
assurances that additions to such allowance will not be necessary in future
periods, which could adversely affect R&G Financial's results of operations.
See "Risk Factors - Composition of the Bank's Loan Portfolio;" "Business of
R&G Financial - Lending Activities of the Bank -- Originations, Purchases and
Sales of Loans" and Note 5 of R&G Financial's Notes to Consolidated Financial
Statements.

At June 30, 1996 and December 31, 1995 and 1994, mortgage loans held for
sale amounted to $18.3 million, $21.3 million and $22.0 million,
respectively. Mortgage loans held for sale primarily reflects loans which
are in the process of being securitized and sold. See "Business of R&G
Financial -- Mortgage Banking Activities" and Note 3 of R&G Financial's Notes
to Consolidated Financial Statements. The level of mortgage banking
activities is highly dependent upon market and economic factors. See "Risk
Factors -- Potential Effects of Changes in Interest Rates on R&G Mortgage and
the Bank" and "Business of R&G Financial - Mortgage Banking Activities --
Loan Originations, Purchases and Sales."

SECURITIES HELD FOR TRADING, AVAILABLE FOR SALE AND HELD FOR INVESTMENT.
R&G Financial maintains a substantial portion of its assets in
mortgage-backed and investment securities which are classified as either held
for trading, available for sale or held to maturity in accordance with
SFAS No. 115. At June 30, 1996, R&G Financial's mortgage-backed and investment
securities totalled $253.3 million or 26.2% of total assets, as compared to
$221.9 million or 26.0% and $226.0 million or 36.3% at December 31, 1995 and
1994, respectively.

Securities held for trading consist primarily of FHA and VA loans which
have been securitized and are being held for sale either to institutions in
the secondary market or private investors through the Bank's Trust
Department. At June 30, 1996 and December 31, 1995 and 1994, securities held
for trading amounted to $137.6 million, $113.8 million and $124.5 million.
At June 30, 1996, all but $2.2 million of such securities were held by R&G
Mortgage. Pursuant to SFAS No. 115, securities held for trading are reported
at fair value with unrealized gains and losses included in earnings.

Securities available for sale consist of mortgage-backed and related
securities (FNMA and FHLMC certificates as well as CMOs and CMO residuals)
and U.S. Government agency securities, all of which were held by the Bank.
At June 30, 1996 and December 31, 1995 and 1994, securities available for
sale totalled $67.6 million, $64.3 million and $15.2 million, respectively.
Pursuant to SFAS No. 115, securities available for sale are reported at fair
value with unrealized gains and losses excluded from earnings, and instead
reported as a separate component of stockholders' equity.

Securities held to maturity consist of mortgage-backed securities (GNMA,
FNMA and FHLMC certificates) Puerto Rico Government obligations and, at
June 30, 1996,

<PAGE>

commercial paper, all of which were held by the Bank. At June 30, 1996 and
December 31, 1995 and 1994, securities held to maturity totalled $48.2
million, $43.8 million and $86.3 million, respectively. Securities held to
maturity are accounted for at amortized cost. At June 30, 1996 and December
31, 1995 and 1994, R&G Financial's securities held to maturity had a market
value of $47.1 million, $42.8 million and $81.0 million, respectively. See
"Business of R&G Financial -- Investment Activities" and Note 4 of R&G
Financial's Notes to Consolidated Financial Statements.

MORTGAGE SERVICING RIGHTS. As of June 30, 1996 and December 31, 1995
and 1994, R&G Financial reported $9.8 million, $8.2 million and $4.4 million
of mortgage servicing rights, respectively. Effective January 1, 1995, R&G
Financial adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights,"
and, in connection therewith, R&G Financial is required to recognize both
purchased and originated mortgage servicing rights as assets in its
Consolidated Financial Statements. However, R&G Financial is not permitted to
recognize retroactively mortgage servicing rights originated prior to the
date of its adoption of SFAS No. 122. SFAS No. 122 also requires R&G
Financial to assess the fair value of its mortgage servicing rights on a
quarterly basis and to determine any potential impairment. Any future decline
in interest rates which results in an acceleration in mortgage loan
prepayments could have an adverse effect on R&G Financial's mortgage
servicing rights, the value of which is dependent upon the cash flows from
the underlying mortgage loans. See "Risk Factors -- Potential Effects of
Changes in Interest Rates on R&G Mortgage and the Bank," "Business of R&G
Financial -- Mortgage Banking Activities -- Loan Servicing" and Note 6 of R&G
Financial's Notes to Consolidated Financial Statements.

DEPOSITS. At June 30, 1996, deposits totalled $563.1 million, as
compared to $518.2 million and $380.1 million at December 31, 1995 and 1994,
respectively. The $44.9 million or 8.7% increase in deposits during the six
months ended June 30, 1996 was primarily due to promotions in connection with
new accounts and competitive pricing, while the $138.0 million or 36.3%
increase in deposits during the year ended December 31, 1995 was primarily
the result of the Bank's acquisition in June 1995 of $77.2 million in
deposits from a local commercial bank. One of the Bank's strategies is to
increase its core deposits, which provide a source of fee income and the
ability to cross-sell other products and services. As a result, core deposits
(consisting of passbook, NOW and Super NOW and checking and commercial
checking accounts) increased from $143.3 million or 40.6% of total deposits
at December 31, 1994 to $204.4 million or 36.3% of total deposits at June 30,
1996. See "Business of R&G Financial -- Sources of Funds -- Deposits" and
Note 9 of R&G Financial's Notes to Consolidated Financial Statements.

BORROWINGS. Other than deposits, R&G Financial's primary sources of
funds consist of securities sold under agreements to repurchase (consisting
of agreements to purchase on a specified later date the same securities or
substantially identical securities) ("reverse repurchase agreements"). At
June 30, 1996 and December 31, 1995 and 1994, reverse repurchase agreements
totalled $98.3 million, $98.5 million and $108.9 million, respectively.

<PAGE>

See "Business of R&G Financial -- Sources of Funds -- Borrowings" and Note 10
of R&G Financial's Notes to Consolidated Financial Statements.

Notes payable consist primarily of warehouse lines of credit (which are
used to fund loan commitments of R&G Mortgage) and Section 936 promissory
notes (which represents a low cost source of short and intermediate-term
funds for the Bank). At June 30, 1996, notes payable amounted to $142.9
million, as compared to $81.1 million and $45.8 million at December 31, 1995
and 1994, respectively. The $61.8 million or 76.2% increase in notes payable
during the six months ended June 30, 1996 reflected $50.0 million and $13.8
million of increased 936 Notes and warehouse lines, respectively, which was
partially offset by a $2.0 million reduction in working capital lines of
credit, while the $35.3 million or 77.1% increase in notes payable during the
year ended December 31, 1995 was due to increases of $27.4 million of 936
Notes and $8.4 million of warehouse lines of credit. See "Business of R&G
Financial -- Sources of Funds -- Borrowings" and Note 11 of R&G Financial's
Notes to Consolidated Financial Statements.

Advances from the FHLB of New York amounted to $11.0 million, $6.0
million and $13.6 million at June 30, 1996 and December 31, 1995 and 1994,
respectively. At June 30, 1996, $11.0 million of FHLB advances were scheduled
to mature in 1996, with an average interest rate of 6.12%, as compared to
6.74% and 5.84% at December 31, 1995 and 1994, respectively. See "Business of
R&G Financial -- Sources of Funds -- Borrowings" and Note 13 of R&G
Financial's Notes to Consolidated Financial Statements.

Long-term debt consists of long-term (greater than one-year) notes
payable and amounted to $4.5 million, $5.3 million and $4.5 million at June
30, 1996 and December 31, 1995 and 1994, respectively. At June 30, 1996, the
average rate paid on R&G Financial's long-term debt amounted to 7.35%, as
compared to 7.36% and 7.40% at December 31, 1995 and 1994, respectively. See
"Business of R&G Financial - Sources of Funds - Borrowings" and Note 12 of
R&G Financial's Notes to Consolidated Financial Statements.

In December 1995, the Bank sold single-family residential mortgage loans
with an aggregate outstanding balance of approximately $55 million to two
commercial banks. In connection with these transactions and in consideration
of higher servicing fees, R&G Mortgage assumed certain recourse obligations.
In addition, the purchasers of the loans have the right, at their option, to
require R&G Mortgage to purchase the mortgage loans beginning on specified
dates in December 2000. Management has estimated its liability, if any, under
the foregoing recourse provisions to be immaterial as of June 30, 1996. In
R&G Financial's Consolidated Financial Statements, R&G Financial has
recognized the foregoing transaction as a transfer of loans with recourse.
Accordingly, the proceeds from such transaction (amounting to $53.5 million
and $55.2 million at June 30, 1996 and December 31, 1995, respectively) have
been reported as other secured borrowings in R&G Financial's Consolidated
Financial Statements. See "Business of R&G Financial - Sources of Funds
- - Borrowings" and Note 14 of R&G Financial's Notes to Consolidated Financial
Statements.

<PAGE>

In June 1991, the Bank issued $3.3 million of subordinated capital notes
bearing interest at 8% payable on a quarterly basis. The subordinated notes
are guaranteed by R&G Mortgage and by the Chairman of the Board and Chief
Executive Officer of R&G Financial, and are secured by an irrevocable standby
letter of credit issued by an unrelated commercial bank. Pursuant to the
terms of the subordinated notes, the Bank is required to deposit in an
established sinking fund in seven equal annual installments (the first of
which was made in September 1992 and the last of which is scheduled for June
1998, when the notes mature) cash or other permitted investments in an amount
sufficient to retire one-seventh ($464,000) of the aggregate principal amount
of the subordinated notes. The standby letter of credit is reduced in equal
proportion to the deposits to such sinking fund. See "Business of R&G
Financial -- Sources of Funds -- Borrowings" and Note 15 of R&G Financial's
Notes to Consolidated Financial Statements.

MINORITY INTEREST IN THE BANK. At June 30, 1996 and December 31, 1995
and 1994, R&G Financial reflects on its books $4.4 million, $4.0 million and
$3.2 million, which represented the interest of the minority stockholders in
the Bank. See "The Merger."

STOCKHOLDER'S EQUITY. Stockholder's equity increased from $56.0 million
at December 31, 1994 to $66.4 million at December 31, 1995 and further
increased to $70.5 million at June 30, 1996. The $10.4 million or 18.6%
increase in stockholder's equity during 1995 was primarily due to the $10.4
million of net income recognized during the year ended December 31, 1995. The
$4.1 million or 6.17% increase in stockholder's equity during the six months
ended June 30, 1996 was primarily due to $6.1 million of net income
recognized during the period, which was partially offset by a one-time
$500,000 cash dividend paid by R&G Mortgage during the period and a decline
in unrealized gains on securities available for sale from $952,000 at
December 31, 1995 to an unrealized loss of $559,000 at June 30, 1996.

RESULTS OF OPERATIONS

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

R&G Financial's major business activities consist of: (i) the
origination by R&G Mortgage of real estate mortgage loans for sale and the
servicing by R&G Mortgage of real

<PAGE>

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

28
<PAGE>

The following table reflects the principal revenue sources of the Bank
and R&G Mortgage and the percentage contribution of each component for the
periods presented.

SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------------------- -----------------------------------------------
1996 1995 1995 1994 1993
---------------- ---------------- --------------- --------------- --------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Bank:
Net interest income after
provision for loan losses . . . . . $11,525 44.86% $ 8,081 39.95% $17,944 41.00% $15,089 52.12% $10,636 19.63%
Net gain on sale of loans . . . . . . 95 0.37 177 0.88 632 1.44 202 0.70 3,977 7.34
Unrealized gain (loss) on
trading securities. . . . . . . . . (13) (0.05) 600 2.97 618 1.41 (214) (0.74) -- --
Net gain on sale of investment
securities. . . . . . . . . . . . . 329 1.28 -- -- -- -- -- -- 394 0.73
Market valuation allowance
on loans held for . . . . . . . . . -- -- 70 0.35 856 1.96 (856) (2.96) -- --
Other income(1) . . . . . . . . . . . 2,236 8.70 996 4.92 2,368 5.41 1,737 6.00 848 1.56
------- ----- ------- ----- ------- ---- ------ ----- ------ -----
14,172 55.16 9,924 49.07 22,418 51.22 15,958 55.12 15,855 29.26
------- ----- ------- ----- ------- ---- ------ ----- ------ -----
R&G Mortgage:
Net interest income . . . . . . . . . 1,564 6.09 1,083 5.35 2,379 5.44 4,048 13.98 3,617 6.68
Loan administration and
servicing fees . . . . . . . . . . . 6,496 25.29 5,235 25.88 11,030 25.20 11,046 38.15 9,327 17.22
Net gain (loss) on sale of
loans and securities 3,897 15.17 2,032 10.05 5,630 12.86 (1,551) (5.35) 25,049 46.23
Net gain on sale of servicing
rights . . . . . . . . . . . . . . . -- -- -- -- -- -- 2,915 10.07 -- --
Unrealized gains (losses) on
trading securities . . . . . . . . . (608) (2.37) 1,695 8.38 1,504 3.44 (4,251) (14.68) -- --
Other income(1). . . . . . . . . . . . 170 0.66 256 1.27 804 1.84 786 2.71 331 0.61
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
11,519 44.84 10,301 50.93 21,347 48.78 12,993 44.88 38,324 70.74
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
$25,691 100.00% $20,225 100.00% $43,765 100.0% $28,951 100.0% $54,179 100.0%
------- ----- ------- ----- ------- ---- ------ ----- ------ -----
------- ----- ------- ----- ------- ---- ------ ----- ------ -----
</TABLE>
- ------------------------

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

<PAGE>

R&G Financial reported net income of $6.1 million, $1.6 million, $10.4
million, $5.5 million and $17.2 million during the six months ended June 30,
1996 and 1995 and the years ended December 31, 1995, 1994 and 1993,
respectively. Net income increased by $841,000 million or 16.0% during the
six months ended June 30, 1996, as compared to the same period in the prior
year, due to a $1.5 million increase in total other income and a $4.3 million
increase in net interest income, which were partially offset by a $3.6
million increase in total operating expenses, a $948,000 increase in income
tax expense and a $407,000 increase in the provision for loan losses.

Net income increased by $5.0 million or 91.6% during 1995 due to a $13.6
million increase in total other income and a $2.1 million increase in net
interest income, which were partially offset by a $5.0 million increase in
income tax expense, a $3.7 million increase in total operating expenses, a
$950,000 increase in the provision for loan losses and the absence of
$867,000 in income recognized during 1994 due to the cumulative effect of a
change in accounting principles.

Net income decreased by $11.7 million or 68.3% during 1994 due to a
$30.1 million decrease in total other income, which was partially offset by
an $8.8 million decrease in income tax expense, a $4.9 million increase in
net interest income, a $3.5 million decrease in total operating expenses and
$867,000 of income recognized during 1994 as a result of the cumulative
effect of a change in accounting principles.

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

Net interest income totalled $13.4 million, $9.1 million, $21.3 million,
$19.1 million and $14.3 million during the six months ended June 30, 1996 and
1995 and the years ended December 31, 1995, 1994 and 1993, respectively. Net
interest income increased by $4.3 million or 47.5% during the six months
ended June 30, 1996, as compared to the same period in the prior year, due to
an increase in R&G Financial's interest rate spread from 2.78% for the six
months ended June 30, 1995 to 2.96% for the six months ended June 30, 1996,
together with an increase in the ratio of average interest-earning assets to
average interest-bearing liabilities from 104.68% to 104.92%, respectively.
Net interest income increased by $2.1 million or 11.2% during 1995 due to an
increase in the ratio of average interest-earning assets to average
interest-bearing liabilities from 105.60% for 1994 to 106.50% for 1995, which
was partially offset by a decline in R&G Financial's interest rate-spread
from 3.24% for 1994 to 2.93% for 1995. Net interest income increased by $4.9
million or 34.3% during 1994 due to significant increases in the average
balance of interest-earning assets, which compensated for a decrease in the
ratio of average interest-earning assets to average interest-bearing
liabilities from 106.08% for 1993 to 105.60% for 1994, as well as a decline
in R&G Financial's interest rate spread from 3.66% for 1993 to 3.24% for 1994.

<PAGE>

The following table presents for R&G Financial for the periods indicated
the total dollar amount of interest from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities expressed both in dollars and rates, and the net interest margin.
The table does not reflect any effect of income taxes. All average balances are
based on the average of month-end balances for R&G Mortgage and average daily
balances for the Bank, in each case during the periods presented.

Six Months Ended June 30,
-------------------------------------------------------------------
1996 1995
-------------------------------- ------------------------------
Yield/ Yield/
Average Rate Average Rate
Balance Interest (1)(2) Balance Interest (1)(2)
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-Earning Assets:
Cash and cash equivalents(3).......... $ 42,916 $ 1,014 4.72% $ 18,445 $ 579 6.28%
Investment securities held for
trading............................. 278 7 5.04 -- -- --
Investment securities available
for sale............................ 14,277 477 6.68 -- -- --
Investment securities held to
maturity............................ 7,645 187 4.89 1,710 47 5.50
Mortgage-backed securities held
for trading......................... 127,748 4,261 6.67 140,573 4,498 6.40
Mortgage-backed securities
available for sale.................. 45,803 1,666 7.27 8,082 352 8.71
Mortgage-backed securities held
to maturity......................... 40,783 1,246 6.11 83,540 2,762 6.61
Loans receivable, net(4)(5)........... 557,744 25,367 9.10 348,962 15,995 9.17
FHLB of New York stock................ 3,822 121 6.33 2,668 105 7.87
-------- ------- -------- -------
Total interest-earning assets....... 841,016 $34,346 8.17% 603,980 $24,338 8.06%
Non-interest-earning assets............. 51,897 ------- ------ 51,857 ------- ------
-------- ------- ------ -------- ------- ------
Total assets............................ $892,913 $655,837
-------- --------
-------- --------
Interest-Bearing Liabilities:
Deposits................................ $533,774 $13,045 4.89% $390,975 $ 9,769 5.00%
Securities sold under agreements
to repurchase......................... 93,787 2,584 5.51 120,183 3,525 5.87
Notes payable........................... 106,183 2,796 5.27 44,868 1,318 5.88
Subordinated debt(6).................... 3,250 166 10.22 3,250 170 10.46
Other borrowings(7)..................... 64,596 2,309 7.15 17,705 442 4.99
-------- ------- -------- -------
Total interest-bearing
liabilities........................ 801,590 $20,900 5.21% 576,981 $15,224 5.08%
Non-interest-bearing liabilities........ 15,341 ------- ------ 15,918 ------- ------
-------- ------- ------ -------- ------- ------
Total liabilities.................... 816,931 592,899
Stockholder's equity.................... 75,982 62,938
-------- --------
Total liabilities and
stockholder's equity............... $892,913 $655,837
-------- --------
-------- --------
Net interest income; interest rate
spread(8)............................. $13,446 2.96% $ 9,114 2.78%
------- ------ ------- ------
------- ------ ------- ------
Net interest margin(8).................. 3.20% 3.02%
------ ------
------ ------
Average interest-earning assets to
average interest-bearing
liabilities........................... 104.92% 104.68%
------ ------
------ ------

Year Ended December 31,
-------------------------------------------------------------------
1995 1994
-------------------------------- ------------------------------
Yield/ Yield/
Average Rate Average Rate
Balance Interest (1)(2) Balance Interest (1)(2)
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-Earning Assets:
Cash and cash equivalents(3).......... $ 10,000 $ 605 6.05% $ 9,235 $ 373 4.04%
Investment securities held for
trading............................. -- -- -- -- -- --
Investment securities available
for sale............................ -- -- -- -- -- --
Investment securities held to
maturity............................ 16,211 972 6.00 9,274 429 4.63
Mortgage-backed securities held
for trading......................... 130,184 8,595 6.60 143,090 9,301 6.50
Mortgage-backed securities
available for sale.................. 16,006 1,193 7.45 33,357 2,449 7.34
Mortgage-backed securities held
to maturity......................... 72,173 4,841 6.71 34,791 2,206 6.34
Loans receivable, net(4)(5)........... 405,784 37,078 9.14 318,155 27,465 8.63
FHLB of New York stock................ 2,976 227 7.63 1,852 141 7.61
-------- ------- -------- -------
Total interest-earning assets....... 653,334 $53,511 8.19% 549,754 $42,364 7.71%
Non-interest-earning assets............. 50,365 ------- ------ 49,542 ------- ------
-------- ------- ------ -------- ------- ------
Total assets............................ $703,699 $599,296
-------- --------
-------- --------
Interest-Bearing Liabilities:
Deposits................................ $431,833 $21,829 5.05 $340,461 $14,461 4.25%
Securities sold under agreements
to repurchase......................... 107,026 6,437 6.01 97,572 4,417 4.53
Notes payable........................... 55,118 3,025 5.49 63,350 3,439 5.43
Subordinated debt(6).................... 3,250 339 10.43 3,250 331 10.18
Other borrowings(7)..................... 16,201 609 3.76 15,920 578 3.63
-------- ------- -------- -------
Total interest-bearing
liabilities........................ 613,428 $32,239 5.26% 520,553 $23,226 4.46%
Non-interest-bearing liabilities........ 29,093 ------- ------ 25,992 ------- ------
-------- ------- ------ -------- ------- ------
Total liabilities.................... 642,521 546,545
Stockholder's equity.................... 61,178 52,751
-------- --------
Total liabilities and
stockholder's equity............... $703,699 $599,296
-------- --------
-------- --------
Net interest income; interest rate
spread(8)............................. $21,272 2.93% $19,138 3.24%
------- ------ ------- ------
------- ------ ------- ------
Net interest margin(8).................. 3.26% 3.48%
------ ------
------ ------
Average interest-earning assets to
average interest-bearing
liabilities........................... 106.50% 105.60%
------ ------
------ ------

Year Ended December 31,
-----------------------------------
1993
-----------------------------------
Yield/
Average Rate
Balance Interest (1)(2)
--------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-Earning Assets:
Cash and cash equivalents(3).......... $ 11,094 $ 310 2.79%
Investment securities held for
trading............................. -- -- --
Investment securities available
for sale............................ -- -- --
Investment securities held to
maturity............................ 4,029 182 4.52
Mortgage-backed securities held
for trading......................... 108,024 7,804 7.22
Mortgage-backed securities
available for sale.................. 6,667 528 7.92
Mortgage-backed securities held
to maturity......................... 20,234 1,579 7.80
Loans receivable, net(4)(5)........... 211,242 19,283 9.13
FHLB of New York stock................ 2,390 205 8.58
-------- -------
Total interest-earning assets....... 363,680 $29,891 8.22%
------- ------
------- ------
Non-interest-earning assets............. 58,423
--------
Total assets............................ $422,103
--------
--------
Interest-Bearing Liabilities:
Deposits................................ $232,848 $10,365 4.45
Securities sold under agreements
to repurchase......................... 4,515 274 6.07
Notes payable........................... 92,918 4,276 4.60
Subordinated debt(6).................... 3,250 355 10.92
Other borrowings(7)..................... 9,314 368 3.95
-------- -------
Total interest-bearing
liabilities........................ 342,845 $15,638 4.56%
------- ------
------- ------
Non-interest-bearing liabilities........ 38,320
--------
Total liabilities.................... 381,165
Stockholder's equity.................... 40,938
--------
Total liabilities and
stockholder's equity............... $422,103
--------
--------
Net interest income; interest rate
spread(8)............................. $14,253 3.66%
------- ------
------- ------
Net interest margin(8).................. 3.92%
------
------
Average interest-earning assets to
average interest-bearing
liabilities........................... 106.08%
------
------

(FOOTNOTES ON FOLLOWING PAGE)
</TABLE>

31
<PAGE>

- ------------------------
(1) Yields and rates for the six months ended June 30, 1996 and 1995 have been
annualized.

(2) At June 30, 1996, the yields earned and rates paid were as follows: cash
and cash equivalents, 5.00%; investment securities held to maturity, 4.92%;
investment securities available for sale, 6.12%; mortgage-backed securities
held for trading, 6.61%; mortgage loans available for sale, 7.94%; loans
receivable, net, 8.77%; FHLB of New York stock, 6.25%; total
interest-earning assets, 7.96%; deposits, 5.02%; securities sold under
agreements to repurchase, 4.52%; notes payable, 5.26%; other borrowings,
6.10%; subordinated debt, 9.94%; total interest-bearing liabilities, 5.33%;
interest rate spread, 2.63%.

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

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

(5) Loan fees amounted to $488,000, $292,000, $639,000, $472,000 and $211,000
during the six months ended June 30, 1996 and 1995 and the years ended
December 31, 1995, 1994 and 1993, respectively or 1.80%, 1.49%, 1.37%,
1.28% and 0.78% of interest income on loans during such respective periods.

(6) Represents a seven-year subordinated capital note of the Bank issued in
1991, which is subject to an annual sinking fund requirement. See "Business
of R&G Financial -- Sources of Funds -- Borrowings" and Note 15 of R&G
Financial's Notes to Consolidated Financial Statements.

(7) Comprised of long-term debt, advances from the FHLB of New York and other
secured borrowings. See "Business of R&G Financial -- Sources of Funds --
Borrowings" and Notes 12 to 14 of R&G Financial's Notes to Consolidated
Financial Statements.

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

<PAGE>

The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
R&G Financial's interest income and interest expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume), and (iii) total change in rate
and volume. The combined effect of changes in both rate and volume has been
allocated in proportion to the absolute dollar amounts of the changes due to
rate and volume.

<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------------- ----------------------------------------------------------
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
------------------------------- ----------------------------- ---------------------------
Increase Increase Increase
(Decrease) (Decrease) (Decrease)
Due to Total Due to Total Due to Total
------------------ Increase --------------- Increase --------------- Increase
Rate Volume (Decrease) Rate Volume (Decrease) Rate Volume (Decrease)
------- -------- ---------- ------ ------- ---------- ------ -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Cash and cash equivalents(1)...... $(333) $ 768 $ 435 $ 201 $ 31 $ 232 $ 115 $ (52) $ 63
Investment securities held
for trading...................... -- 7 7 -- -- -- -- -- --
Investment securities available
for sale......................... -- 477 477 -- -- -- -- -- --
Investment securities held to
maturity......................... (23) 163 140 222 321 543 10 237 247

Mortgage-backed securities
held for trading................. 173 (410) (237) 133 (839) (706) (1,036) 2,533 1,497
Mortgage-backed securities
held to maturity................. (102) (1,414) (1,516) 265 2,370 2,635 299 1,136 627
Mortgage-backed securities
available for sale............... (329) 1,643 1,314 18 (1,274) (1,256) (193) 2,114 1,921
Loans receivable, net(4).......... (198) 9,570 9,372 2,048 7,565 9,613 (1,577) 9,759 8,182
FHLB of New York stock............ (29) 45 16 -- 86 86 (18) (46) (64)
----- ------- ------- ------ ------- ------- ------- ------- -------
Total interest-earning assets... $(841) $10,849 10,008 $2,887 $ 8,260 11,147 $ 2,998 $15,681 12,473
----- ------- ------- ------ ------- ------- ------- ------- -------
----- ------- ------ ------- ------- -------

Interest-Bearing Liabilities:
Deposits.......................... $(292) $ 3,568 $ 3,276 $3,487 $ 3,881 $ 7,368 $ (694) $ 4,790 $ 4,096
Securities sold under agreements
to repurchase.................... (167) (774) (941) 1,592 428 2,020 (1,504) 5,647 4,143
Notes payable............ (323) 1,801 1,478 33 (447) (414) 524 (1,361) (837)
Subordinated debt(2).............. (4) -- (4) 8 -- 8 (24) -- (24)
Other borrowings(3)............... 696 1,171 1,867 21 10 31 (51) 261 210
----- ------- ------- ------ ------- ------- ------- ------- -------
Total interest-bearing
liabilities..................... $ (90) $5,766 5,676 $5,141 $ 2,134 9,013 $(1,749) $ 9,337 7,588
----- ------- ------- ------ ------- ------- ------- ------- -------
----- ------- ------ ------- ------- -------
Increase (decrease) in net
interest income.................. $ 4,332 $ 2,235 $ 4,885
------- ------- -------
------- ------- -------

(FOOTNOTES ON FOLLOWING PAGE)

</TABLE>

<PAGE>

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

(2) Represents a seven-year subordinated capital note of the Bank issued in
1991, which is subject to an annual sinking fund requirement. See
"Business of R&G Financial -- Sources of Funds - Borrowings" and Note 15 of
R&G Financial's Notes to Consolidated Financial Statements.

(3) Comprised of long-term debt, advances from the FHLB of New York and
other secured borrowings. See "Business of R&G Financial -- Sources of
Funds -- Borrowings" and Notes 12 to 14 of R&G Financial's Notes to
Consolidated Financial Statements.

(4) Includes mortgage loans held for sale.

INTEREST INCOME. Total interest income increased by $10.0 million or
41.1% during the six months ended June 30, 1996, as compared to the same
period in the prior year, and increased by $11.1 million or 26.3% and $12.5
million or 41.7% during the years ended December 31, 1995 and 1994,
respectively. Interest income on loans, the largest component of R&G
Financial's interest-earning assets, increased by $9.1 million or 44.7%
during the six months ended June 30, 1996, as compared to the same period in
the prior year, and increased by $9.6 million or 35.0% and $8.2 million or
42.4% during 1995 and 1994, respectively. Such increases were primarily the
result of increases in the average balance of loans receivable of $208.8
million, $87.6 million and $106.9 million during the six months ended June
30, 1996 and the years ended December 31, 1995 and 1994, respectively. One of
R&G Financial's strategies in recent years has been to grow R&G Financial's
loans held for investment. See "Business of R&G Financial - Lending
Activities of the Bank."

Interest income on mortgage-backed and investment securities (which, for
purposes of this discussion, includes securities held for trading, available
for sale and held to maturity) increased by $185,000 or 2.4% during the six
months ended June 30, 1996, as compared to the same period in the prior year,
and increased by $1.2 million or 8.5% and $4.3 million or 42.5% during the
years ended December 31, 1995 and 1994, respectively. The increase in
interest income on mortgage-backed and investment securities during the six
months ended June 30, 1996 was due primarily to an increase in the average
balance of investment securities of $20.5 million, which was partially offset
by a $17.9 million decrease in the average balance of mortgage-backed
securities during the period. The increase in investment securities reflects
the purchase of tax-free short- and medium-term securities, which were funded
with the proceeds from the sale of mortgage-backed securities. The increase
in interest income on mortgage-backed and investment securities during 1995
was primarily due to a $37.4 million increase in the average balance of
mortgage-backed securities held

34
<PAGE>
to maturity, which was largely offset by decreases of $17.4 million and $12.9
million in the average balance of mortgage-backed securities available for
sale and held for trading, which was attributable to sales in the secondary
market in response to favorable market conditions. The increase in interest
income on mortgage-backed and investment securities during 1994 was primarily
due to a $76.3 million increase in the average balance of mortgage-backed
securities, which was partially offset by a decrease in the average yield
earned on mortgage-backed securities.

Interest income on cash and cash equivalents (consisting of cash and due
from banks, securities purchased under agreements to resell, certificates of
deposit with other financial institutions and federal funds sold) increased
by $435,000 or 75.1% during the six months ended June 30, 1996, as compared
to the same period in the prior year, and increased by $232,000 or 62.2% and
$63,000 or 20.3% during the years ended December 31, 1995 and 1994,
respectively. The increases during the six months ended June 30, 1996
reflected the increase in the average balance of $24.5 million, which was
partially offset by a decrease in the yield from 6.2% to 4.7%. The increases
in interest earned on money market investments during 1995 and 1994 were due
primarily to increases in the average yield earned thereon of 201 basis
points and 125 basis points, respectively. The fluctuations in yields earned
by R&G Financial on its money market investments reflect the general
fluctuations in short-term market rates of interest during the periods
presented.

INTEREST EXPENSE. Total interest expense increased by $5.7 million or
37.3% during the six months ended June 30, 1996, as compared to the same
period in the prior year, and increased by $9.0 million or 38.8% and by $7.6
million or 48.5% during the years ended December 31, 1995 and 1994,
respectively. Interest expense on deposits, the largest component of R&G
Financial's interest-bearing liabilities, increased by $3.3 million or 33.5%
during the six months ended June 30, 1996, as compared to the same period in
the prior year, and increased by $7.4 million or 51.0% and $4.1 million or
39.5% during the years ended December 31, 1995 and 1994, respectively. The
increases in interest expense on deposits during the six months ended June
30, 1996 and the years ended December 31, 1995 and 1994 were primarily due to
increases in the average balance of deposits of $142.8 million, $91.4 million
and $107.6 million during such respective periods. In June 1995, the Bank
acquired $77.2 million in deposits from a commercial bank. In addition, in
June 1993, the Bank acquired $46.4 million in deposits in connection with its
acquisition of a federally chartered savings institution. During 1995, the
average rate paid on deposits increased by 80 basis points as a result of a
general increase in market rates of interest.

Interest expense on reverse repurchase agreements decreased by $941,000
or 26.7% during the six months ended June 30, 1996, as compared to the same
period in the prior year, and increased significantly by $2.0 million and
$4.1 million during the years ended December 31, 1995 and 1994, respectively.
The increase in interest expense on reverse repurchase agreements during 1995
was due primarily to an increase in the average rate paid thereon of 148
basis points, while the increase in such expense during 1994 was due
primarily to a $93.1 million increase in the average balance of such
borrowings outstanding.

35
<PAGE>

R&G Financial generally uses reverse repurchase agreements to repay warehouse
lines of credit which are used to fund loan originations. The reverse
repurchase agreements are collateralized by mortgage-backed securities held
for trading. The fluctuations in the average balance of reverse repurchase
agreements during the periods presented is therefore a function both of the
amount of originations by R&G Financial as well as the level of
mortgage-backed securities held for trading which are available to
collateralize such agreements.

Interest expense on notes payable (consisting of warehouse lines of
credit and promissory notes) increased by $1,478,000 or 112.1% during the six
months ended June 30, 1996, as compared to the same period in the prior year,
decreased by $414,000 or 12.0% during the year ended December 31, 1995 and
decreased by $837,000 or 19.6% during the year ended December 31, 1994. The
increase during the six months ended June 30, 1996 was due to a $61.3 million
increase in the average balance of notes payable, as the Bank used 936 Notes
to fund increased consumer and commercial lending, while the decrease during
the year ended December 31, 1995 was primarily due to an $8.2 million
decrease in the average balance of the 936 Notes. The decrease in interest
expense on notes payable during 1994 was due to the $29.6 million decline in
the average balance of such borrowings, which reflected the general decline
in mortgage loan origination activity when compared to the levels experienced
in 1993.

Interest expense on other borrowings (consisting of long-term notes
payable, subordinated notes, advances from the FHLB of New York and other
secured borrowings) increased by $1,867,000 or 422.40% during the six months
ended June 30, 1996, as compared to the same period in the prior year,
increased by $39,000 or 4.3% during the year ended December 31, 1995 and
increased by $186,000 or 25.7% during the year ended December 31, 1994. The
increase during the six months ended June 30, 1996 was primarily due to a
$46.9 million increase in the average balance of such borrowings together
with a 216 basis point increase in the average rate paid thereon. The
increase in interest expense on other borrowings during 1995 was due
primarily to an increase in the average rate paid thereon, while the increase
in such interest expense during 1994 primarily reflected the $6.6 million
increase in the average balance of other borrowings (primarily FHLB advances).

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

R&G Financial made provisions (reductions) to its allowance for loan
losses of $357,000, $(50,000) and $950,000 during the six months ended June
30, 1996 and 1995 and the year ended December 31, 1995. R&G Financial did not
establish any provisions for loan

36
<PAGE>

losses during 1994 or 1993 due, in part, to the Bank's acquisition of a
federally chartered savings institution in June 1993 and, in connection
therewith, the acquisition of $1.7 million of reserves of such institution.
The $950,000 provision during 1995 reflected R&G Financial's increased
consumer loan originations and an increase in loan charge-offs related
thereto. Although R&G Financial's allowance for loan losses as a percentage
of total loans and total non-performing loans has declined since December 31,
1993, management believes that its allowance for loan losses at June 30,
1996, was adequate based upon, among other things, the significant level of
single-family residential loans within R&G Financial's portfolio (as compared
to commercial real estate, commercial business and consumer loans, which are
considered by management to carry a higher degree of credit risk) and the low
level of loan charge-offs with respect to R&G Financial's loan portfolio.
Nevertheless, there can be no assurances that additions to such allowance
will not be necessary in future periods, particularly if the growth in R&G
Financial's commercial real estate, commercial business and consumer lending
continues.

OTHER INCOME. The following table sets forth information regarding
other income for the periods shown.

<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
----------------------- ---------------------------
1996 1995 1995 1994 1993
--------- ----------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net gain (loss) on sale of loans................... $3,992 $2,210 $6,262 $(1,349) $29,026
Unrealized gain (loss) on trading securities....... (621) 2,295 2,122 (4,465) --
Change in provision for cost in excess of market
value of loans held for sale...................... -- 70 856 (856) --
Net gain on sale of investments.................... 329 -- -- -- 394
Net gain on trading account........................ 587 -- -- -- --
Loan administration and servicing fees............. 6,496 5,235 11,030 11,046 9,326
Gain on sale of servicing rights................... -- -- -- 2,915 --
Service charges, fees and other.................... 1,819 1,251 3,172 2,523 1,179
------- ------- ------- ------- -------
Total other income................................ $12,602 $11,061 $23,442 $ 9,814 $39,925
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>

Total other income increased by $1.5 million or 13.9% during the six
months ended June 30, 1996, as compared to the same period in the prior year,
increased by $13.6 million or 138.9% during the year ended December 31, 1995
and decreased by $30.1 million or 75.4% during the year ended December 31,
1994. Net gain (loss) on sale of loans amounted to $4.0 million, $2.2
million, $6.3 million, $(1.3) million and $29.0 million during the six months
ended June 30, 1996 and 1995 and the years ended December 31, 1995, 1994 and
1993, respectively. Net gain (loss) on sale of loans reflects the income
generated from R&G Financial's origination and purchase of single-family
residential real estate loans and the subsequent securitization and sale of
such loans. During the year ended December 31, 1995, the adoption of SFAS No.
122 had the effect of increasing net gain on sales of loans by approximately
$1.6 million. See Note 1 of R&G Financial's Notes to Consolidated Financial
Statements. During the six months ended June 30, 1996 and 1995 and the years
ended

37
<PAGE>

December 31, 1995, 1994 and 1993, R&G Mortgage originated and purchased
$222.2 million, $162.3 million, $362.4 million, $499.1 million and $851.9
million, respectively, and sold $91.8 million, $82.6 million, $232.4 million,
$368.1 million and $604.1 million of mortgage loans, respectively. In
addition, the Bank sold $5.0 million, $12.2 million, $75.1 million, $26.8
million and $89.3 million of loans from its portfolio during such respective
periods. The significant level of loan originations and sales (by both
parties) during 1993 reflected the low level of mortgage interest rates which
prevailed during the year and which stimulated demand for refinancing of
existing mortgage loans. The decrease in loan origination, purchase and sale
activity during 1994 as compared to 1993 was due to the rise in interest
rates experienced during the second half of 1994 and the resultant decline in
refinancing activity. The continued weakness in refinancing activity during
1995 and the first six months of 1996 reflects the stabilization of interest
rates following the unusually high refinancing activity experienced during
1993. As R&G Financial's results of operations indicate, R&G Financial's
mortgage banking operations are highly dependent upon market and economic
conditions.

During the six months ended June 30, 1996 and 1995 and the years ended
December 31, 1995 and 1994, R&G Financial recognized unrealized gains
(losses) with respect to securities held for trading of $(621,000), $2.3
million, $2.1 million and $(4.5) million, respectively. Such gains and losses
reflect fluctuations in the market value of primarily FHA and VA loans which
have been securitized into GNMA mortgage-backed securities and are being held
for sale either to institutions in the secondary market or private investors
through the Bank's Trust Department. In addition, during the six months ended
June 30, 1996, R&G Financial recognized $587,000 of net gains on trading
activities and from hedge positions on certain investment securities
available for sale. See "Business of R&G Financial -- Investment Activities
- -- General." At June 30, 1996, securities held for trading amounted to
$137.6 million.

During the year ended December 31, 1994, R&G Financial established an
$856,000 provision to reflect a decline in the market value of loans held for
sale as a result of the increase in market rates of interest which occurred
during the second half of the year. During the first three months of 1995,
market rates of interest continued to increase and R&G Financial established
an additional $225,000 provision to reflect the further decline in the market
value of loans held for sale. During the year ended December 31, 1995, market
rates of interest subsequently declined and R&G Financial was able to sell
such mortgage loans without recognizing any losses. As a result, R&G
Financial reversed the prior $856,000 provision during the year ended
December 31, 1995.

During the six months ended June 30, 1996 and 1995 and the years ended
December 31, 1995, 1994 and 1993, R&G Financial recognized loan
administration and servicing fees (consisting of loan servicing fees) of $6.5
million, $5.2 million, $11.0 million, $11.0 million and $9.3 million,
respectively. The increase in loan administration and servicing fees since
1993 reflects the increase in R&G Financial's loan servicing portfolio from
42,041 loans with

38
<PAGE>

an aggregate principal balance of $2.00 billion at December 31, 1993 to
50,069 loans with an aggregate principal balance of $2.5 billion at June 30,
1996.

Service charges, fees and other amounted to $1.8 million, $1.3 million,
$3.2 million, $2.5 million and $1.2 million during the six months ended June
30, 1996 and 1995 and the years ended December 31, 1995, 1994 and 1993,
respectively. The $568,000 or 45.4% increase during the six months ended June
30, 1996 over the prior comparable period was primarily attributable to
increased service charges from deposit accounts, primarily associated with
the 1995 branch acquisition. The $649,000 or 25.7% increase during 1995 was
primarily due to increased service charges in the 1995 branch acquisition
plus other fee income from increases in the loan portfolio, while the $1.3
million or 114% increase during 1994 was primarily attributable to fees on
deposits and loans acquired in the 1993 thrift acquisition.

OPERATING EXPENSES. The following table sets forth certain information
regarding operating expenses for the periods shown.

<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
------------------ ----------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Employee compensation and benefits.... $ 5,955 $ 3,364 $ 8,284 $ 5,252 $ 8,590
Office occupancy and equipment........ 2,895 2,010 4,711 4,488 3,395
Other administrative and general...... 6,516 6,378 13,731 13,269 14,561
------- ------- ------- ------- -------
Total operating expenses............. $15,366 $11,752 $26,726 $23,009 $26,546
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>

Total operating expenses increased by $3.6 million or 30.8% during the
six months ended June 30, 1996, as compared to the same period in the prior
year, increased by $3.7 million or 16.2% during the year ended December 31,
1995 and decreased by $3.5 million or 13.3% during the year ended December
31, 1994. The increase in total operating expenses during the six months
ended June 30, 1996 was primarily due to increases in each major category.
The 1995 branch acquisition was the primary reason for the increases in
compensation and benefits and occupancy expenses during the 1996 six month
period. The decrease in total operating expenses during 1994 was primarily
due to decreases in employee compensation and benefits and other
administrative and general expenses, which were partially offset by an
increase in office occupancy and equipment expense.

Employee compensation and benefits expense amounted to $6.0 million,
$3.4 million, $8.3 million, $5.3 million and $8.6 million during the six
months ended June 30, 1996 and 1995 and the years ended December 31, 1995,
1994 and 1993, respectively. The $2.6 million or 77.0% increase in such
expense during the six months ended June 30, 1996 was due to an increase in
employees as a result of the Bank's June 1995 branch acquisition, while the
$3.3 million or 38.9% decrease in such expense during the year ended December
31, 1994

39
<PAGE>

was due to reductions in employees as the result of the significant
decrease in loan production from the levels experienced in 1993.

Office occupancy and equipment expense amounted to $2.9 million, $2.0
million, $4.7 million, $4.5 million and $3.4 million during the six months
ended June 30, 1996 and 1995 and the years ended December 31, 1995, 1994 and
1993, respectively. The $885,000 or 44.0% increase in such expense recognized
by R&G Financial during the six months ended June 30, 1996 reflects the
Bank's acquisition in June 1995 of six branch offices (after closing and
consolidating one branch office) from a local commercial bank. The $1.1
million or 32.2% increase in such expense during 1994 was due primarily to
the Bank's acquisition in June 1993 of an unrelated savings institution and,
in connection therewith, the acquisition of three branch offices.

Other administrative and general expenses, which consist primarily of
advertising, license and property taxes, amortization of servicing,
insurance, telephone, printing and supplies and other miscellaneous expenses,
amounted to $6.5 million, $6.4 million, $13.7 million, $13.3 million and
$14.6 million during the six months ended June 30, 1996 and 1995 and the
years ended December 31, 1995, 1994 and 1993, respectively. The $138,000 or
2.2% increase in such expense during the six months ended June 30, 1996 was
primarily the result of general growth in the operations of R&G Financial and
the addition of new products and services offered, while the $1.3 million or
8.9% decrease in such expense during 1994 was primarily due to decreases in
promotional expenses and amortization of servicing acquired, which reached
its highest level in 1993 due to the volume of new loan originations and
refinancings.

INCOME TAXES. R&G Financial's income tax provision amounted to $3.8
million during the six months ended June 30, 1996, as compared to $2.9
million during the same respective period in the prior year. On June 29,
1996, R&G Mortgage and the Puerto Rico Treasury Department settled all taxes
due for the years 1989 through and including 1992 which were under audit. The
settlement reached was for $1.6 million. The effect of this settlement was to
record additional income tax expense during the six months ended June 30,
1996 of $450,000. The remainder of the settlement was reserved for during
prior periods. See also Note 29 of R&G Financial's Notes to Consolidated
Financial Statements. R&G Financial's effective tax rate amounted to 37.0%
during the six months ended June 30, 1996, as compared to 33.9% during the
same respective period in the prior year.

R&G Financial incurred income tax expense of $5.9 million, $856,000 and
$9.6 million during the years ended December 31, 1995, 1994 and 1993,
respectively. R&G Financial's effective tax rate amounted to 34.3%, 14.4% and
34.8%, during such respective periods. R&G Financial's low effective tax rate
during 1994 was due primarily to the recognition of a deferred tax benefit of
$1.7 million during the year.

<PAGE>

Effective January 1, 1994, R&G Financial changed its method of accounting
for its mortgage-backed and investment securities pursuant to the terms of SFAS
No. 115. The cumulative effect of this change in accounting principle resulted
in the recognition of $866,000 of unrealized gains with respect to R&G
Financial's securities portfolio during the year ended December 31, 1994.

SUBSEQUENT EVENT

On August 29, 1996 as a result of a review of its loan portfolio,
management of the Bank became aware of certain potential loan losses related
to the operation of its insurance premiums financing business and began an
intensive investigation. The Bank believes that there were irregularities
with respect to the origination and administration of a number of loans in
contravention of established Bank policies by the former loan officer in
charge of the department and has also notified the appropriate regulatory
enforcement authorities. While the Bank's investigation is in its early
stages, management is in the process of reviewing the collectibility of
the loans in question and believes, based on information
available to date, that its maximum loss exposure is $3.2 million, which does
not take into consideration recovery efforts already initiated with existing
obligors. While management presently is not able to estimate its actual loss
exposure, management plans to continue to review its portfolio and to
increase its reserve for loan losses during the third quarter. Furthermore,
management believes that the claims which it will submit pursuant to its
fidelity insurance policy will ultimately result in the recovery of a
substantial portion of the amounts not recoverable from existing obligors.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY. Liquidity refers to R&G Financial's ability to generate
sufficient cash to meet the funding needs of current loan demand, savings
deposit withdrawals, principal and interest payments with respect to outstanding
borrowings and to pay operating expenses. It is management's policy to maintain
greater liquidity than required in order to be in a position to fund loan
purchases and originations, to meet withdrawals from deposit accounts, to make
principal and interest payments with respect to outstanding borrowings and to
make investments that take advantage of interest rate spreads. R&G Financial
monitors its liquidity in accordance with guidelines established by R&G
Financial and applicable regulatory requirements. R&G Financial's need for
liquidity is affected by loan demand, net changes in deposit levels and the
scheduled maturities of its borrowings. R&G Financial can minimize the cash
required during the times of heavy loan demand by modifying its credit policies
or reducing its marketing efforts. Liquidity demand caused by net reductions in
deposits are usually caused by factors over which R&G Financial has limited
control. R&G Financial derives its liquidity from both its assets and
liabilities. Liquidity is derived from assets by receipt of interest and
principal payments and prepayments, by the ability to sell assets at market
prices and by utilizing unpledged assets as collateral for borrowings. Liquidity
is derived from liabilities by maintaining a variety of funding sources,
including deposits, advances from the FHLB of New York and other short and
long-term borrowings.

R&G Financial's liquidity management is both a daily and long-term function
of funds management. Liquid assets are generally invested in short-term
investments such as securities purchased under agreements to resell, federal
funds sold and certificates of deposit in other financial institutions. If R&G
Financial requires funds beyond its ability to generate them internally, various
forms of both short and long-term borrowings provide an additional source of
funds. At June 30, 1996, R&G Financial had $39.5 million in borrowing capacity
under unused warehouse lines of credit and $39.0 million in borrowing capacity
under a line of credit with the FHLB of New York. R&G Financial has generally
not relied upon brokered deposits as a source of liquidity, and does not
anticipate a change in this practice in the foreseeable future.

At June 30, 1996, R&G Financial had outstanding commitments (including
unused lines of credit) to originate and/or purchase mortgage and non-mortgage
loans of $374.0 million. Certificates of deposit which are scheduled to mature
within one year totalled $273.1 million at June 30, 1996, and borrowings that
are scheduled to mature within the same period amounted to $202.6 million. R&G
Financial anticipates that it will have sufficient funds available to meet its
current loan commitments.

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<PAGE>

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

The FDIC also requires that banks meet a risk-based capital standard. The
risk-based capital standard for banks requires the maintenance of total capital
(which is defined as Tier I capital and supplementary (Tier 2) capital) to risk
weighted assets of 8%. In determining the amount of risk-weighted assets, all
assets, plus certain off balance sheet assets, are multiplied by a risk-weight
of 0% to 100%, based on the risks the FDIC believes are inherent in the type of
asset or item. The components of Tier I capital are equivalent to those
discussed above under the 3% leverage capital standard. The components of
supplementary capital include certain perpetual preferred stock, certain
mandatory convertible securities, certain subordinated debt and intermediate
preferred stock and general allowances for loan and lease losses. Allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted
toward supplementary capital cannot exceed 100% of core capital. At June 30,
1996, the Bank met each of its capital requirements, with Tier I leverage
capital, Tier I risk-based capital and total risk-based capital ratios of 6.09%,
10.04% and 11.02%, respectively.

In addition, the Federal Reserve Board has promulgated capital adequacy
guidelines for bank holding companies which are substantially similar to those
adopted by FDIC regarding state-chartered banks, as described above. R&G
Financial is currently in compliance with such regulatory capital requirements.
For additional information concerning the capital requirements of R&G Financial
and Bank, see "Regulation -- R&G Financial -- Capital Requirements" and "-- The
Bank -- Capital Requirements."

INFLATION AND CHANGING PRICES

R&G Financial's Consolidated Financial Statements and related data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars (except with respect to
securities which are carried at market value),

42
<PAGE>

without considering changes in the relative purchasing power of money over
time due to inflation. Unlike most industrial companies, substantially all of
the assets and liabilities of R&G Financial are monetary in nature. As a
result, interest rates have a more significant impact on R&G Financial's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services.

RECENT ACCOUNTING PRONOUNCEMENTS

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

In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation," establishing financial
accounting and reporting standards for stock-based employee compensation plans.
This Statement encourages all entities to adopt a new method of accounting to
measure compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however, allowed to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting, which generally does not result
in compensation expense recognition for most plans. Companies that elect to
remain with the existing accounting are required to disclose in a footnote to
the financial statements pro forma net income, and if presented, earnings per
share, as if this Statement had been adopted. The accounting requirements of
this Statement are effective for transactions entered into during fiscal years
that begin after December 15, 1995; however, companies are required to disclose
information for awards granted in their first fiscal year beginning after
December 15, 1994. R&G Financial adopted a Stock Option Plan in June 1996 and
made initial awards thereunder in conjunction with R&G Financial's initial
public offering in August 1996. See "Management - Benefits - Stock Option Plan."

In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." Pursuant to
SFAS No. 125, after a transfer of financial assets, an entity would be required
to recognize all financial assets and servicing it controls and liabilities it
has incurred and, conversely, would not be required to recognize financial
assets when control has been surrendered and liabilities when extinguished. SFAS
No. 125 provides standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings. SFAS No. 125 will be
effective with respect to the transfer and servicing of financial assets and the
extinguishment of liabilities occurring after December 31, 1996, with earlier
application prohibited. R&G Financial has not completed an analysis of the
potential effects of this Statement on R&G Financial's financial condition or
results of operations.

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<PAGE>

BUSINESS OF R&G FINANCIAL

GENERAL

R&G Mortgage and the Bank have historically been primarily engaged in a
wide range of real estate secured lending activities, including the origination,
servicing, purchase and sale of mortgages on single-family residences, the
issuance and sale of various mortgage-backed and related securities and the
holding and financing of mortgage loans and mortgage-backed and related
securities for sale or investment. The Bank also originates for its portfolio
commercial real estate loans, construction loans, commercial business loans and
consumer loans. Finally, the Bank provides trust and investment services. R&G
Mortgage and the Bank both compete for business in Puerto Rico primarily by
providing a wide range of financial services to its customers. With the
consummation of the Bank Stockholder Exchange Transaction, R&G Financial, as the
holding company of R&G Mortgage and the Bank, will continue to direct its
business efforts toward meeting the complete banking and financial needs of the
customers of R&G Mortgage and the Bank.

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 FHA or guaranteed by the VA. R&G Mortgage
also originates conforming conventional single-family residential loans which
are neither insured by the FHA nor guaranteed by the VA. Non-conforming
conventional loans and consumer loans, primarily all of which are secured by
real estate, are also originated by R&G Mortgage for portfolio retention by the
Bank. R&G Mortgage has become one of the largest originators of loans secured by
single-family residential properties in Puerto Rico, second only to First
Financial Caribbean Corporation.

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

44
<PAGE>

customers. The Bank also offers trust services through its Trust Department.
The Bank's deposits are insured by the FDIC and it is regulated and examined
by the FDIC as its primary federal regulatory agency as well as by the OCFI as
its state chartering authority.

MORTGAGE BANKING ACTIVITIES

LOAN ORIGINATIONS, PURCHASES AND SALES. During the six months ended June
30, 1996 and the years ended December 31, 1995, 1994 and 1993, R&G Mortgage
originated a total of $226.4 million, $322.7 million, $488.1 million and $834.7
million of loans, respectively. These aggregate originations include loans
originated by R&G Mortgage directly for the Bank of $116.1 million,
$156.3 million, $142.6 million and $180.8 million during the six months ended
June 30, 1996 and the years ended December 31, 1995, 1994 and 1993,
respectively, or 51%, 48%, 29% and 22%, 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, most of
which are secured by real estate.

R&G Mortgage is engaged to a significant extent in the origination of
FHA-insured and VA-guaranteed single-family residential loans which are
primarily securitized into GNMA mortgage-backed securities and sold to
institutional and/or private investors in the secondary market. During the six
months ended June 30, 1996 and the years ended December 31, 1995, 1994 and 1993,
R&G Mortgage originated $100.6 million, $154.9 million, $332.4 million and
$614.2 million, respectively, of FHA/VA loans, which represented 44.4%, 48.0%,
68.1% and 73.6%, 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 six months ended June
30, 1996 and the years ended December 31, 1995, 1994 and 1993, R&G Mortgage
originated $115.5 million, $151.9 million, $155.7 million and $220.5 million,
respectively, of conventional single-family residential mortgage loans.
Substantially all conforming conventional single-family residential loans are
securitized and sold in the secondary market while substantially all
non-conforming conventional single-family residential loans are originated by
R&G Mortgage on behalf of the Bank and either held by the Bank in its portfolio
or subsequently securitized by R&G Mortgage and sold in the secondary market.

Non-conforming loans generally consist of loans which, primarily because of
size or other underwriting technicalities which may be cured through seasoning,
do not satisfy the guidelines for resale of FNMA, FHLMC, GNMA and other private
secondary market investors at the time of origination. Management believes that
these loans are essentially of the same credit quality as conforming loans.
During the six months ended June 30, 1996 and the years ended December 31, 1995,
1994 and 1993, non-conforming conventional loans represented approximately 49%,
43%, 29% and 21%, respectively, of R&G Mortgage's total

45
<PAGE>

volume of mortgage loans originated, substantially all of which were
originated by R&G Mortgage on behalf of the Bank. During the six months ended
June 30, 1996 and the years ended December 31, 1995, 1994 and 1993, 99.7%,
81.0%, 92.4% and 97.1% 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 $72,900 and $74,100, 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 on the property.

R&G Mortgage's loan origination activities are conducted out of its offices
and mortgage banking centers. See "-- Offices and Other Material Properties."
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 June 30, 1996,
R&G Mortgage employed 46 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

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<PAGE>

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 approximately $6.1 million of loans from
third parties during the six months ended June 30, 1996 and $55.6 million,
$11.0 million and $17.2 million during the years ended December 31, 1995, 1994
and 1993, respectively.

The following table sets forth loan originations, purchases and sales by
R&G Mortgage for the periods indicated.

<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------------ -------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans Originated For the Bank:
Conventional loans(1):
Number of loans ........................... 1,535 965 2,226 2,204 2,648
Volume of loans ........................... $105,855 $ 58,718 $140,363 $142,572 $180,779
FHA/VA loans:
Number of loans ........................... -- -- -- -- --
Volume of loans ........................... $ -- $ -- $ -- $ -- $ --
Consumer loans(2):
Number of loans ........................... 524 472 974 -- --
Volume of loans ........................... $ 10,291 $ 7,995 $ 15,944 $ -- $ --
Total loans:
Number of loans ........................... 2,059 1,437 3,200 2,204 2,648
Volume of loans ........................... $116,146 $ 66,713 $156,307 $142,572 $180,779
Percent of total volume ................... 50% 39% 41% 29% 21%
For Third Parties:
Conventional loans(1):
Number of loans ........................... 143 37 151 166 487
Volume of loans ........................... $ 9,661 $ 2,836 $ 11,496 $ 13,122 $ 39,683
FHA/VA loans:
Number of loans ........................... 1,411 1,088 2,313 6,030 11,206
Volume of loans ........................... $100,577 $ 71,437 $154,916 $332,377 $614,218
Total loans:
Number of loans ........................... 1,554 1,125 2,464 6,196 11,693
Volume of loans ........................... $110,238 $ 74,273 $166,412 $345,499 $653,901
Percent of total volume ................... 47% 44% 44% 69% 77%
------- ------- ------- ------- -------
Total loan originations ................. $226,384 $140,986 $322,719 $488,071 $834,680
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Loans Purchased For R&G Mortgage:
Number of loans ............................. 102 529 1,017 188 314
Volume of loans ............................. $ 6,131 $ 29,321 $ 55,630 $ 11,003 $ 17,234
Percent of total volume ..................... 3% 17% 15% 2% 2%
------- ------- ------- ------- -------
Total loan originations and purchases ..... $232,515 $170,307 $378,349 $499,074 $851,914
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>

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<PAGE>

Adjustments:
Loans originated for the Bank ............... $(116,146) $(66,713) $(156,307) $(142,572) $(180,779)
Loans amortization .......................... (970) (598) (1,260) (1,577) (1,497)
-------- ------- -------- -------- --------
Increase (decrease) in loans held for sale ..... $ 23,563 $ 20,391 $ (11,629) $ (13,184) $ 65,532
-------- ------- -------- -------- --------
-------- ------- -------- -------- --------
Average Initial Loan Origination Balance:
The Bank:
Conventional loans(1) ..................... $69 $61 $63 $65 $68
FHA/VA loans .............................. $-- $-- $-- $-- $--
Third Parties:
Conventional loans(1) ..................... $68 $77 $76 $79 $81
FHA/VA loans .............................. $71 $62 $63 $55 $55
Total Average Initial Balance:
Conventional loans(1) ..................... $69 $61 $64 $66 $70
FHA/VA loans .............................. $71 $62 $63 $55 $55
Refinancings(4):
The Bank .................................... 67% 63% 58% 46% 57%
Third Parties ............................... 25% 27% 26% 38% 81%
</TABLE>

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

(2) All but $1.4 million, $1.6 million and $3.3 million of such loans were
secured by real estate at June 30, 1996 and 1995 and December 31, 1995,
respectively.

(3) Includes loans converted into mortgage-backed securities.

(4) As a percent of the total dollar volume of loans originated by R&G
Mortgage for the Bank or third parties, as the case may be. In the case
of the Bank, refinancings do not necessarily represent refinancings of
loans previously held by the Bank.

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<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 six
months ended June 30, 1996 and the years ended December 31, 1995, 1994 and
1993, R&G Mortgage sold $91.8 million, $232.4 million, $368.1 million and
$604.1 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, $83.2 million or 90.6%, $220.4 million
or 94.0%, $348.1 million or 94.0% and $564.3 million or 93.0% 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).

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<PAGE>

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 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 six months ended June 30, 1996, and the years ended December 31, 1995,
1994 and 1993, R&G Mortgage issued GNMA serial notes totalling approximately
$93.0 million, $184.4 million, $228.8 million and $155.8 million, respectively.

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

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

Each CMO normally consists of several classes of senior, subordinate and
residual certificates. The residual certificates evidence a right to receive
payments on the mortgage loans after payment of all required amounts on the
senior and subordinate certificates then due. Some form of credit enhancement,
such as an insurance policy, letter of credit or subordination, will generally
be used to increase the credit rating of the senior certificates and thereby
improve their marketability. During the years ended December 31, 1995, 1994
and 1993, R&G Mortgage and the Bank completed sales of approximately $38.2
million, $201.5 million and $116.5 million, respectively, of CMOs in
securitization transactions.

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<PAGE>

There were no sales of CMOs in securitization transactions during the six
months ended June 30, 1996. In connection with such transactions, either the
Bank or R&G Mortgage generally retains the residual certificates issued by the
respective trusts as well as the subordinate certificates issued in such
transactions. As of June 30, 1996, R&G Mortgage held CMOs (which were
primarily issued by R&G Mortgage) with a fair value of $15.1 million and
residual certificates issued in CMO transactions involving R&G Mortgage and
the Bank with a fair value of $9.4 million. In addition, the Bank held CMO
subordinated certificates and residual certificates from one of its issues
with a fair value of $7.9 million at June 30, 1996. See "- Investment
Activities." Currently a liquid secondary market for subordinate or residual
certificates does not exist in Puerto Rico. The value of residual certificates
is subject to substantial fluctuations as a result of changes in prevailing
interest rates. However, such residuals often exhibit elasticity and convexity
characteristics which R&G Financial can utilize to hedge other components of
its portfolio. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of R&G Financial -- Asset and Liability
Management."

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 June 30, 1996, R&G Financial did not deem
it necessary to establish reserves for possible losses related to its recourse
obligations. At June 30, 1996, R&G Mortgage had loans in its servicing
portfolio with provisions for recourse in the principal amount of
approximately $217.2 million, as compared to $238.2 million, $162.9 million
and $118.7 million as of December 31, 1995, 1994 and 1993, respectively. Of
the recourse loans existing at June 30, 1996, approximately $164.4 million in
principal amount consisted of loans sold to FNMA and FHLMC and converted into
mortgage-backed securities of such agencies, and approximately $52.8 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 "R&G Financial -- Affiliated Transactions" and
"Regulation -- R&G Financial -- Limitations on Transactions with Affiliates."

51
<PAGE>

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 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
three years. At June 30, 1996, R&G Mortgage's servicing portfolio totalled
$2.5 billion and consisted of a total of 50,069 loans, as compared to $2.00
billion and 42,041 loans at December 31, 1993. At June 30, 1996, R&G Mortgage
was servicing $334.1 million of loans for the Bank or 13.6% of the total
servicing portfolio, as compared to $290.8 million or 12.7%, $213.9 million or
10.1% and $159.5 million or 8.0% at December 31, 1995, 1994 and 1993,
respectively. 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 "R&G Financial -- 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.

<PAGE>

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

<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------- ------------------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Composition of Servicing
Portfolio at End of Period:
Conventional and other
mortgage loans(1) ............. $1,021,669 $ 669,549 $ 811,269 $ 634,944 $ 561,358
FHA/VA loans ................... 1,429,098 1,535,262 1,486,931 1,479,799 1,439,172
---------- ---------- ---------- ---------- ----------
Total servicing portfolio(2). $2,450,767 $2,204,811 $2,298,200 $2,114,743 $2,000,530
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Activity in the Servicing
Portfolio:
Beginning servicing
portfolio .................... $2,298,200 $2,114,743 $2,114,743 $2,000,530 $1,740,975
Add: Loan originations ........ 248,072 156,196 325,870 473,821 885,509
Servicing of portfolio loans
acquired ....................... 27,916 16,029 239,414 27,726 43,472
Less: Sale of servicing rights. -- -- 196,895(3) -- --
Run-offs(4) ................... 123,421 82,157 184,932 387,334 669,426
---------- ---------- ---------- ---------- ----------
Ending servicing portfolio .... $2,450,767 $2,204,811 $2,298,200 $2,114,743 $2,000,530
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Number of loans serviced(5) ... 50,069 44,962 48,240 43,572 42,041
Average loan size(5) .......... $49 $49 $48 $49 $48
Average servicing fee rate(5) . 0.540 0.529 0.505 0.558 0.486

</TABLE>

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

(2) At the dates shown, included $334.0 million, $245.9 million, $290.8
million, $213.9 million and $159.5 million of loans serviced for the
Bank, respectively, which constituted 13.63%, 11.15%, 12.65%, 10.12% and
7.97% of the total servicing portfolio, respectively.

(3) R&G Mortgage sold servicing rights during 1994 and recognized a gain of
$2.9 million. Pursuant to a subservicing agreement with the purchaser
of the servicing rights, R&G Mortgage continued to service the loans
subject to such sale and they remained in R&G Mortgage's servicing
portfolio until 1995.

(4) Run-off refers to regular amortizations of loans, prepayments and
foreclosures.

(5) At June 30, 1996, R&G Mortgage was servicing 5,291 loans for the Bank
with an average loan size of approximately $63,000 and at an average
servicing rate of 0.231%.

53
<PAGE>

The following table sets forth certain information at June 30, 1996
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 June 30, 1996
-----------------------------------------------------------------------------------------------
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% .............. 60 $ 3,296 2,869 $146,944 2,929 $150,240
7.00% - 7.49% ................ 449 39,061 6,704 388,743 7,153 427,804
7.50% - 7.99% ................ 1,151 90,287 10,886 571,475 12,037 661,762
8.00% - 8.49% ................ 1,156 79,205 5,717 313,505 6,873 392,710
8.50% - 8.99% ................ 988 61,132 8,068 348,408 9,056 409,540
9.00% - 9.49% ................ 558 28,429 3,698 142,796 4,256 171,225
9.50% - 9.99% ................ 324 15,821 3,049 92,553 3,373 108,374
10.00% - 10.49% .............. 172 5,726 1,283 46,539 1,455 52,265
10.50% - 10.99% .............. 219 6,189 794 23,210 1,013 29,399
11.00% or more ............... 214 4,919 1,710 42,529 1,924 47,448
----- -------- ------ ---------- ------ ----------
5,291 $334,065 44,778 $2,116,702 50,069 $2,450,767
----- -------- ------ ---------- ------ ----------
----- -------- ------ ---------- ------ ----------
</TABLE>

The amount of principal prepayments on mortgage loans serviced by R&G
Mortgage was $35.4 million for the first six months of 1996 and $68.2
million, $62.2 million and $45.2 million for the years ended December 31,
1995, 1994 and 1993, respectively. This represented approximately 1.4%, 3.0%,
2.9% and 2.3% of the aggregate principal amount of mortgage loans serviced
during such periods. Principal prepayments have declined since 1993 as a
result of decreased refinancing activity caused by the increase in interest
rates experienced following the refinance boom of 1993. 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 six months ended June 30, 1996 and the years ended December 31, 1995,
1994 and 1993, the monthly average amount of funds advanced by R&G Mortgage
under such servicing agreements was $2.2 million, $4.4 million, $6.3 million
and $85,000, 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 June 30, 1996, R&G Mortgage
held $30.6 million of such escrow funds,

54
<PAGE>

$16.4 million of which were deposited in the Bank and $14.2 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 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 June 30, 1996, R&G
Mortgage was servicing mortgage loans with an aggregate principal amount of
$217.2 million on a recourse basis. During the last three years, losses
incurred due to recourse servicing have not been significant.

R&G Mortgage's general strategy is to retain the servicing rights related
to the mortgage loans it originates and purchases. Nevertheless, there is a
market in Puerto Rico for servicing rights, which are generally valued in
relation to the present value of the expected income stream generated by the
servicing rights. Among the factors which influence the value of a servicing
portfolio are servicing fee rates, loan balances, loan types, loan interest
rates, the expected average life of the underlying loans (which may be reduced
through foreclosure or prepayment), the value of escrow balances, delinquency
and foreclosure experience, servicing costs, servicing termination rights of
permanent investors and any recourse provisions. During the year ended December
31, 1995, R&G Mortgage sold servicing rights on $196.9 million of mortgage
loans. Although R&G Mortgage may on occasion consider future sales of a portion
of its servicing portfolio, management does not anticipate sales of servicing
rights to become a significant part of its operations.

The market value of, and earnings from, R&G Mortgage's mortgage loan
servicing portfolio may be adversely affected if mortgage interest rates
decline and mortgage loan prepayments increase. In a period of declining
interest rates and accelerated prepayments, income generated from R&G
Mortgage's mortgage loan servicing portfolio may also decline. Conversely, as
mortgage interest rates increase, the market value of R&G Mortgage's mortgage
loan servicing portfolio may be positively affected. See Note 7 to R&G
Financial's Notes to Consolidated Financial Statements for a discussion of SFAS
No. 122 and the treatment of servicing rights.

55
<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>
Six Months Year Ended December 31,
Ended -------------------------------------------------------------------------
June 30, 1996 1995 1994 1993
--------------------- ---------------------- ---------------------- ----------------------
Percent of Percent of Percent of Percent of
Number Servicing Number of Servicing Number of Servicing Number of Servicing
of Loans Portfolio Loans Portfolio Loans Portfolio Loans Portfolio
-------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days................ 3,054 6.10% 3,366 6.98% 2,609 5.99% 2,436 5.92%
60-89 days................ 761 1.52 906 1.88 543 1.25 504 1.22
90 days or more........... 853 1.70 988 2.05 716 1.64 757 1.84
----- ---- ----- ----- ----- ---- ----- ----
Total delinquencies(1).. 4,668 9.32% 5,260 10.90% 3,868 8.88% 3,697 8.98%
----- ---- ----- ----- ----- ---- ----- ----
----- ---- ----- ----- ----- ---- ----- ----
Foreclosures pending(2)..... 626 1.25% 459 0.95% 401 0.92% 294 0.71%
----- ---- ----- ----- ----- ---- ----- ----
----- ---- ----- ----- ----- ---- ----- ----
</TABLE>

- ------------------------
(1) Includes at June 30, 1996, an aggregate of $27.5 million of delinquent
loans serviced for the Bank, or 8.24% of the total servicing portfolio and
$1.7 million of delinquent loans held in R&G Mortgage's own portfolio.

(2) At June 30, 1996, the Bank had foreclosures pending on $5.0 million of
loans being serviced by R&G Mortgage, which constituted 1.51% of the
servicing portfolio. R&G Mortgage had foreclosures pending on $447,000 of
loans it is servicing for its own portfolio at June 30, 1996.

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 June 30, 1996 and December 31, 1995, 1994 and
1993, R&G Mortgage held REO with a book value of approximately $0, $0, $43,000
and $239,000, respectively. Sales of REO resulted in net gains to R&G Mortgage
of approximately $47,000 for the six months ended June 30, 1996, $30,000 for
the year ended December 31, 1995, $12,000 for the year ended December 31, 1994
and $64,000 for the year ended December 31, 1993. There is no liquid secondary
market for the sale of R&G Mortgage's REO.

With respect to mortgage loans securitized through GNMA programs, R&G
Mortgage is fully insured as to principal by the FHA against foreclosure loans,
while the VA guarantee is subject to a limitation which is generally equal to
25% to 50% of the principal amount of the loan, up to a maximum ranging from
$50,750 to $101,500, depending upon the amount of the loan. As a result of
these programs, foreclosure on these loans had generated no loss of principal
as of June 30, 1996. R&G Mortgage, however, incurs about $3,000 per loan
foreclosed in interest and legal charges during the time between payment

56
<PAGE>

by R&G Mortgage and FHA or VA reimbursement. For the six months ended June 30,
1996 and the years ended December 31, 1995, 1994 and 1993, total expenses
related to FHA or VA loans foreclosed amounted to $72,000, $230,000, $290,000
and $288,000, respectively. Although FNMA and FHLMC are 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 ("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 Incentive Acts also encourage
investment in Puerto Rico by allowing Exempt Companies to reduce the otherwise
applicable 10% tax (the "Tollgate Tax") on distributions to shareholders by
investing their exempt industrial development income ("IDI") in Puerto Rico for
fixed periods of time, generally from five years to ten years.

Most Exempt Companies are United States corporations which operate in
Puerto Rico under Section 936 of the Code. Corporations that meet certain
requirements and elect the benefits of Section 936 ("Section 936 Corporations")
are entitled to credit against their United States corporate income tax a
portion of such tax attributable to (i) income derived

57
<PAGE>

from sources outside the United States from the active conduct of a trade or
business within Puerto Rico or from the sale or exchange of substantially all
assets used in the active conduct of such trade or business ("Active Business
Income") and (ii) qualified possession source investment income ("QPSII").
QPSII includes interest derived from mortgage loans secured by real property
located in Puerto Rico and mortgage-backed securities consisting of such
mortgage loans as well as interest on deposits with financial institutions
which in turn use such funds to finance the origination of mortgage loans and
other qualifying assets. The credit provided for QPSII tends to increase the
demand for Puerto Rico mortgage loans and mortgage-backed securities as well as
to reduce funding costs for mortgage banking institutions.

The Omnibus Budget Reconciliation Act of 1993 amended various provisions
of Section 936. The amendments (the "OBRA Amendments"), which are generally
effective for taxable years beginning after December 31, 1993, permit a
taxpayer to compute the tax credit available under Section 936 (the "936
Credit") as under prior law but limit the amount of credit allowed with respect
to Active Business Income under one of two alternatives to be selected at the
option of the taxpayer. Under the first alternative, the limit is equal to a
fixed percentage of the amount of tax credit allowable under prior law (the
"Fixed Percentage Method"). This fixed percentage commenced at 60% for taxable
years beginning in 1994 and is reduced by 5% per year until 1998. For taxable
years beginning in 1998, such percentage would be 40%. Under the second
alternative (the "Economic Activity Method"), which is based on the amount of
economic activity conducted by the taxpayer in Puerto Rico, the credit may not
exceed the sum of the following three components: (i) 60% of the qualified
possession wages and the allocable fringe benefits paid by the taxpayer, (ii)
applicable percentages of certain depreciation deductions claimed for regular
tax purposes by the taxpayer with respect to qualified tangible property and
(iii) a portion of the possession income taxes paid by the taxpayer except
where the taxpayer uses the profit-split method for determining its income. The
OBRA Amendments did not limit the 100% credit available under Section 936 for
QPSII, including income received from investment in certain Puerto Rico
mortgage loans and mortgage-backed securities.

In November 1995, the United States Congress passed the Budget Bill which
would have repealed Section 936. Although the Budget Bill was subsequently
vetoed by the President, the Budget Bill would have generally repealed the 936
Credit for taxable years beginning after December 31, 1995. 936 Corporations
that were engaged in the active conduct of a trade or business on October 13,
1995 and that qualified for and elected the benefits of Section 936 for taxable
years beginning before December 31, 1995, would have had the benefit of a
ten-year grandfather rule. Under the grandfather rule, the amount of Active
Business Income eligible for the 936 Credit would have been subject to certain
caps that would vary depending upon whether the 936 Corporation computed its
936 Credit under the Economic Activity Method or under the Fixed Percentage
Method. The credit available for QPSII would not have been subject to the
grandfather rule and would have been eliminated for taxable years beginning
after December 31, 1995.

58
<PAGE>

In May 1996, the House of Representatives approved H.R. 3448, entitled the
Small Business Job Protection Act of 1996 (the "House SBJPA"). Similar to the
Budget Bill, this legislation would have repealed Section 936 for taxable years
beginning after December 31, 1995. The House SBJPA provided a grandfather rule
with respect to those Section 936 Corporations which have an election in effect
and which are conducting an active trade or business in Puerto Rico as of
October 13, 1995 (the "Existing Claimants"). Under the grandfather rules, an
Existing Claimant would continue to be entitled to the 936 Credit until the
taxable year beginning before January 1, 2006 (the "Grandfather Period").
During the Grandfather Period, the 936 Credit would be available, subject to
certain limitations preventing artificial increase of qualified income, only
with respect to income derived from sources without the United States and
attributable to the active conduct of a trade or business in Puerto Rico and
from the sale of substantially all the assets used in such trade or business.
Further, the credit limitations under the Fixed Percentage Method and the
Economic Activity Method would continue to apply during the Grandfather Period.
QPSII is not covered by the grandfather provisions, and would be eliminated
effective for taxable years beginning after December 31, 1995. In July 1996,
the Senate approved a modified version of the House SBJPA (the "Senate SBJPA").
The Senate SBJPA modified the 936 Credit provisions of the House SBJPA in two
material ways. First, the Senate SBJPA extends the effective date for the
elimination of QPSII from tax years beginning after December 31, 1995 to
amounts received or accrued on or before July 1, 1995. Second, the Senate SBJPA
allowed a 40% 936 Credit for Existing Claimants following the Grandfather
Period and thus would indefinitely preserve a reduced 936 Credit. As part of a
compromise, a conference committee comprised of both houses of Congress adopted
the House SBJPA's 10-year phase-out of the 936 Credit for Existing Claimants
and the Senate SBJPA's approach for the elimination of QPSII by extending the
effective date of such elimination from tax years beginning after December 31,
1995 to amounts received or accrued on or before July 1, 1995. In August 1996,
the conference SBJPA was passed by the House of Representatives and the Senate
and signed by the President into law.

The Government of Puerto Rico has proposed an alternative (the "Puerto
Rico Government Proposal") to the Budget Bill. The Puerto Rico Government
Proposal basically adopts a ten-year grandfather period for the existing 936
Credit. In addition, however, it provides for the creation of a new tax credit
for qualifying corporations that invest in "economically developing
jurisdictions." This new credit would not be subject to a ten-year phase-out.
An "economically developing jurisdiction" would be defined to include any state
or territory of the United States, including Puerto Rico, in which the
prevailing per capita income and rate of unemployment, among other indicators,
are substantially below the national average. The applicable credit would be
similar to the 936 Credit determined under the Economic Activity Method
introduced by the OBRA Amendments. The Conference SBJPA incorporates in part
the Puerto Rico Government Proposal, with a new Section 30A of the Code,
providing for an income tax credit to domestic corporations operating in Puerto
Rico. This new credit is provided under guidelines similar to the Economic
Activity Method.

59
<PAGE>

The modification of Section 936 as enacted into law could have an adverse
effect on the general economic condition of Puerto Rico, R&G Financial's
service area, by reducing incentives for investment in Puerto Rico. Any such
adverse effect on the general economy of Puerto Rico could lead to an increase
in mortgage delinquencies and a reduction in the level of residential
construction and demand for mortgage loans. The elimination of the credit for
QPSII could also lead to a decrease in the amount of 936 Funds invested in
Puerto Rico financial assets by 936 Corporations, thereby increasing funding
costs and decreasing liquidity in the Puerto Rico financial market. The
magnitude of the impact of any such changes on R&G Financial's profitability or
financial condition cannot be determined at this time. R&G Financial has taken
steps to attempt to reduce the impact of any such adverse changes by
diversifying its sources of funding and identifying additional investors for
its mortgage products. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition of R&G Financial -- Liquidity and Capital
Resources." During recent periods, the disparity between the cost of 936 Funds
and other sources of funding such as the Eurodollar market have 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. Generally, a Puerto Rico 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 is subject to
local Puerto Rico taxes, the benefits under the Incentives Act, which provide a
90 percent tax exemption on profits for companies that manufacture 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 corporation would be allowed to claim a foreign tax credit
with respect to income tax paid in Puerto Rico. U.S. shareholders are also not
required to recognize income attributable to manufacturing operations of a
Puerto Rico 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 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 addition to the foregoing incentives, interest derived from FHA loans
or VA loans secured by real property in Puerto Rico originated after June 30,
1983 and, under certain circumstances, on or before February 15, 1973, and from
GNMA certificates consisting of such mortgages, is exempt from Puerto Rico
income tax. FHA and VA mortgage loans are also exempt from Puerto Rico gift and
estate taxes. Individuals who are bona fide residents of Puerto Rico are also
not subject to United States federal income tax on income from

60
<PAGE>

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 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 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 June 30, 1996, R&G Financial's loans receivable, net totalled
$598.2 million, which represented 62.0% of R&G Financial's $965.6 million of
total assets. At June 30, 1996, $545.4 million or 91.2% 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 June 30, 1996, $323.9 million or 99.5% 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.

61
<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,
-------------------------------------------------------------
June 30, 1996 1995 1994 1993
------------------- ------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate -- first
mortgage(1)............................ $378,272 62.45% $282,498 58.23% $194,707 62.14% $137,396 60.95%
Residential real estate -- second
mortgage............................... 14,377 2.37 14,372 2.96 13,298 4.24 11,135 4.94
Residential construction................. 7,992 1.32 15,046 3.10 12,039 3.84 3,940 1.75
Commercial construction and land
acquisition............................ 6,699 1.11 5,523 1.14 1,062 0.34 1,084 0.48
Commercial real estate................... 65,079 10.74 61,862 12.74 43,029 13.72 30,290 13.44
Commercial business...................... 33,290 5.50 27,816 5.74 14,102 4.51 15,417 6.84
Consumer loans:
Loans secured by deposits............. 8,934 1.48 7,497 1.55 5,829 1.86 3,815 1.69
Real estate secured consumer loans.... 36,446 6.02 33,381 6.88 29,279* 9.34* 22,355* 9.92*
Unsecured consumer loans(2)........... 54,592 9.01 37,180 7.66 * * * *
-------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable.............. 605,681 100.00% 485,175 100.00% 313,345 100.00% 225,432 100.00%
-------- ------ -------- ------ -------- ------ -------- ------
Less:
Allowance for loan losses............. (3,202) (3,510) (2,887) (3,029)
Loans in process...................... (2,795) (5,727) (5,945) (1,531)
Deferred loan fees.................... (97) (266) (424) (456)
Unearned interest..................... (1,405) (1,831) (2,475) (3,796)
-------- -------- -------- --------
(7,499) (11,334) (11,731) (8,814)
-------- -------- -------- --------
Loans receivable, net(3).............. $598,182 $473,841 $301,614 $216,618
-------- -------- -------- --------
-------- -------- -------- --------

<CAPTION>
December 31,
------------------------------------------
1992 1991
------------------- --------------------
Amount Percent Amount Percent
-------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate -- first
mortgage(1)............................ $ 64,777 50.27% $ 62,078 57.89%
Residential real estate -- second
mortgage............................... 7,945 6.17 8,318 7.76
Residential construction................. 13,801 10.71 8,569 7.99
Commercial construction and land
acquisition............................ 707 0.55 -- 0.00
Commercial real estate................... 21,246 16.49 13,011 12.13
Commercial business...................... 4,574 3.55 2,776 2.59
Consumer loans:
Loans secured by deposits............. 1,900 1.47 1,060 0.99
Real estate secured consumer loans.... 13,896* 10.78* 11,416* 10.65*
Unsecured consumer loans(2)........... * * * *
-------- ------ -------- ------
Total loans receivable.............. 128,846 100.00% 107,228 100.00%
-------- ------ -------- ------
Less:
Allowance for loan losses............. (1,230) (892)
Loans in process...................... (5,776) (3,684)
Deferred loan fees.................... (452) (897)
Unearned interest..................... (3,960) (5,075)
-------- --------
(11,418) (10,548)
-------- --------
Loans receivable, net(3).............. $117,428 $ 96,680
-------- --------
-------- --------
</TABLE>

- ------------------------
(1) Includes $52.8 million and $55.2 million of residential real estate --
first mortgage loans which are held by R&G Mortgage at June 30, 1996 and
at December 31, 1995, respectively.

(2) In each year includes a small amount of loans secured by collateral other
than real estate which, at June 30, 1996, includes $486,000 of other
secured consumer loans.

(3) Does not include mortgage loans held for sale of $18.3 million, $21.3
million, $22.0 million, $174.2 million, $106.4 million and $31.3 million
at June 30, 1996 and December 31, 1995, 1994, 1993, 1992 and 1991,
respectively.

* R&G Financial is unable to distinguish these two sub-categories of
consumer loans during the years ended December 31, 1994, 1993, 1992 and
1991.

<PAGE>

CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following table
sets forth certain information at June 30, 1996 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
Due 1 year after years after
or less June 30, 1996 June 30, 1996 Total(1)
----------- ------------- -------------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Residential real estate............... $ 184 $ 6,861 $385,604 $392,649
Residential construction.............. 7,992 -- -- 7,992
Commercial real estate(2)............. 17,980 12,641 41,157 71,778
Commercial business................... 14,340 14,319 4,631 33,290
Consumer:
Loans on savings..................... 4,062 4,596 276 8,934
Real estate secured consumer loans... 595 11,006 24,845 36,446
Unsecured consumer loans............. 5,763 47,746 1,083 54,592
------- ------- -------- --------
Total(3).............................. $50,916 $97,169 $457,596 $605,681
------- ------- -------- --------
------- ------- -------- --------
</TABLE>

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

(2) Includes $6.7 million of commercial construction and land acquisition
loans.

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

The following table sets forth the dollar amount of total loans due
after one year from June 30, 1996, 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............ $392,649 $ -- $392,649
Residential construction........... 7,992 -- 7,992
Commercial real estate(1).......... 12,890 58,888 71,778
Commercial business................ 22,338 10,952 33,290
Consumer:
Loans on savings.................. 8,934 -- 8,934
Real estate secured consumer loans 36,446 -- 36,446
Unsecured consumer loans.......... 54,592 -- 54,592
-------- --------- --------
Total............................. $535,841 $69,840 $605,681
-------- --------- --------
-------- --------- --------
</TABLE>

- ------------------------
(1) Includes $1.7 million of commercial construction and land acquisition
loans.

63
<PAGE>

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.

64
<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>
Six Months Ended
June 30, Year Ended December 31,
---------------------- ----------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loan originations:
Loans originated by R&G Mortgage:
Residential mortgages . . . . . . . . . . . . $105,574 $ 48,924 $126,599 $131,749 $175,452
Commercial mortgages. . . . . . . . . . . . . -- -- -- 123 1,293
Construction loans. . . . . . . . . . . . . . 280 9,794 13,764 10,700 4,024
Consumer loans. . . . . . . . . . . . . . . . 10,291 7,995 15,944 -- --
Total loans originated by R&G
Mortgage . . . . . . . . . . . . . . . . . 116,145 66,713 156,307 142,572 180,779
Other loans originated:. . . . . . . . . . . .
Commercial real estate. . . . . . . . . . . . 31,224 18,167 48,497 21,921 15,577
Commercial business . . . . . . . . . . . . . 8,429 12,318 21,556 13,391 10,875
Consumer loans:. . . . . . . . . . . . . . . .
Loans on deposit. . . . . . . . . . . . . . . 7,003 6,522 12,546 9,290 5,630
Real estate secured consumer loans. . . . . . -- 3,254 3,436 9,323 7,303
Unsecured consumer loans. . . . . . . . . . . 19,823 14,890 38,589 4,005 1,307
Total other loans originated . . . . . . . . 182,624 121,864 124,624 57,930 40,692
Loans purchased(1). . . . . . . . . . . . . . 187 719 807 12,837 1,590
Total loans originated and
purchased. . . . . . . . . . . . . . . . . 182,811 122,583 281,738 213,339 223,051
Loans sold . . . . . . . . . . . . . . . . . . (4,999) (12,168) (75,093) (26,844) (89,301)
Loan principal reductions. . . . . . . . . . . (49,365) (36,001) (78,519) (62,170) (30,633)
Net increase before other items, net . . . . . 128,447 74,414 128,126 124,325 103,117
Loans securitized and transferred to
mortgage-backed securities. . . . . . . . . . (1,377) (1,008) (17,631) (51,492) --
Other increases (decreases). . . . . . . . . . -- -- 179 (2,519) (1,665)
Net increase in loan portfolio . . . . . . . . $127,070 $ 73,406 $110,674 $70,314 $101,452
</TABLE>

- ------------------------
(1) Comprised of conventional loans purchased from other financial institutions
aggregating $187,000, $807,000, $8.5 million and $449,000 in the six months
ended June 30, 1995 and the years ended December 31, 1995, 1994 and 1993,
and FHA and conventional loans purchased from R&G Mortgage aggregating $4.3
million and $1.1 million during the years ended December 31, 1994 and 1993.

65
<PAGE>

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.

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
six months ended June 30, 1996 and the year ended December 31, 1995, 1994 and
1993, R&G Mortgage received $2.5 million, $3.6 million, $3.2 million and $3.5
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 "R&G Financial -
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
$400,000, the Credit Committee of the Board of Directors is authorized to
approve real estate secured loans not exceeding $500,000, and the Executive
Committee of the Board of Directors is authorized to approve all loans exceeding
$500,000. 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 occasionally purchases loans secured by first liens on
single-family residential real estate. The Bank will occasionally purchase FHA
loans from R&G Mortgage and conventional loans 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
generally securitized by R&G Mortgage and sold by the Bank. During the six
months ended June 30, 1995 and the years ended December 31, 1995, 1994

66
<PAGE>

and 1993, the Bank purchased $187,000, $807,000, $12.8 million and $1.6 million
of loans, respectively. The Bank did not purchase any loans during the six
months ended June 30, 1996.

During the six months ended June 30, 1996 and 1995 and the years
ended December 31, 1995, 1994 and 1993, the Bank sold $5.0 million, $12.2
million, $75.1 million, $26.8 million and $89.3 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 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 June 30, 1996, R&G Financial's five largest loans-to-one borrower and
their related entities amounted to $2.0 million, $1.9 million, $1.2 million,
$800,000 and $639,000. The largest loan concentration is primarily comprised of
a loan to a developer of a new shopping center in Carolina. Plans and permits
are being developed for various fast food chains. The second largest loan
concentration consists of a construction loan to develop a 58-unit residential
subdivision in Fajardo. The third largest loan concentration is primarily
comprised of a $1.2 million loan to a developer for the interim financing of a
project that consists of 55 single family detached residential units at Humacao,
with the balance of the loan concentration comprised of other commercial loans.
In both construction projects, units have been sold and delivered and the
projects are proceeding as planned. The fourth largest loan consists of a loan
to a developer for the construction of walk-up units at Bayamon. The fifth
largest loan concentration consists of a commercial small business
administration loan. All of R&G Financial's five largest loan concentrations
were performing in accordance with their terms as of June 30, 1996.

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 June 30, 1996, $378.3
million or 62.5% of R&G Financial's total loans held for investment consisted of
such loans, $376.8 million or 99.6% 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

67
<PAGE>

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 June 30, 1996, $14.4 million or 2.4% 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).

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 June 30, 1996,
residential construction loans amounted to $8.0 million or 1.3% of R&G
Financial's total loans held for investment, while commercial construction and
land acquisition loans amounted to $6.7 million or 1.1% 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
June 30, 1996, the Bank's construction loan portfolio included 88
construction/permanent loans with an aggregate principal balance of $8.0
million.

The Bank has also originated construction loans to developers on a very
limited basis to develop single family residential properties. The Bank does not
intend to actively engage in this business and will primarily undertake such
investments to accommodate a valued developer client if the Bank determines that
the project is worthy and the risk is acceptable. At June 30, 1996, the Bank had
two residential construction loans outstanding to developers

68
<PAGE>

aggregating $2.7 million to develop single-family subdivisions, each with 58
units, in Fajardo and Humaco. Both loans are referenced in the discussion of the
Bank's largest loan concentrations above. The Fajardo project, which involved a
$2.3 million loan, had an outstanding balance of $1.9 million as of June 30,
1996. As of such date, 14 residences have closed, 16 residences had down
payments given pending contract of sale and 44 residences were under
construction. The Humaco project, which involved a $1.4 million loan, had an
outstanding balance of $840,000 at June 30, 1996. As of such date, 15 residences
have closed, 11 residences had down payments given pending contract of sale and
all residences were completed. Each loan is performing in accordance with its
terms.

In addition to the foregoing, at June 30, 1996, the Bank had two land
acquisition loans amounting to $312,000 and $299,400 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 one 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 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. At
June 30, 1996, $769,000 of the Bank's construction loans were classified as
non-performing.

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.

COMMERCIAL REAL ESTATE LOANS. The Bank has also originated mortgage loans
secured by commercial real estate. At June 30, 1996, $71.8 million or 11.9% 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 671 loans with an average principal balance of $107,000. At June
30, 1996, $2.5 million of R&G Financial's commercial real estate loans were
classified as nonperforming.

69
<PAGE>

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, 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 June 30, 1996, commercial business loans
amounted to $33.3 million or 5.5% 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 recently begun to emphasize the origination
of consumer loans in order to provide a full range of financial services to its
customers and

70
<PAGE>

because such loans generally have shorter terms and higher interest rates than
mortgage loans. At June 30, 1996, $100.0 million or 16.5% of R&G Financial's
total loans held for investment consisted of consumer loans. The consumer loans
offered by the Bank include real estate secured consumer loans (which are
originated by R&G Mortgage), 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 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 $8.9 million at June 30, 1996. 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
June 30, 1996, real estate secured consumer loans totalled $36.4 million. In
November 1995, the Bank began issuing credit cards in its own name. At June 30,
1996, credit card receivables totalled $630,000.

Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely effected by job loss, divorce, illness and personal bankruptcy. In
many cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of improper repair and maintenance of the underlying security. The remaining
deficiency may not warrant further substantial collection efforts against the
borrower. At June 30, 1996, $357,000 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

71
<PAGE>

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.

<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>
June 30, December 31,
---------- -----------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans:
Residential real estate(1). . . . . . $ 9,750 $7,921 $4,045 $2,942 $1,939 $1,198
Construction. . . . . . . . . . . . . 769 -- -- -- -- --
Commercial real estate. . . . . . . . 2,493 1,903 789 1,311 141 215
Commercial business . . . . . . . . . 20 -- -- -- -- --
Consumer. . . . . . . . . . . . . . . 269 40 918 736 221 93
--------- --------- --------- --------- --------- ----------
Total . . . . . . . . . . . . . . . 13,301(2) 9,864 5,752 4,989 2,301 1,506
--------- --------- --------- --------- --------- ----------

Accruing loans greater than 90 days
delinquent:
Residential real estate . . . . . . . -- -- -- -- -- --
Residential construction. . . . . . . -- 611 -- -- 28 69
Commercial real estate. . . . . . . . -- -- -- -- -- --
Commercial business . . . . . . . . . 10 8 10 70 -- --
Consumer. . . . . . . . . . . . . . . 88 94 -- -- 4 1
--------- --------- --------- --------- --------- ----------
Total accruing loans greater than
90 days delinquent . . . . . . . . 98 713 10 70 32 70
--------- --------- --------- --------- --------- ----------
Total non-performing loans. . . . . 13,399 10,577 5,762 5,059 2,333 1,576
--------- --------- --------- --------- --------- ----------
Real estate owned, net of reserves(3) . 995 654 722 699 21 193
--------- --------- --------- --------- --------- ----------
Total non-performing assets . . . . $14,394 $11,231 $6,484 $5,758 $2,354 $1,769
--------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- ----------
Total non-performing loans as a
percentage of total loans. . . . . 2.23% 2.18% 1.84% 2.24% 1.81% 1.47%
--------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- ----------
Total non-performing assets as a
percentage of total assets . . . . 1.49% 1.32% 1.04% 1.07% 0.80% 0.95%
--------- --------- --------- --------- --------- ----------
--------- --------- --------- --------- --------- ----------
</TABLE>

- ------------------------
(1) Includes residential real estate secured by both first and second mortgage
loans.

(2) As of June 30, 1996, comprised of 148 loans secured by residential real
estate, 26 loans secured by commercial real estate, 9 construction loans
and 41 consumer loans.

(3) Includes properties held by R-G Mortgage of $43,000, $239,000 and $193,000
as of December 31, 1994, 1993 and 1991. As of June 30, 1996, the Bank had
11 residential properties aggregating $995,000. As of December 31, 1995,
the Bank had two residential properties aggregating $654,000.

While the level of total non-performing assets of R&G Financial has
increased on an absolute basis during the periods presented, from $1.8 million
at December 31, 1991 to $14.4 million at June 30, 1996, R&G Financial's net
loans receivable portfolio has increased by 518.7% during this period, from
$96.7 million at December 31, 1991 to $598.2 million at June 30, 1996. Thus,
total non-performing assets as a percent of total assets increased from 0.95% at
December 31, 1991 to 1.48% at June 30, 1996.

73
<PAGE>
It is the policy of the Bank to maintain an allowance for estimated losses
on loans and to increase such allowance when, based on management's evaluation,
a loss becomes both probable and estimable (i.e., the loss is likely to occur
and can be reasonably estimated). Major loans and major lending areas are
reviewed periodically to determine potential problems at an early date. Also,
management's periodic evaluation considers factors such as loss experience,
current delinquency data, known and inherent risks in the portfolio,
identification of adverse situations which may affect the ability of debtors to
repay the loan, the estimated value of any underlying collateral and assessment
of current economic conditions. Additions to the allowance are charged to
income. Such provisions are based on management's estimated value of any
underlying collateral, as applicable, considering the current and anticipated
operating conditions of the borrower. Any recoveries are credited to the
allowance.

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
Six Months
Ended June 30, At and For the Year Ended December 31,
------------------------ ---------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $3,510 $2,887 $2,887 $3,029 $1,230 $ 892 $604
--------- -------- -------- -------- -------- -------- --------
Charge-offs:
Residential real estate. . . . . . 35 53 53 -- -- 5 --
Construction . . . . . . . . . . . 50 -- -- -- -- -- --
Commercial real estate . . . . . . -- -- -- -- -- -- --
Commercial business. . . . . . . . 80 22 91 3 56 105 3
Consumer . . . . . . . . . . . . . 605 121 365 139 90 11 91
--------- -------- -------- -------- -------- -------- --------
Total charge-offs. . . . . . . . 770 196 509 142 146 121 94
--------- -------- -------- -------- -------- -------- --------
Recoveries:
Residential real estate. . . . . . -- 1 1 -- -- -- --
Construction . . . . . . . . . . . -- -- -- -- -- -- --
Commercial real estate . . . . . . -- -- -- -- -- -- --
Commercial business. . . . . . . . 28 61 85 -- 20 2 --
Consumer . . . . . . . . . . . . . 77 45 96 -- 242 22 33
--------- -------- -------- -------- -------- -------- --------
Total recoveries . . . . . . . . 105 107 182 -- 262 24 33
--------- -------- -------- -------- -------- -------- --------
Net charge-offs. . . . . . . . . . . 665 89 327 142 (116) 97 61
--------- -------- -------- -------- -------- -------- --------
Allowance for loan losses acquired from
Caribbean Federal -- -- 1,683 -- --
Provision for losses on loans . . . . 357 (50) 950(1) -- -- 435 349
Balance at end of period. . . . . . . $ 3,202 $ 2,748 $3,510 $2,887 $3,029 $1,230 $892
--------- -------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- -------- --------
Allowance for loan losses as a percent
of total loans outstanding. . . . . 0.53% 0.72% 0.72% 0.92% 1.34% 0.95% 0.83%
--------- -------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- -------- --------
Allowance for loan losses as a percent
of non-performing loans . . . . . . 23.90% 29.06% 33.19% 50.10% 59.87% 52.72% 56.60%
--------- -------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- -------- --------
Ratio of net charge-offs to average
loans outstanding . . . . . . . . . 0.12% 0.03% 0.08% 0.05% (0.06)% 0.07% 0.07%
--------- -------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- -------- --------
</TABLE>
- ------------------------
(1) 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.

74
<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,
---------------------------------------------------
June 30, 1996 1995 1994
----------------------- ------------------------ ------------------------
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. . $1,910 59.65% $2,094 59.66% $1,962 67.95%
Construction . . . . . . . 32 .99 32 0.90 -- --
Commercial real estate . . -- -- -- -- -- --
Commercial business. . . . 729 22.77 782 22.28 403 13.96
Consumer . . . . . . . . . 531 16.59 602 17.16 522 18.09
------ ------ ------ ------ ------ ------
Total. . . . . . . . . . . $3,202 100.00% $3,510 100.00% $2,887 100.00%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------

December 31,
----------------------------------------------------------------------------
1993 1992 1991
------------------------ ----------------------- -----------------------
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)
Residential real estate. . $2,029 66.99% $913 74.23% $685 76.79%
Construction . . . . . . . -- -- -- -- -- --
Commercial real estate . . -- -- -- -- -- --
Commercial business. . . . 576 19.02 154 12.60 104 11.66
Consumer . . . . . . . . . 424 13.99 163 13.17 103 11.55
------ ------ ------ ------ ------ ------
Total. . . . . . . . . . . $3,029 100.00% $1,230 100.00% $ 892 100.00%
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>

75
<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 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 June 30, 1996, R&G Mortgage held GNMA mortgage-backed securities with a fair
value of $110.1 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 June 30, 1996, R&G Mortgage's
CMOs and CMO residuals, which are classified as held for trading, had an
amortized cost of $25.5 million and a fair value of $24.6 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 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 June 30, 1996, the Bank's securities portfolio consisted of $48.2
million of securities held for investments, consisting of $39.5 million of
tax-free mortgage-backed securities and $8.7 million of Puerto Rico Government
obligations. In addition, at June 30, 1996, the Bank had a securities portfolio
classified as available for sale with a fair value of $67.6 million, consisting
of $36.6 million of mortgage-backed securities, $4.1 million of FHLB stock, $7.9
million of CMOs and CMO residuals and $19.0 million of U.S. Government agency
securities. Finally, at June 30, 1996, $2.2 million of the Bank's securities
were classified as held for trading, consisting of $1.8 million of GNMA
certificates and $397,000 of U.S. Treasury Bills.

76
<PAGE>

In February 1996, the Company entered into various agreements with an
independent investment management firm whereby such firm has been appointed as
investment advisor with respect to a portion of the Company's securities
portfolio. Pursuant to such agreements, this investment advisory firm
advises and recommends the purchase and/or sale of otherwise eligible
investments on behalf of the Company as well as the execution of various
hedging strategies. Such firm, which has been engaged by the Company to,
among other things, assist it in achieving the objectives established by the
Company's IRRBICO, receives an annual management fee of .15% of the average
aggregate principal amount under management (payable quarterly) together
with a quarterly performance fee of 25% of the net trading profits earned
during each calendar quarter. At June 30, 1996, this investment advisory
firm was managing assets of the Company with an approximate fair value of $32.1
million ($19.0 million of which is being utilized for hedging purposes and
$13.1 million of which is being utilized for trading purposes), which were
invested in U.S. Government agency securities, money market instruments and
cash and due from banks. Beginning with the quarter ended June 30, 1996,
such firm also executes hedging strategies on behalf of the Company for U.S.
Government and agency securities available for sale and all mortgage-backed
securities which are available for sale (excluding CMOs) or held for
trading. At June 30, 1996, the Company's securities held for trading and
available for sale for which hedging contracts are made had a fair value of
$190.5 million.

77
<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,
----------------------------------
June 30, 1996 1995
------------------------------------ ----------------------------------
Weighted Weighted
Carrying Market Average Carrying Market Average
Value Value Yield Value Value Yield
---------- --------- --------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
GMNA
Due within one year. . . . . $ -- $ -- --% $ -- $ -- --%
Due from one-five years. . . 106 108 10.00 -- -- 10.00
Due from five-ten years. . . -- -- -- 118 108 --
Due over ten years . . . . . 23,077 21,887 6.02 24,617 23,681 6.03
FNMA
Due within one year. . . . . -- -- -- -- -- --
Due from one-five years. . . -- -- -- -- -- --
Due from five-ten years. . . -- -- -- -- -- --
Due over ten years . . . . . 15,942 16,139 7.18 16,623 16,623 7.18
FHLMC
Due within one year. . . . . -- -- -- -- -- --
Due from one-five years. . . -- -- -- -- -- --
Due from five-ten years. . . -- -- -- -- -- --
Due over ten years . . . . . 348 339 5.50 373 373 5.50
Investment Securities:
Puerto Rico Government
obligations
Due within one year. . . . . 3,720 3,720 4.30 377 377 2.69
Due from one-five years. . . 4,362 4,338 5.38 1,042 1,000 6.25
Due from five-ten years. . . -- -- -- -- -- --
Due over ten years . . . . . 603 596 5.27 627 619 4.25
U.S. Government Agency . . . -- -- --
Due within one year. . . . . -- -- -- -- -- --
Due within one-five years. . -- -- -- -- -- --
Due within five-ten years. . -- -- -- -- -- --
Due over ten years . . . . . -- -- -- -- -- --
Commercial paper:
Due within one year. . . . . -- -- -- -- -- --
Due within one-five years. . -- -- -- -- -- --
Due within five-ten years. . -- -- -- -- -- --
Due over ten years . . . . . -- -- -- -- -- --
Total Securities held for
investment . . . . . . . $48,158 $47,127 6.22% $43,777 $42,781 6.42%

December 31,
----------------------------------------------------------------------------
1994 1993
-------------------------------------- ------------------------------------
Weighted Weighted
Carrying Market Average Carrying Market Average
Value Value Yield Value Value Yield
---------- --------- --------- --------- --------- --------
(Dollars in Thousands)
Mortgage-backed securities:
GMNA
Due within one year. . . . . $ -- $ -- --% $ -- $ -- --%
Due from one-five years. . . -- -- -- -- -- --
Due from five-ten years. . . 174 164 10.00 257 264 10.00
Due over ten years . . . . . 26,619 24,224 5.98 29,563 29,418 6.27
FNMA
Due within one year. . . . . -- -- -- -- -- --%
Due from one-five years. . . -- -- -- -- -- --
Due from five-ten years. . . -- -- -- -- -- --
Due over ten years . . . . . 16,175 15,267 7.16 2,346 2,509 9.62
FHLMC
Due within one year. . . . . -- -- -- -- -- --
Due from one-five years. . . -- -- -- -- -- --
Due from five-ten years. . . 659 678 9.16 753 804 9.20
Due over ten years . . . . . 40,495 38,512 7.05 6,204 6,564 8.91
Investment Securities:
Puerto Rico Government
obligations
Due within one year. . . . . 460 460 3.49 -- -- --
Due from one-five years. . . 1,046 982 6.25 1,455 1,460 6.52
Due from five-ten years. . . -- -- -- -- -- --
Due over ten years . . . . . 676 667 4.55 774 740 4.66
U.S. Government Agency
Due within one year. . . . . -- -- -- -- -- --
Due within one-five years. . -- -- -- 1,006 1,000 5.50
Due within five-ten years. . -- -- -- -- -- --
Due over ten years . . . . . -- -- -- -- -- --
Commercial paper:
Due within one year. . . . . -- -- -- -- -- --
Due within one-five years. . -- -- -- -- -- --
Due within five-ten years. . -- -- -- -- -- --
Due over ten years . . . . . -- -- -- -- -- --
Total Securities held for
investment . . . . . . . $86,304 $80,954 6.76% $42,358 $42,759 6.89%
</TABLE>

<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,
--------------------------------
June 30, 1996 1995
--------------------------------- --------------------------------
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):
FNMA mortgage-backed securities
Due within one year. . . . . . . . . . . . . . $ -- -- --% $ -- $ -- --%
Due from one-five years. . . . . . . . . . . . -- -- -- -- -- --
Due from five-ten years. . . . . . . . . . . . -- -- -- -- -- --
Due over ten years . . . . . . . . . . . . . . 15,425 14,991 7.09 14,846 14,946 7.12
FHLMC mortgage-backed securities
Due within one year. . . . . . . . . . . . . . -- -- -- -- -- --
Due from one-five years. . . . . . . . . . . . -- -- -- -- -- --
Due from five-ten years. . . . . . . . . . . . 586 594 9.26 1,122 1,180 8.90
Due over ten years . . . . . . . . . . . . . . 21,788 21,012 6.96 36,353 36,759 6.94
CMO residuals and other mortgage-backed
securities (2)
Due within one year. . . . . . . . . . . . . . -- -- -- -- -- NA
Due from one-five years. . . . . . . . . . . . -- -- -- -- -- NA
Due from five-ten years. . . . . . . . . . . . -- -- -- -- -- NA
Due over ten years . . . . . . . . . . . . . . 7,092 7,872 N/A 7,126 8,123 NA
Investment Securities Available for Sale(1)
U.S. Government Agency
Due within one year. . . . . . . . . . . . . . -- -- -- -- -- --
Due from one-five years. . . . . . . . . . . . 14,500 14,241 5.91 -- -- --
Due from five-ten years. . . . . . . . . . . . 5,027 4,792 6.73 -- -- --
Due over ten years . . . . . . . . . . . . . . -- -- -- -- -- --
FHLB stock . . . . . . . . . . . . . . . . . . . 4,075 4,075 6.32 3,280 3,280 7.68
-------- -------- ---- -------- -------- -----
$ 68,493 $ 67,577 6.70% $ 62,727 $ 64,288 6.42%
-------- -------- ---- -------- -------- -----
-------- -------- ---- -------- -------- -----
Securities held for trading(3):
GNMA certificates. . . . . . . . . . . . . . . . $111,962 $111,985 6.62% $ 87,656 $ 88,448 6.71%
CMO certificates . . . . . . . . . . . . . . . . 16,200 15,147 5.95 16,200 15,570 5.95
CMO residuals(4) . . . . . . . . . . . . . . . . 9,326 9,444 8.07 10,248 9,791 8.07
U.S. Treasury Bills. . . . . . . . . . . . . . . 990 990 4.90 -- -- --
-------- -------- ---- -------- -------- -----
$138,478 $137,566 6.63% $114,104 $113,809 6.72%
-------- -------- ---- -------- -------- -----
-------- -------- ---- -------- -------- -----

December 31,
------------------------------------------------------------------------
1994 1993
----------------------------------- -----------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
--------- -------- --------- --------- --------- --------
(Dollars in Thousands)
Mortgage-Backed Securities Available for Sale(1):
FNMA mortgage-backed securities
Due within one year. . . . . . . . . . . . . . $ -- $ -- --% $ -- $ -- --%
Due from one-five years. . . . . . . . . . . . -- -- -- -- -- --
Due from five-ten years. . . . . . . . . . . . -- -- -- -- -- --
Due over ten years . . . . . . . . . . . . . . -- -- -- -- -- --
FHLMC mortgage-backed securities
Due within one year. . . . . . . . . . . . . . -- -- -- -- -- --
Due from one-five years. . . . . . . . . . . . -- -- -- -- -- --
Due from five-ten years. . . . . . . . . . . . -- -- -- -- -- --
Due over ten years . . . . . . . . . . . . . . -- -- -- -- -- --
CMO residuals and other mortgage-backed
securities (2)
Due within one year. . . . . . . . . . . . . . -- -- NA -- -- NA
Due from one-five years. . . . . . . . . . . . -- -- NA -- -- NA
Due from five-ten years. . . . . . . . . . . . -- -- NA -- -- NA
Due over ten years . . . . . . . . . . . . . . 11,684 13,300 NA 10,241 10,241 NA
Investment Securities Available for Sale(1)
U.S. Government Agency
Due within one year. . . . . . . . . . . . . . -- -- -- -- --
Due from one-five years. . . . . . . . . . . . -- -- -- -- --
Due from five-ten years. . . . . . . . . . . . -- -- -- -- --
Due over ten years . . . . . . . . . . . . . . -- -- -- -- --
FHLB stock . . . . . . . . . . . . . . . . . . . 1,878 1,878 7.60 1,721 1,721 10.79
-------- -------- ---- -------- -------- -----
. . . . . . . . . . . . . . . . . . . . . . . . . $ 13,562 $15,178 5.01% $11,962 $11,962 6.76%
-------- -------- ---- -------- -------- -----
-------- -------- ---- -------- -------- -----
Securities held for trading(3):
GNMA certificates. . . . . . . . . . . . . . . . $ 65,813 $ 64,184 6.59% -- --
CMO certificates . . . . . . . . . . . . . . . . 54,350 50,241 5.76 -- -- --
CMO residuals(4) . . . . . . . . . . . . . . . . 9,500 10,097 8.00 -- -- --
U.S. Treasury Bills. . . . . . . . . . . . . . . -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
$129,663 $124,522 6.35% $ -- $ -- --%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>

(FOOTNOTES ON FOLLOWING PAGE)

79
<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 $1.8 million, $1.8
million and $1.9 million during the six months ended June 30, 1996 and the
years ended December 31, 1995 and 1994 and U.S. Treasury Bills with a fair
value of $397,000 at June 30, 1996, all of such securities are held in R&G
Mortgage's securities portfolio.

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

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

80
<PAGE>

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
$207,000. To accommodate larger-sized loans, and loans that, for other reasons,
do not conform to the agency programs, a number of private institutions have
established their own home-loan origination and securitization programs.

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

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 June 30, 1996, $57.0
million or 25.8% of R&G Financial's mortgage-backed securities was pledged to
secure various obligations of R&G Financial.

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 June 30, 1996, the Bank's

81
<PAGE>

CMOs and CMO residuals, which had a fair value of $7.9 million, were designated
as "high-risk mortgage securities" and classified as available for sale.

SOURCES OF FUNDS

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

DEPOSITS. Deposits are the major sources of the Bank's funds for lending
and other investment purposes. Consumer and commercial deposits are attracted
principally from within the Bank's primary market area through the offering of a
broad selection of deposit instruments, including passbook, NOW and Super NOW,
checking and commercial checking and certificates of deposit ranging in terms
from 7 days to 10 years. Included among these deposit products are $145.6
million of certificates of deposit with balances of $100,000 or more, which
amounted to 25.9% of the Bank's total deposits at June 30, 1996. 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 June 30, 1996 it held
$5.3 million of deposits acquired from money desks in the United States.

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

<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,
---------------------------------------------------------------
June 30, 1996 1995 1994 1993
------------------- ------------------- ------------------- -------------------
Average Average Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid Balance Rate Paid
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook.................................... $ 73,542 3.75% $ 59,860 3.66% $ 45,220 3.60% $ 30,800 4.18%
NOW and Super NOW accounts.................. 76,381 3.83 65,135 3.82 72,662 3.87 47,818 3.67
Checking.................................... 10,610 -- 6,050 -- 2,725 -- 1,423 --
Commercial checking(1)...................... 36,547 -- 24,601 -- 22,819 -- 23,827 --
Certificates of deposit..................... 336,703 6.06 276,187 6.25 197,035 5.20 128,980 5.37
-------- --------- -------- --------- -------- --------- -------- ---------
Total deposits............................ $533,783 4.89% $431,833 5.05% $340,461 4.25% $232,848 4.45%
-------- --------- -------- --------- -------- --------- -------- ---------
-------- --------- -------- --------- -------- --------- -------- ---------
</TABLE>

- ------------------------
(1) Includes $16.4 million, $9.7 million, $10.0 million and $13.3 million of
escrow funds of R&G Mortgage maintained with the Bank at June 30, 1996 and
at December 31, 1995, 1994 and 1993, respectively.

The following table sets forth the maturities of the Bank's certificates
of deposit having principal amounts of $100,000 or more at June 30, 1996.

Amount
----------------
(In Thousands)
Certificates of deposit maturing:
Three months or less........................................ $41,118
Over three through six months.................................. 29,829
Over six through twelve months................................. 40,007
Over twelve months............................................. 34,627
--------
Total....................................................... $145,581
--------
--------

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

83
<PAGE>

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 June 30, 1996, R&G Financial had
$98.3 million of reverse repurchase agreements outstanding, all but $10.2
million of which represented borrowings of R&G Mortgage. At June 30, 1996,
the weighted average interest rate on R&G Financial's reverse repurchase
agreements amounted to 4.52%. See Note 10 of R&G Financial's Notes to
Consolidated Financial Statements.

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 June 30, 1996, R&G Mortgage was permitted to borrow
under such Warehouse Lines up to $79.4 million, $39.9 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
certificates of deposit, a general assignment of mortgage payments
receivable, an assignment of certain mortgage servicing rights and an
assignment of key man life insurance policies on Mr. Victor J. Galan, R&G
Financial's Chairman of the Board and Chief Executive Officer. In addition,
some of the Warehouse Lines are personally guaranteed by Mr. Galan. Certain
of these warehousing lines of credit impose restrictions on R&G Mortgage with
respect to the maintenance of minimum levels of net worth and working capital
and limitations on the amount of indebtedness and dividends which may be
declared.

The interest rate on funds borrowed pursuant to the Warehouse Lines is
based upon a specified prime rate less a negotiated amount or 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
June 30, 1996, the weighted average interest rate being paid by R&G Mortgage
under its Warehouse Lines amounted to 4.36%.

84
<PAGE>

The Warehouse Lines include various covenants and restrictions on R&G
Mortgage's operations, including maintenance of minimum levels of net worth
and working capital, 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 (which is limited to
50% of R&G Mortgage's net income for the preceding fiscal year). Management
of R&G Financial believes that as of June 30, 1996, it was in compliance with
all of such covenants and restrictions and does not anticipate that such
covenants and restrictions will limit its operations. See Note 11 of R&G
Financial's Notes to Consolidated Financial Statements.

R&G Mortgage also obtains funds on a longer-term basis (greater than
one-year) through various notes payable. Long-term notes payable amounted to
$4.5 million as of June 30, 1996. These long-term notes payable are generally
cross-collateralized with certain of the assets and guarantees used as
collateral for the Warehouse Lines discussed above. See Note 12 of R&G
Financial's Notes to Consolidated Financial Statements.

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 eight years and are payable semiannually at
either a variable interest rate (84% of three-month LIBOR less .125%) or a
fixed interest rate (ranging from 5.50% 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 June 30, 1996, $41.0 million of the 936 Notes
were secured by marketable securities, while $60.0 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 June 30, 1996, the Bank had $101.0
million of 936 Notes outstanding, $50.0 million of which matures in 1997,
$23.6 million of which matures in 1999, $25.0 million of which matures in
2000 and $2.4 million of which matures in 2003. See Note 11 of R&G
Financial's Notes to Consolidated Financial Statements.

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

85
<PAGE>

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 June 30, 1996,
the Bank had access to $50.0 million in advances from the FHLB of New York,
and had two FHLB of New York advances aggregating $11.0 million outstanding
as of such date, which mature in 1996 and have a weighted average interest
rate of 6.12%. In addition, at June 30, 1996, the Bank maintained $73.8
million in standby letters of credit with the FHLB of New York, which secured
$60.0 million of outstanding 936 Notes payable and $7.0 million of 936
certificates of deposit. At June 30, 1996, the Bank had pledged specific
collateral aggregating $113.5 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 additional borrowings by the Bank in the future. See Note
13 of R&G Financial's Notes to Consolidated Financial Statements.

In June 1991, the Bank issued $3.3 million of subordinated capital notes
bearing interest at 8% payable on a quarterly basis. The subordinated notes
are guaranteed by R&G Mortgage and by the Chairman of the Board and Chief
Executive Officer of R&G Financial, and are secured by an irrevocable standby
letter of credit issued by an unrelated commercial bank. Pursuant to the
terms of the subordinated notes, the Bank is required to deposit with an
established sinking fund in seven equal annual installments (the first of
which began in September 1992 and the last of which is scheduled for June
1998, when the notes mature) cash or other permitted investments in an amount
sufficient to retire one-seventh ($464,000) of the aggregate principal amount
of the subordinated notes. The standby letter of credit is reduced in equal
proportion to the deposits to such sinking fund. See Note 15 of R&G
Financial's Notes to the Consolidated Financial Statements.

In December 1995, the Bank sold single-family residential mortgage loans
with an aggregate outstanding balance of approximately $55 million to two
commercial banks. In connection with the foregoing, R&G Mortgage assumed
certain recourse provisions and guaranteed a specific yield to the purchasers
of the loans. In addition, the purchasers of the loans have the right, at
their option, to require R&G Mortgage to purchase the mortgage loans at any
time after December 2000. Management has estimated its liability, if any,
under the foregoing recourse provisions to be immaterial as of June 30, 1996.
In R&G Financial's Consolidated Financial Statements, R&G Financial has
recognized the foregoing transaction as a transfer of loans with recourse.
Accordingly, the proceeds from such transaction (amounting to $53.5 million
at June 30, 1996) have been reported as a secured borrowing in R&G
Financial's Consolidated Financial Statements. Similarly, the aggregate
outstanding principal balance of the related loans (amounting to $52.8
million as of June 30, 1996) have been reported as an asset in R&G
Financial's Consolidated Financial Statements. See Note 14 of R&G Financial's
Notes to the Consolidated Financial Statements.

86
<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 Six
Months Ended At or For the Year Ended
June 30, December 31,
------------------ ----------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
R&G Mortgage:
Securities sold under agreements to repurchase:
Average balance outstanding......................................... $ 90,765 $108,447 $ 99,145 $ 84,405 $ 2,273
Maximum amount outstanding at any month-end during the period....... 95,314 124,535 112,507 119,926 19,089
Balance outstanding at end of period................................ 88,094 124,535 87,958 97,355 --
Average interest rate during the period............................. 5.32% 5.93% 5.87% 4.74% 2.65%
Average interest rate at end of period.............................. 4.51% 4.49% 5.47% 4.20% --%

Notes Payable:
Average balance outstanding......................................... $ 33,205 $ 21,268 $ 24,521 $ 61,352 $ 79,263
Maximum amount outstanding at any month-end during the period....... 41,883 27,849 31,626 134,271 133,913
Balance outstanding at end of period................................ 41,883 20,511 30,130 22,215 133,913
Average interest rate during the period............................. 4.10% 4.70% 4.92% 5.15% 5.40%
Average interest rate at end of period.............................. 4.36% 4.88% 3.00% 3.50% 5.60%

The Bank:
FHLB of New York advances:
Average balance outstanding......................................... $ 5,728 $ 13,554 $ 11,796 $ 12,060 $ 9,110
Maximum amount outstanding at any month-end during the period....... 11,000 13,562 13,562 14,592 28,108
Balance outstanding at end of period................................ 11,000 13,534 6,007 13,568 11,688
Average interest rate during the period............................. 6.34% 5.27% 6.00% 6.06% 5.36%
Average interest rate at end of period.............................. 6.12% 5.84% 6.74% 5.84% 5.90%
Securities sold under agreements to repurchase:
Average balance outstanding......................................... $ 3,022 $ 11,736 $ 7,737 $ 9,724 $ 2,641
Maximum amount outstanding at any month-end during the period....... 10,200 14,673 14,673 22,272 11,575
Balance outstanding at end of period................................ 10,200 -- 10,525 11,566 --
Average interest rate during the period............................. 4.92% 5.30% 5.16% 3.98% 2.65%
Average interest rate at end of period.............................. 4.73% --% 5.11% 4.91% --%

Notes Payable:
Average balance outstanding......................................... $ 72,978 $ 22,287 $ 30,597 $ 4,020 $ --
Maximum amount outstanding at any month-end during the period....... 101,000 23,600 51,000 23,600 --
Balance outstanding at end of period................................ 101,000 23,600 51,000 23,600 --
Average interest rate during the period............................. 6.04% 7.26% 6.42% 6.47% --
Average interest rate at end of period.............................. 5.31% 6.74% 5.93% 6.74% --
</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 June 30, 1996, the Bank's Trust
Department administered approximately 5,631 trust accounts, with aggregate
assets of $18.9 million as of such date. In addition, during the three months
ended June 30, 1996, the Bank's Trust Department had sold $5.4 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.

87
<PAGE>

OFFICES AND OTHER MATERIAL PROPERTIES

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 June 30, 1996, all of which
properties are leased.

<TABLE>
<CAPTION>
Net Book Value
Description/Address Lease Term Expiration of Property
- -------------------------------------------------- ------------------------------ --------------
(In Thousands)
<S> <C> <C>
THE BANK:
Hato Rey Branch(1)(2)(3) November 30, 1998 $548
280 Jess T. Pinero Avenue Two (2) five year options
Hato Rey, PR 00919

Los Jardines Branch September 4, 1999 158
Los Jardines de Guaynabo Shopping Center One (1) ten year option
PR Road No. 20
Guaynabo, PR 00969

San Patricio Branch July 31, 2007 182
San Patricio Plaza
Ortegon Street
Guaynabo, PR 00969

Bayamon Branch(2)(3) May 31, 2001 289
42-43 Betances Avenue One (1) ten year option
Urb. Hermanas Davila
Bayamon, PR 00959

Bayamon East(4) January 10, 2001 -0-
Road #174, Lote 100
Urb. Ind. Minillas
Bayamon, PR 00959

Arecibo Branch(3) December 31, 2001 136
Marginal Vista Azul Two (2) five year options
Corner San Daniel Avenue
Arecibo, PR 00612

Manati Branch(3) August 8, 2009 515
Plaza Puerta del Sol Four (4) five year options
PR Road No. 2, Km. 49.7
Manati, PR 00674

Carolina Branch(3) July 31, 2003 284
65th Infantry Avenue
Corner San Marcos Street
Carolina, PR 00985

Trujillo Alto Branch(5) October 31, 2004 137
Trujillo Alto Shopping Center
Trujillo Alto, PR 00976

88
<PAGE>

Net Book Value
Description/Address Lease Term Expiration of Property
- -------------------------------------------------- ------------------------------ --------------
(In Thousands)

Santurce Branch April 30, 1999 64
1077 Ponce de Leon Avenue Three (3) six year options
Santurce, PR 00917

Laguna Gardens Branch(5) April 30, 1999 161
Laguna Gardens Shopping Center One (1) five year option
Isla Verde
Carolina, PR 00979

Plaza Carolina Branch(5) May 31, 2000 221
Plaza Carolina Mall
Carolina, PR 00985

Norte Shopping Branch(5) April 30, 2000 81
Norte Shopping Center Two (2) five year options
Baldorioty de Castro Avenue
San Juan, PR 00907

Vega Baja Branch(5) May 31, 2003 244
Cabo Caribe Development One (1) five year option
PR Road No. 2, Marginal
Vega Baja, PR 00693

Mayaguez Branch(3) April 30, 1997 678
McKinley Street Four (4) five year options
Corner Dr. Vady
Mayaguez, PR 00680

Operations Center(2) January 10, 2001 1,213
Road #174, Lote #100 -------
Urb. Ind. Minillas
Bayamon, PR 00959 4,911
-------

R&G MORTGAGE:
Caguas Office July 31, 2000 18
D-9 Degetau Street One (1) five year option
Urb. San Alfonso
Caguas, PR 00725

Ponce Office May 1, 1998 13
25 Las Americas Avenue
Ext. Buena Vista
Ponce, PR 00731

Fajardo Office May 16, 1999 11
51 Celis Aguilera Street One (1) five year option
Fajardo, PR 00738

89
<PAGE>

Net Book Value
Description/Address Lease Term Expiration of Property
- -------------------------------------------------- ------------------------------ --------------
(In Thousands)

Los Jardines Office(6) August 1, 2006 37
Los Jardines de Guaynabo Shopping Center One (1) five year option
PR Road No. 20
Guaynabo, PR 00969

San Patricio Office(6) May 1, 1998 18
K-4 Ebano Street One (1) five year option
Ponderosa Building
San Patricio
Guaynabo, PR 00969

Hato Rey Office(2)(3) September 1, 1996 with monthly 1,677
280 Jesus T. Pinero Avenue renewal options
Hato Rey, PR 00919

Bayamon Office(2)(3) May 30, 2001 54
42-43 Betances Avenue One (1) ten year option
Urb. Hermanas Davila
Bayamon, PR 00959

Arecibo Office(3) January 1, 2002 30
Marginal Vista Azul Two (2) five year options
Corner San Daniel Avenue
Arecibo, PR 00612

Manati Office(3)(7) October 30, 1998 24
Plaza Puerta del Sol One (1) five year option
PR Road No. 2, Km. 49.7
Manati, PR 00674

Carolina Office(3)(7) October 30, 1998 20
65th Infantry Avenue One (1) five year option
Corner San Marcos Street
Carolina, PR 00985

Mayaguez Office(3)(7) October 30, 1998 43
McKinley Street One (1) five year option -------
Corner Dr. Vady
Mayaguez, PR 00680
1,945
-------
$6,856
-------
-------
</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.
See "Management - Transactions with Certain Related Persons."

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

90
<PAGE>

(4) Application was approved by regulatory authorities in June 1996. The Bank
will operate a temporary trailer facility at the site beginning July 1, 1996
until improvements to the branch office are completed in late 1996.

(5) Facility includes an R&G Mortgage Banking Center. See "Management --
Transactions with Certain Related Persons."

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

(7) Office is subleased from the Bank.

PERSONNEL

As of June 30, 1996, R&G Financial (on a consolidated basis) had 662
full-time employees and 49 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.

LEGAL PROCEEDINGS

R&G Financial is involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition and results of
operations of R&G Financial.

91
<PAGE>

SELECTED FINANCIAL AND OTHER DATA
OF R-G PREMIER BANK

The following table presents selected financial and other data of the
Bank for the six months ended June 30, 1996 and 1995, and for each of the
five years in the period ended December 31, 1995. The selected financial
data should be read in conjunction with the Financial Statements of the Bank,
including the accompanying Notes, presented elsewhere herein. The financial
information presented for the six months ended June 30, 1996 and 1995 is
unaudited. In the opinion of management, this information reflects all
adjustments, consisting only of normal recurring accruals and adjustments,
necessary for a fair presentation. The information set forth in the table
does not reflect adjustments made to the Financial Statements upon
consolidation with R&G Financial.

<TABLE>
<CAPTION>
At or for the Six
Months Ended
June 30, At or For the Year Ended December 31,
------------------ ------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total assets.............................................. $742,148 $568,655 $640,846 $464,982 $359,708 $194,128 $145,289
Loans receivable, net..................................... 545,353 370,374 417,245 301,614 216,628 116,464 96,029
Mortgage loans held for sale.............................. 8,292 18,933 9,330 14,286 28,958 27,634 10,669
Mortgage-backed and investment securities held for
trading.................................................. 2,152 1,921 1,847 1,918 -- -- --
Mortgage-backed securities available for sale............. 44,469 7,964 61,008 11,422 12,699 4,763 4,197
Mortgage-backed securities held to maturity............... 39,473 81,600 41,731 84,122 39,122 15,557 12,119
Investment securities, available for sale................. 23,108 3,280 3,280 1,878 1,721 1,861 1,198
Investment securities held to maturity.................... 8,685 1,753 2,046 2,182 3,255 406 406
Cash and cash equivalents(1).............................. 53,818 69,607 89,733 36,175 48,370 19,392 16,900
Deposits.................................................. 563,147 484,048 518,187 380,148 317,186 169,998 128,226
Securities sold under agreements to repurchase............ 10,200 -- 10,525 11,566 -- -- 1,800
Notes payable............................................. 101,000 23,600 51,000 23,600 -- -- --
Other borrowings(2)....................................... 11,000 13,534 6,007 13,568 11,688 -- --
Subordinated notes(3)..................................... 3,250 3,250 3,250 3,250 3,250 3,250 3,250
Stockholders' equity...................................... 45,926 38,918 43,712 27,878 20,885 13,553 8,100

SELECTED INCOME STATEMENT DATA:
Revenues:
Net interest income after
provision for loan losses................................ $ 11,279 $ 8,081 $ 17,905 $ 15,089 $ 10,636 $ 6,489 $ 3,645
Net gain on sale of securities and mortgage loans......... 424 647 1,567 202 4,368 2,722 1,088
Other(4).................................................. 2,634 1,602 4,998 1,671 2,396 1,690 714
-------- -------- -------- -------- -------- -------- --------
Total revenue............................................. 14,337 10,330 24,470 16,962 17,400 10,901 5,447
-------- -------- -------- -------- -------- -------- --------
Expenses:
Employee compensation and benefits........................ 3,083 1,633 4,330 3,193 1,905 1,129 868
Office occupancy and equipment............................ 1,943 1,132 2,860 2,316 1,448 454 300
Other administrative and general.......................... 4,061 2,885 7,498 5,277 4,117 2,364 1,703
-------- -------- -------- -------- -------- -------- --------
Total expenses.......................................... 9,087 5,650 14,688 10,786 7,470 3,947 2,872
-------- -------- -------- -------- -------- -------- --------
Income before income taxes................................ 5,250 4,680 9,782 6,176 9,930 6,954 2,575
Income taxes(5)........................................... 1,525 1,690 3,576 2,170 3,849 2,751 503
Cumulative effect of change in accounting principle....... -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income................................................ $ 3,725 $ 2,990 $ 6,206 $ 4,006 $ 6,081 $ 4,203 $ 2,072
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
SELECTED OPERATING DATA(6):
Performance Ratios and Other Data:
Return on average assets.................................. 1.11% 1.23% 1.15% 0.99% 2.17% 2.41% 1.82%
Return on average equity.................................. 16.81 19.91 18.56 17.38 36.65 38.08 31.67
Equity to assets at end of period......................... 6.19 6.84 6.82 6.00 5.81 6.98 5.58
Interest rate spread(7)................................... 3.34 3.40 3.29 3.80 4.14 4.15 3.63
Net interest margin(7).................................... 3.58 3.53 3.57 3.87 4.25 4.27 3.76
Average interest-earning assets to average interest-
bearing liabilities...................................... 105.01 102.57 105.66 101.76 102.74 102.24 101.85
Full-service Bank offices................................. 14 8 14 8 8 5 3

92
<PAGE>

At or for the Six
Months Ended
June 30, At or For the Year Ended December 31,
------------------ ------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Asset Quality Ratios(8):
Non-performing loans to total loans at end of period...... 2.42% 2.46% 2.50% 1.87% 2.26% 1.91% 1.53%
Non-performing assets to total assets at end of period.... 1.94 1.79 1.75 1.39 1.60 1.21 1.22
Allowance for loan losses to total loans at end of
period................................................... 0.58 0.72 0.83 0.94 1.35 1.01 0.87
Allowance for loan losses to total non-performing loans at
end of period............................................ 23.90 29.06 33.19 50.10 59.87 52.72 56.60
Bank Regulatory Capital Ratios(9):
Tier 1 risk-based capital ratio........................... 10.04% 10.53% 10.53% 11.03% N/A N/A N/A
Total risk-based capital ratio............................ 11.02 12.03 11.66 13.59 N/A N/A N/A
Tier 1 leverage capital ratio............................. 6.09 5.82 6.25 5.95 N/A N/A N/A
</TABLE>

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

(2) Comprised of advances from the Federal Home Loan Bank ("FHLB") of New York.
See "Business of R&G Financial - Sources of Funds - Borrowings" and Note 13
of R&G Financial's Notes to Consolidated Financial Statements.

(3) Represents a seven-year subordinated capital note of the Bank issued in
1991, which is subject to an annual sinking fund requirement. See "Business
of R&G Financial - Sources of Funds - Borrowings" and Note 15 of R&G
Financial's Notes to Consolidated Financial Statements.

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

(5) Net of income tax benefits of approximately $622,000 in 1991 related to loss
carryforwards.

(6) With the exception of end of period ratios, all ratios are based on average
daily balances. All ratios are annualized where appropriate.

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

(8) Non-performing loans consist of the Bank's non-accrual loans and
non-performing assets consist of the Bank's non-performing loans and real
estate acquired by foreclosure or deed-in-lieu thereof. See "Business of R&G
Financial - Asset Quality."

(9) All of such ratios were in compliance with the applicable requirements of
the FDIC. Prior to 1994, the Bank operated as a savings and loan
association. As such, the Bank was subject to the capital ratios of the OTS
and not those of the FDIC and was at all times in capital compliance
therewith. For definitions and further information relating to the
regulatory capital requirements of the Bank, see "Regulation - The Bank -
Capital Requirements."

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE BANK

FINANCIAL CONDITION

At June 30, 1996, the Bank's total assets amounted to $742.1 million,
as compared to $640.8 million at December 31, 1995. The $101.3 million or
15.8% increase in the Bank's total assets during the six months ended June
30, 1996 was primarily the result of a $128.1 million or 30.7% increase in
loans receivable net, primarily reflecting increased net residential loan
originations, and a $19.8 million increase in investment securities
available for sale, which was partially offset by a $16.5 million or 27.1%
decrease in mortgage backed securities available for sale. These increases
were funded by increases in deposits of $45.0 million or 8.7% and notes
payable of $50.0 million or 98.0%, as well as by the liquidity resulting
from decreases of $19.8 million or 604.6% in investment securities available
for sale and $22.9 million or 51.1% of time deposits with other banks.
Stockholders' equity increased during the six months ended June 30, 1996 by
$2.2 million or 5.1% to $45.9 million, attributable to the $3.7 million of
net income earned by the Bank during the period, offset by a $1.5 million
increase in unrealized loss on securities available for sale resulting from
the application of FASB 115.

The Bank's total assets increased by $175.9 million or 37.8% to $640.8
million at December 31, 1995 from the prior fiscal year end. The growth during
1995 reflects the Bank's June 1995 acquisition from another Puerto Rico
commercial bank of $77.2 million in deposits and six branch offices (after
consolidation). Total deposits increased by $138.0 million or 36.3% and notes
payable increased by $27.4 million or 116.1%. The investment of these sources
of funds into interest-earning assets is evidenced by increases of $115.6
million or 38.3% in loans receivable, net. In addition, investment securities
available for sale increased by $1.4 million or 74.6%, while investment
securities at cost decreased by $42.4 million or 50.4%, as the Bank took
advantage of FASB 115 and transferred $42.4 million of investment securities to
its available for sale portfolio. Stockholders' equity increased by $15.8
million or 56.8%, primarily reflecting the issuance of $10.0 million of the
Bank's preferred stock to R&G Mortgage and $4.0 million of net income during the
year.

RESULTS OF OPERATIONS

GENERAL. The Bank reported net income of $3.7 million, $3.0 million, $6.2
million, $4.0 million and $6.1 million during the six months ended June 30, 1996
and 1995 and the years ended December 31, 1995, 1994 and 1993, respectively.

Net income increased by $736,000 or 24.6% during the six months ended June
30, 1996 over the prior comparable period, due primarily to a $3.2 million or
39.6% increase in net interest income after provision for loan losses and
$809,000 or 36.0% increase in other income, which offset a $3.4 million or 60.8%
increase in total operating expenses.

<PAGE>

Net income increased by $2.2 million or 54.9% during the year ended
December 31, 1995 over the prior year. The improved earnings was due to
increases of $4.7 million or 250.6% in total other income and $2.8 million or
18.7% in net interest income after provision for loan losses. These increases
more than offset increases of $3.9 million or 36.2% in total operating expenses
and $1.4 million or 64.8% in provision for income taxes.

Net income decreased by $2.1 million or 34.1% during the year ended
December 31, 1994 over the prior year. The decrease in net income was primarily
due to a $4.9 million or 72.3% decrease in total other income and a $3.3 million
or 44.4% increase in total operating expenses. These changes, which adversely
affected net income, more than offset a $4.5 million or 41.9% increase in net
interest income after provision for loan losses and a $1.7 million or 43.6%
decrease in provision for income taxes.

NET INTEREST INCOME. Net interest income amounted to $11.6 million, $8.0
million, $18.9 million, $15.1 million and $10.6 million during the six months
ended June 30, 1996 and 1995 and the years ended December 31, 1995, 1994 and
1993, respectively. The $3.6 million or 44.9% increase during the six months
ended June 30, 1996 was due to a $7.8 million or 39.8% increase in interest
income, primarily attributable to increased interest income on the loan
portfolio. This increase offset a $4.2 million or 36.2% increase in interest
expense, attributable to an increase of $175.7 million or 39.7% in the average
balance of interest-bearing liabilities.

The $3.8 million or 25.0% increase in net interest income during 1995 was
due to a $12.9 million or 41.1% increase in interest income, primarily a $10.6
million or 41.3% increase in interest on loans and a $1.4 million or 29.6%
increase in interest on mortgage-backed securities. These increases offset a
$9.1 million or 56.2% increase in interest expense, principally a $7.7 million
or 53.3% increase in interest paid on deposits.

The $4.5 million or 41.9% increase in net interest income during 1994 was
attributable to a $9.5 million or 43.4% increase in interest income, due
primarily to a $6.7 million or 35.1% increase in interest on loans and a $2.5
million or 120.9% increase in interest on mortgage-backed securities. These
increases offset a $5.0 million or 44.8% increase in interest expense,
principally due to a $4.4 million or 44.3% increase in interest paid on
deposits.

For further information on the increase in the Bank's loan portfolio and
increased deposits, see "Business of R&G Financial - Lending Activities of the
Bank" and "- Sources of Funds - Deposits." For information on the Bank's
provision for loan losses, see "Management's Discussion and Analysis of
Financial Condition and Results of Operation of R&G Financial - Results of
Operations - Provision for Loan Losses."

TOTAL OTHER INCOME. The Bank's total other income amounted to $3.1
million, $2.2 million, $6.6 million, $1.9 million and $6.8 million for the six
months ended June 30, 1996 and 1995 and for the years ended December 31, 1995,
1994 and 1993, respectively. The $809,000 or 36.0% increase during the six
months ended June 30, 1996 was primarily due

<PAGE>

to the $687,000 increase in service charges resulting from the acquisition of
new branch offices in June 1995.

During 1995, total other income increased significantly by $4.7 million or
250.6%. The increase was due to a $1.4 million or 676.6% increase in gain on
sale of securities and mortgage loans, due to a $48.2 million increase in loan
sales over the prior year, a $1.3 million or 45.9% increase in service charges,
fees and other, due to the recognition of deferred fees on loans sold and
additional service charges resulting from the new branch offices acquired, and a
$1.7 million change in (provision) credit for cost in excess of market value of
loans available for sale, as the Bank reversed an $859,000 provision established
in the prior year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of R&G Financial - Results of Operations -
Other Income."

During 1994, total other income decreased significantly, by $4.9 million or
72.3%. The decrease was due primarily to a $4.2 million or 95.4% decrease in
gain on sale of securities and mortgage loans, due to a decrease of $62.5
million in loan sales during the year and an $856,000 provision for cost in
excess of market value for loans available for sale compared to none in 1993.

TOTAL OPERATING EXPENSES. The Bank's total operating expenses amounted to
$9.1 million, $5.7 million, $14.7 million, $10.8 million and $7.5 million during
the six months ended June 30, 1996 and 1995 and for the years ended December 31,
1995, 1994 and 1993, respectively. The $3.4 million or 60.8% increase in total
operating expenses during the six months ended June 30, 1996 was primarily due
to the offering of new products and services to the public, and reflects a full
period of increased expenses resulting from the Bank's June 1995 branch
acquisition.

The $3.9 million or 36.2% increase in total operating expenses in 1995,
like the six month period ended June 30, 1996, reflects the Bank's June 1995
branch acquisition. Salaries and employees' benefits increased by $1.1 million
or 35.6%, while other services, primarily occupancy, FDIC insurance, advertising
and other taxes, increased by $2.2 million or 43.2%. All other expense
categories experienced increases as well.

During 1994, total operating expenses increased by $3.3 million or 44.4%.
The major reason for the increase was a $1.3 million or 67.6% increase in
salaries and employees' benefits and an $867,000 or 59.9% increase in occupancy
and equipment. These increases were due to the purchase of Caribbean Federal
Savings Bank on June 30, 1993. Other expenses also increased by $1.2 million or
28.2% due to additional expenses from the acquired institution.

PROVISION FOR INCOME TAXES. Provision for income taxes amounted to $1.5
million, $1.7 million, $3.6 million, $2.2 million and $3.8 million during the
six months ended June 30, 1996 and 1995 and for the years ended December 31,
1995, 1994 and 1993, respectively. The Bank's effective tax rate during such
respective periods was 29.05%, 36.1%, 36.6%, 35.1% and 38.8%.

SUBSEQUENT EVENT

<PAGE>

MANAGEMENT

DIRECTORS

The following table sets forth information with respect to the directors of
R&G Financial, R&G Mortgage and the Bank. There are no arrangements or
understandings between R&G Financial, R&G Mortgage and the Bank and any person
pursuant to which such person has been elected as a director. Except as set
forth in the notes to the table below, no director is related to any other
director or executive officer of R&G Financial, R&G Mortgage or the Bank by
blood, marriage or adoption.

<TABLE>
<CAPTION>
Name Age(1) Director Since Term Expires
<S> <C> <C> <C>
R&G FINANCIAL:
Victor J. Galan................ 62 1996 1998
Ana M. Armendariz.............. 63 1996 1997
Ramon Prats.................... 46 1996 1998
Juan J. Diaz................... 50 1996 1996
Victor L. Galan(2)............. 32 1996 1997
Enrique Umpierre-Suarez........ 54 1996 1998
Benigno Fernandez.............. 55 1996 1997
Gilberto Rivera-Arreaga........ 46 1996 1996
Eduardo McCormack.............. 68 1996 1998
Laureano Carus Abarca.......... 65 1996 1996
Pedro L. Ramirez............... 53 1996 1997

R&G MORTGAGE:
Victor J. Galan................ 62 1972 1996
Ana M. Armendariz.............. 63 1977 1996
Nelida Galan(2)................ 62 1972 1996
Ramon Prats.................... 46 1985 1996
Juan J. Diaz................... 50 1996 1996
Victor L. Galan(2)............. 32 1996 1996
Pedro L. Ramirez............... 53 1996 1996
Eduardo McCormack.............. 68 1996 1996
Gilberto Rivera-Arreaga........ 46 1996 1996
Benigno Fernandez.............. 55 1996 1996
Laureano Carus Abarca.......... 65 1996 1996

THE BANK:
Victor J. Galan................ 62 1990 1999
Ana M. Armendariz.............. 63 1990 1998
Ramon Prats.................... 46 1990 1999
Juan J. Diaz................... 50 1990 1997
Victor L. Galan................ 32 1995 1998
Pedro Ramirez.................. 53 1990 1997
Laureno Carus Abarca........... 65 1983(3) 1997
Jeanne Ubinas.................. 67 1983(3) 1997
Eduardo McCormack.............. 68 1990 1999
Enrique Umpierre-Suarez........ 54 1996 1999
Gilberto Rivera-Arreaga........ 46 1996 1997
Benigno R. Fernandez........... 55 1996 1998
</TABLE>

<PAGE>

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

(1) As of December 31, 1995.

(2) Nelida Galan is the wife of Victor J. Galan, the Chairman of the Board and
Chief Executive Officer of R&G Financial. Victor L. Galan is the son of
Victor J. Galan.

(3) Includes service as director of Guaynabo Federal Savings and Loan
Association, the predecessor to the Bank.

BIOGRAPHICAL INFORMATION

R&G FINANCIAL AND R&G MORTGAGE. Information concerning the principal
occupation of each director of R&G Financial and R&G Mortgage during the past
five years is set forth below.

VICTOR J. GALAN. Mr. Galan is Chairman of the Board and Chief Executive
Officer of R&G Financial, a position he has held since R&G Financial's
incorporation in March 1996. Mr. Galan is the founder and Chairman of the Board
of R&G Mortgage, a position he has held since 1972. Mr. Galan served as Chief
Executive Officer of R&G Mortgage from its inception until November 1994. In
connection with the conversion of the Bank from a federal savings bank to a
Puerto Rico commercial bank, in accordance with requirements of the OCFI,
Mr. Galan turned over day to day responsibility for R&G Mortgage to Ramon Prats,
Executive Vice President. Mr. Galan is also the Chairman of the Board, President
and Chief Executive Officer of the Bank, a position he has held since the Bank
was acquired by R&G Mortgage in February 1990.

ANA M. ARMENDARIZ. Ms. Armendariz has been Controller and Treasurer of R&G
Financial since April 1996 (its principal financial officer) and Senior Vice
President and Controller of R&G Mortgage since January 1984.

RAMON PRATS. Mr. Prats has been the Vice Chairman of the Board of
Directors of R&G Financial since April 1996 and a director of R&G Mortgage since
April 1985. Mr. Prats has been Executive Vice President of R&G Mortgage since
February 1980 and has held the same position with R&G Financial since its
inception. Mr. Prats also currently serves as Vice Chairman of the Board of
Directors of the Bank, a position he has held since February 1990.

JUAN J. DIAZ. Mr. Diaz has been a director of R&G Financial since
April 1996, a director of R&G Mortgage since June 1996 and a director of the
Bank since 1990. Mr. Diaz has served as Senior Vice President, Servicing
Department of R&G Mortgage since April 1984.

ENRIQUE UMPIERRE-SUAREZ. Mr. Umpierre-Suarez has been a director of R&G
Financial and its Secretary since April 1996 and a director of the Bank since
January 1996.

<PAGE>

Mr. Umpierre-Suarez has also served as the Acting Secretary of the
Bank since April 1996. Mr. Umpierre-Suarez is an attorney in private practice in
Hato Rey, Puerto Rico and is also engaged in the private practice of engineering
in Hato Rey, Puerto Rico.

VICTOR L. GALAN. Mr. Galan is the son of Victor J. Galan, the Chairman and
Chief Executive Officer of R&G Financial. Mr. Galan has been a director of R&G
Financial since April 1996, a director of R&G Mortgage since June 1996 and a
director of the Bank since 1995. Mr. Galan has been the Marketing Manager and
Vice President of R&G Mortgage since February 1996. Mr. Galan has been
associated with R&G Mortgage since 1982, having more recently served as Branch
Manager at various locations since 1992. Mr. Galan served as Marketing Officer
in charge of telemarketing in 1991 and his responsibilities prior thereto
included work in the Accounting, Data Processing and Closing Departments..

NELIDA GALAN. Ms. Galan is the wife of Victor J. Galan, the Chairman of
the Board and Chief Executive Officer of R&G Financial. Ms. Galan has served as
Treasurer of R&G Mortgage since it was organized.

PEDRO RAMIREZ. Mr. Ramirez has been a director of R&G Financial since
April 1996, a director of R&G Mortgage since June 1996 and a director of the
Bank since 1990. Mr. Ramirez has been President and Chief Executive Officer of
Empresas Nativas, Inc., a real estate development company, in Hato Rey, Puerto
Rico, since 1983.

LAURENO CARUS ABARCA. Mr. Carus has been a director of R&G Financial since
April 1996, a director of R&G Mortgage since June 1996 and a director of the
Bank (and its predecessor) since 1983. Mr. Carus has been the Chairman of the
Board of Alonso and Carus Iron Works, Inc., in Catano, Puerto Rico, which is
engaged in the production and fabrication of metal products and in the
construction of commercial buildings, since September 1977 and he has been with
the firm since 1960.

EDUARDO MCCORMACK. Mr. McCormack has been a director of R&G Financial
since April 1996, a director of R&G Mortgage since June 1996 and a director of
the Bank since 1990. Mr. McCormack is recently retired. During 1994 and 1995, he
served as a consultant to Bacardi Corporation, a rum manufacturer based in
Catano, Puerto Rico. Prior thereto, Mr. McCormack was a Vice President of
Bacardi Corporation from 1981 to 1993.

GILBERTO RIVERA-ARREAGA. Mr. Rivera-Arreaga has been a director of R&G
Financial since April 1996 and a director of R&G Mortgage and the Bank since
June 1996. Mr. Rivera-Arreaga has been Executive Director and Vice President of
Administration of the National College of Business & Technology, Inc., an
educational center in Bayamon, Puerto Rico, since 1993. Prior thereto,
Mr. Rivera-Arreaga engaged in the private practice of law in Bayamon, Puerto
Rico.

BENIGNO R. FERNANDEZ. Mr. Fernandez has been a director of R&G Financial
since April 1996 and a director of R&G Mortgage and the Bank since June 1996.
Mr. Fernandez is Senior

<PAGE>

Partner of Fernandez, Perez Villarini & Co., a certified public accounting
firm in Hato Rey, Puerto Rico. Mr. Fernandez has been a certified public
accountant since 1969.

THE BANK. Information concerning the principal occupation of the director
of the Bank (who does not also serve as a director of R&G Financial and R&G
Mortgage) during the past five years is set forth below.

JEANNE UBINAS. Ms. Ubinas, a director of the Bank (and its predecessor)
since 1983, engages in the private practice of radio therapeutic medicine with
Radiation Oncology Center, Inc., in Hato Rey, Puerto Rico, and has been a
radiation therapist since 1963.

BOARD OF DIRECTORS MEETINGS AND COMMITTEES OF R&G FINANCIAL, R&G MORTGAGE AND
THE BANK

As a newly established corporation, R&G Financial did not hold regular
meetings of its Board of Directors during the year ended December 31, 1995. R&G
Financial intends to hold regular meetings of the Board of Directors as is
needed to adequately conduct R&G Financial's business. R&G Financial has
established an Audit Committee, comprised of Messrs. Pedro L. Ramirez
(Chairman), Gilberto Rivera-Arreaga and Eduardo McCormack. The Audit Committee
shall be responsible for reviewing the reports of the independent auditors and
internal auditors, and generally overseeing compliance with internal policies
and procedures. R&G Financial may appoint an Executive Committee, and the Board
of Directors intends to act as its own nominating committee with respect to
nominating individuals to serve on its Board of Directors.

Regular and special meetings of the Board of Directors of R&G Mortgage may
be called and held at any time as necessary. During the year ended December 31,
1995, the Board of Directors of R&G Mortgage held 10 meetings. No incumbent
director attended fewer than 75% of the aggregate of the total number of Board
meetings held during the period he served as a director. R&G Mortgage did not
operate any committees during the year ended December 31, 1995.

Regular meetings of the Board of Directors of the Bank are held monthly and
special meetings may be called at any time as necessary. During the year ended
December 31, 1995, the Board of Directors of the Bank held 13 meetings. No
incumbent director attended fewer than 75% of the aggregate of the total number
of Board meetings held during the period he or she served as a director and the
total number of meetings held by committees of the Board of Directors on which
he or she served in fiscal 1995 except Mr. Carus, Mr. Rovira and Mr. McCormack,
who each attended nine meetings or 69% of the 13 meetings held by the Board of
Directors, respectively, and Ms. Ubinas, who attended seven meetings or 54% of
the 13 meetings held by the Board of Directors.

The Audit and Compliance Committee of the Bank's Board monitors the Bank's
internal operations and audit functions and met 12 times during fiscal 1995. The
Audit and Compliance Committee members are Messrs. Ramirez (Chairman),
Rivera-Arreaga and Ms. Ubinas.

100

<PAGE>

The Ancillary Agreements Committee of the Bank examines all inter-company
transactions between R&G Financial, R&G Mortgage and the Bank. The Ancillary
Agreement Committee was established in February 1990 in connection with R&G
Mortgage's acquisition of a controlling interest in the Bank, and is composed of
directors not affiliated with R&G Mortgage. The Committee is responsible for the
evaluation of the terms and conditions of any business transactions between R&G
Mortgage and the Bank, with a view to continued compliance with the provisions
of Sections 23A and 23B of the Federal Reserve Act, as well as applicable FDIC
regulations. The Committee conducts surveys and obtains opinions from
independent parties as part of its evaluations, and submits its recommendations
to the Board of Directors. This is done with the purpose of ascertaining that
the terms and conditions of such transactions are substantially the same, or at
least as favorable to the Bank, as those prevailing for comparable transactions
with or involving other nonaffiliated companies. The Ancillary Agreements
Committee met ten times during fiscal 1995 and is comprised of Messrs. McCormack
(Chairman), Fernandez and Carus. See "R&G Financial - Affiliated Transactions"
and "Regulation - R&G Financial - Limitations on Transactions with Affiliates."

The Trust Committee of the Bank is responsible for overseeing and directing
the Trust Department of the Bank. The Trust Committee, which is comprised of
Messrs. Domenech (Chairman), Carus, Mr. Victor J. Galan and Ms. Ubinas, met 12
times during fiscal 1995.

The Interest Rate Risk and Budget Committee is responsible for monitoring
the effects of interest rate changes on the Bank's loan portfolio. The Interest
Rate Risk and Budget Committee, which is comprised of Mr. Victor J. Galan
(Chairman), Messrs. Ortiz, Prats, Mr. Luis F. Aldea and Ms. Armendariz, met 12
times during fiscal 1995.

In addition to the committees described above, the Bank has also
established other committees of the Board and senior management which meet as
required. These committees include, among others, the Executive Committee, the
Internal Loan Review Committee, the Credit Committee, the Management Compliance
Committee, the Electronic Data Processing Committee, the Operations Committee
and the Training and Education Committee.

BOARD OF DIRECTORS FEES

Directors of R&G Financial do not currently receive fees for attendance at
meetings. Members of the Board of Directors of R&G Mortgage did not receive fees
for meetings attended during fiscal 1995. Executive officers of R&G Mortgage who
also serve on the Board of Directors are not compensated for serving on the
Board of Directors or Committees thereof. Effective August 1996, the members of
the Board of Directors of R&G Financial and R&G Mortgage who are not also
executive officers will receive fees of $350 per Board meeting attended and $300
per Committee meeting attended.

During fiscal 1995, members of the Board of Directors of the Bank received
fees of $300 per meeting attended from January through June and $350 per meeting
attended from July to December. Executive officers of the Bank who also serve on
the Board of Directors are not

101

<PAGE>

compensated for their services on the Board of Directors or committees
thereof. Non-officer members of the Board of Directors of the Bank serving
on committees receive additional compensation in the amount of $250 per
meeting attended from January through June 1995 and $300 per committee
meeting attended from July to December 1995.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

Set forth below is information concerning the two executive officers of the
Bank who do not serve on the Board of Directors of R&G Financial, R&G Mortgage
or the Bank. There are no additional executive officers of R&G Mortgage who do
not serve on the Board of R&G Financial, R&G Mortgage or the Bank. Each
executive officer is elected by the Board of Directors and serves until their
successor is elected and qualified. No executive officer set forth below is
related to any director or other executive officer of R&G Financial, R&G
Mortgage or the Bank by blood, marriage or adoption, and there are no
arrangements or understandings between a director of R&G Financial, R&G Mortgage
or the Bank and any other person pursuant to which such person was elected an
executive officer.

OSVALDO DOMENECH. Mr. Domenech has been Executive Vice President and Chief
Operating Officer of the Bank since February 1988.

JOSE L. ORTIZ. Mr. Ortiz has been Chief Financial Officer of the Bank
since September 1990. Prior thereto, Mr. Ortiz was Vice President -- Accounting
Department of Caguas Federal Savings Bank in Hato Rey, Puerto Rico from May 1985
to September 1990.

BENEFITS

STOCK OPTION PLAN. The Board of Directors of R&G Financial recently
adopted the Stock Option Plan, which is designed to attract and retain qualified
personnel in key positions, provide officers and key employees with a
proprietary interest in R&G Financial as an incentive to contribute to the
success of R&G Financial and reward key employees for outstanding performance
and the attainment of targeted goals. The Stock Option Plan was approved by R&G
Financial's stockholder in June 1996. An amount of Common Stock equal to 10% of
the aggregate number of Class B Shares sold in R&G Financial's initial public
offering (241,500 shares) were authorized under the Stock Option Plan, which may
be filled by authorized but unissued shares, treasury shares or shares purchased
by R&G Financial on the open market or from private sources. The Stock Option
Plan provides for the grant of stock options and stock appreciation rights
(collectively "Awards"). Awards are available for grant to key employees of R&G
Financial and any subsidiaries. In connection with R&G Financial's initial
public offering, R&G Financial awarded options for 200,000 shares to 28
employees of R&G Mortgage and the Bank at the initial public offering price of
$14.50 per share, including stock options for 100,000, 15,000 and 10,000 shares
to Ramon Prats, Juan J. Diaz and Osvaldo Domenech, respectively.

The Stock Option Plan is administered and interpreted by a committee of the
Board of Directors ("Committee") which are "disinterested" pursuant to
applicable regulations under the

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federal securities laws. Unless sooner terminated, the Stock Option Plan will
be in effect for a period of ten years from the earlier of adoption by the
Board of Directors or approval by R&G Financial's stockholder.

Under the Stock Option Plan, the Committee determines which officers and
key employees will be granted options, the number of shares subject to each
option, whether such options may be exercised by delivering other Class B Shares
and when such options become exercisable. The per share exercise price of all
stock options shall be required to be at least equal to the fair market value of
a Class B Share on the date the option is granted.

Stock options shall become vested and exercisable in the manner specified
by the Committee at the rate of 20% per year, beginning one year from the date
of grant. Each stock option or portion thereof shall be exercisable at any time
on or after it vests and is exercisable until ten years after its date of grant
or three months after the date on which the optionee's employment terminates,
unless extended by the Committee to a period not to exceed one year from such
termination. Stock options are non-transferable except by will or the laws of
descent and distribution.

Under the Stock Option Plan, the Committee is authorized to grant rights to
optionees ("stock appreciation rights") under which an optionee may surrender
any exercisable incentive stock option or compensatory stock option or part
thereof in return for payment by R&G Financial to the optionee of cash or
Class B Shares in an amount equal to the excess of the fair market value of the
Class B Shares subject to option at the time over the option price of such
shares, or a combination of cash and Class B Shares. Stock appreciation rights
may be granted concurrently with the stock options to which they relate or at
any time thereafter which is prior to the exercise or expiration of such
options.

All unvested options are accelerated in the event of retirement under R&G
Financial's normal retirement policies or a change in control of R&G Financial,
as defined in the Stock Option Plan. In addition, if an optionee dies or
terminates service due to disability, while serving as an employee or
non-employee director, all unvested options are accelerated. Under such
circumstances, the optionee or, as the case may be, the optionee's executors,
administrators, legatees or distributees, shall have the right to exercise all
unexercised options during the twelve-month period following termination due to
disability, retirement or death, provided no option will be exercisable within
six months after the date of grant or more than ten years from the date it was
granted.

In the event of a stock split, reverse stock split or stock dividend, the
number of Class B Shares under the Stock Option Plan, the number of shares to
which any Award relates and the exercise price per share under any option or
stock appreciation right shall be adjusted to reflect such increase or decrease
in the total number of Class B Shares outstanding.

PROFIT SHARING PLAN. Effective January 1, 1993, R-G Mortgage and the Bank
adopted the R-G Mortgage Corporation and R-G Federal Savings Bank Profit Sharing
Plan (the "Plan"),

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which is intended to comply with the Code, the Employee Retirement Income
Security Act of 1974, and the Puerto Rico Income Tax Act of 1954. All
employees of R&G Mortgage and the Bank are eligible to participate in the
Plan except, among others, for those employees who are non-resident aliens.
Eligible employees may enter the Plan on January 1, April 1, July 1, and
October 1 following attaining age 21 and completing one year of service. Under
the Plan, a separate account is established for each participating employee and
R&G Mortgage and the Bank may make discretionary contributions to the Plan which
are allocated to employees' accounts. Employees may also contribute to the Plan
by making salary reductions up to 10% of annual compensation for the year. Such
contributions defer the employee's earning up to a maximum of $7,000 in each
plan year. In 1995, R&G Mortgage and the Bank each matched an employee's
contribution to the Plan up to 62.5% of the first 5% of an employee's
compensation as follows: 12.5% when an employee has 0 to 5 years of service, 25%
when an employee has 6 to 10 years of service, 39.5% when an employee has 11 to
15 years of service, 50% when an employee has 16 to 20 years of service, and
62.5% when an employee has 21 or more years of service. Employees' contributions
to the Plan are immediately vested, and employees become 100% vested in employer
contributions upon the completion of 5 years of service. All funds contributed
to the Plan are held in a trust fund. R&G Mortgage and the Bank direct the
investment of matching and discretionary contributions and employees direct the
investment of elective contributions and rollover contributions. Contributions
may be directed into four separate funds: a fixed income fund investing in
insurance annuity contracts, the Fidelity Growth Fund, the Fidelity Growth &
Income Fund, and the Fidelity S & P 500 Index Fund. Distributions from the Plan
are made upon termination of service, death, or disability in a lump sum or
installment payments. The normal retirement age under the Plan is age 65.

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EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE. The following table includes individual
compensation information with respect to the Chairman of the Board and Chief
Executive Officer of R&G Financial and the other most highly compensated
officers of R&G Financial and its subsidiaries whose total compensation exceeded
$100,000 for services rendered in all capacities during the fiscal year ended
December 31, 1995. R&G Financial presently does not anticipate that it will pay
salaries to its officers until such time as activities are specifically
performed for it. Except as set forth in the footnotes to the table, the
compensation expense shown below was incurred by the subsidiary (R&G Mortgage or
the Bank) for whom the executive officer is employed.

<TABLE>
<CAPTION>
Annual
Compensation Long-Term
----------------------- Compensation All Other
Name and Principal Position Salary(1) Bonus Awards Compensation(2)
- ---------------------------------------- ------------ --------- ---------------- ------------------

<S> <C> <C> <C> <C>
Victor J. Galan, ....................... $193,087 $200,000 -- $1,874
Chairman and Chief Executive Officer
of the Company; Chairman, R&G Mortgage;
Chairman, President and Chief Executive
Officer the Bank(3)

Ramon Prats ............................ $185,000 $300,000 -- $2,414
Executive Vice President, R&G Mortgage;
Vice Chairman, the Bank (4)

Osvaldo Domenech, ...................... $116,360 $50,000 -- $666
Executive Vice President and Chief
Operating Officer of the Bank

Juan J. Diaz, .......................... $98,261 $127,975 -- $1,562
Senior Vice President, R&G Mortgage

Roberto Cordova, ....................... $76,178 $45,000 -- $796
Vice President, R&G Mortgage
</TABLE>

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

(1) Does not include amounts attributable to miscellaneous benefits received
by the named officers. The costs to R&G Financial of providing such
benefits to the named officers during the year ended December 31, 1995
did not exceed the lesser of $50,000 or 10% of the total of annual
salary and bonus reported.

(2) Represents the employers' contribution on behalf of the employee to the
Profit Sharing Plan. See "-- Profit Sharing Plan."

(3) Mr. Galan was paid a salary of $42,562 and $150,525 from R&G Mortgage and
the Bank, respectively, and a bonus of $200,000 from R&G Mortgage.

(4) Mr. Prats day to day services are conducted on behalf of, and he is
compensated by, R&G Mortgage.

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Bonuses are paid by R&G Mortgage and the Bank based upon determinations
by senior management of each company, which determinations are influenced by
the profitability of the enterprise for the year in question. The bonuses of
managers of the R&G Mortgage branches are based in part on loan production
levels, while the bonuses for Bank branch managers are based in part on the
level of deposits, loan production and new accounts. The bonuses of Vice
Presidents and Department Managers are based in part on the final results of
the entity's operations and business generated during the year. The Board of
Directors of R&G Mortgage determine the bonuses for the President and
Executive Vice President, which are based on profitability of that company's
operations.

TRANSACTIONS WITH CERTAIN RELATED PERSONS

The operations of R&G Mortgage and the Bank are linked to a material
extent by a series of Ancillary Agreements which govern the significant
affiliated transactions between the two companies. These agreements have been
prepared with a view to compliance with Sections 23A and 23B of the Federal
Reserve Act, which requires that the terms and conditions of transactions
between a financial institution and an affiliate be on terms which are
substantially the same, or at least as favorable to the financial
institution, as those prevailing for comparable transactions with or
involving other non-affiliated companies. See "R&G Financial - Affiliated
Transactions and "Regulation - R&G Financial - Limitations on Transactions
with Affiliates."

In addition to the affiliated transactions described under "R&G
Financial - Affiliated Transactions," R&G Mortgage and the Bank are also
subject to a Data Processing Agreement, pursuant to which the Bank provides
data processing services to R&G Mortgage with respect to the loan origination
and loan administration of its servicing portfolio. The Bank charges R&G
Mortgage a monthly fee for each R&G Mortgage computer that is linked to the
Bank's main frame computer. R&G Mortgage assumed all of the expenses
associated with modifying the Bank's existing computer programs, the design
of the mortgage loan processing system and for installation of telephone
lines, communications hardware and additional equipment.

R&G Mortgage presently subleases space at eight branch offices of the
Bank where it operates mortgage centers. The activities of the mortgage
center include interviewing prospective borrowers for loans secured by first
mortgages or second mortgages on residential real estate and home equity
loans, processing the initial application for such loans, referring such loan
applications to R&G Mortgage and/or the Bank, and accepting and processing
the documentation necessary to underwrite such mortgage loans. No other
lending or banking activity is conducted by R&G Mortgage on the premises of
the Bank. R&G Mortgage pays the Bank a monthly rental payment, which is based
on a pro rata portion of the main lease obligation. See "Business of R&G
Financial -- Offices and Other Material Properties."

During the year ended December 31, 1995, VIG Leasing, S.E., a Puerto
Rico real estate partnership which is 95.8% owned by the family of Victor J.
Galan, R&G Financial's

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Chairman of the Board and Chief Executive Officer, received lease payments
from R&G Mortgage and the Bank on properties owned of $656,000 and $312,000,
respectively. R&G Mortgage and the Bank believe that the lease terms are on
terms substantially the same as they would have negotiated with a
non-affiliated party. In addition, in November 1995, R&G Mortgage originated a
$1.4 million commercial real estate loan to VIG Leasing, S.E. to fund the
purchase of a warehouse and office building located in Bayamon. The loan was
guaranteed by R&G Financial's Chairman of the Board and Chief Executive
Officer. The facility is leased to the Bank and serves as the Bank's
Operations Center. In June 1996, VIG Leasing, S.E. refinanced the property
with an unaffiliated financial institution and the loan with R&G Mortgage was
repaid. See "Business of R&G Financial -- Offices and Other Material
Properties."

Under applicable federal law, loans or extensions of credit to executive
officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with the general public and must not involve more
than the normal risk of repayment or present other unfavorable features.

The Bank's policy provides that all loans made by the Bank to its
directors and officers are made in the ordinary course of business, on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other persons.
The Bank's policy provides that such loans may not involve more than the
normal risk of collectibility or present other unfavorable features. As of
December 31, 1995, mortgage and consumer loans to employees in excess of
$60,000 aggregated $1.1 million or 1.7% of R&G Financial's consolidated
stockholder's equity as of such date. All such loans were made by the Bank in
accordance with the aforementioned policy. In addition, R&G Mortgage in July
1995 made a $900,000 construction loan to a real estate development company
owned by Pedro Ramirez, a director of R&G Financial, R&G Mortgage and the
Bank. The loan, which had an outstanding balance of $656,000 at June 30,
1996, has an interest rate of 2% over the prime rate. The loan has been
performing in accordance with its terms and matured in July 1996 and is
callable on demand.

During the year ended December 31, 1995, Martin J. Rovira, who was the
Secretary of the Bank, provided certain legal services to the Bank and also
provided legal services to borrowers of the Bank in connection with the
closing of consumer and commercial loans. During the year ended December 31,
1995, Mr. Rovira received $289,600 in fees for legal services, of which
$4,600 was paid by the Bank for legal services provided to it and $285,000
was paid for by customers of the Bank in connection with loan closings.

During the year ended December 31, 1995, R&G Mortgage referred customers
requiring hazard insurance in connection with their mortgage transactions to
Home and Property Insurance Company, which is owned by the wife of Pedro
Ramirez, a director of R&G Financial, R&G Mortgage and the Bank. Each
customer has the ability to seek insurance coverage required from an
alternative acceptable insurance company of his choice. During the year ended
December 31, 1995, Home and Property Insurance Company wrote

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$1.0 million of hazard insurance policies for the Bank's customers. In 1996,
Mrs. Ramrez sold her 100% equity in Home and Property Insurance Company, but
remains as an employee of the Agency until the purchase price is paid in full.

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 has recently applied to and received approval
from the Federal Reserve Board to become a registered bank holding company
pursuant to the Bank Holding Company Act of 1956, as amended (the "BHCA").
Thus, R&G Financial in July 1996 became a bank holding company 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 Shares. R&G Financial, as a bank holding company, will
be subject to regulation and supervision by the Federal Reserve Board and the
Commissioner. R&G Financial will be required to file annually a report of its
operations with, and will be subject to examination by, the Federal Reserve
Board and the Department.

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

The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company, the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or to managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve Board is
required to weigh the expected benefit to the public, such as greater
convenience, increased competition or gains in efficiency, against the
possible adverse effects, such as undue concentration of resources, decreased
or unfair competition, conflicts of interest or unsound banking practices.

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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 generally "R&G Financial -- Affiliated
Transactions" for a discussion of the affiliated transactions conducted by
R&G Mortgage and the Bank.

In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a financial institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the financial
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires
that loans to directors, executive officers and principal stockholders be
made on terms substantially the same as offered in comparable transactions to
other persons and 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

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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 will be
expected to maintain Tier I leverage capital ratios of at least 4.0% to 5.0%
or more, depending on their overall condition.

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

FINANCIAL SUPPORT OF AFFILIATED INSTITUTIONS. Under Federal Reserve
Board policy, R&G Financial will be expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank in
circumstances when it might not do so absent such policy. The legality and
precise scope of this policy is unclear, however, in light of recent judicial
precedent. In addition, any capital loans by a bank holding company to a
subsidiary

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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 Commissioner, 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 Commissioner 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 Commissioner, 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 SAIF-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 .23%
for well capitalized, healthy institutions to .31% for undercapitalized
institutions with substantial supervisory concerns. The Bank was classified
as a "well-capitalized" institution as of June 30, 1996.

The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement
with the FDIC. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is terminated,
the accounts at the institution at the

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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 AND RELATED LEGISLATIVE PROPOSALS. Both the
SAIF and the Bank Insurance Fund ("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. 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 BIF has achieved a fully funded status in
contrast to the SAIF and, therefore, as discussed below, the FDIC recently
substantially reduced the average deposit insurance premium paid by
BIF-insured commercial banks to a level substantially below the average
premium paid by SAIF-insured institutions.

In late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with respect to the semiannual premium assessment
beginning January 1, 1996, reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to an annual minimum of $2,000)
for institutions in the lowest risk category. Deposit insurance premiums for
SAIF members were maintained at their existing levels (23 basis points for
institutions in the lowest risk category). Accordingly, in the absence of
further legislative action, SAIF members such as the Bank will be
competitively disadvantaged as compared to commercial banks by the resulting
premium differential. It is anticipated that, under present conditions, it
will be at least several years before the SAIF reaches a reserve ratio of
1.25% of insured deposits.

The U.S. House of Representatives and Senate have actively considered
legislation which would have eliminated the premium differential between
SAIF-insured institutions and BIF-insured institutions by recapitalizing the
SAIF's reserves to the required ratio. The proposed legislation would have
provided that all SAIF member institutions pay a special one-time assessment
to recapitalize the SAIF, which in the aggregate would have been sufficient
to bring the reserve ratio in the SAIF to 1.25% of insured deposits. Based on
the current level of reserves maintained by the SAIF, it was anticipated that
the amount of the special assessment required to recapitalize the SAIF would
have been approximately 80 to 85 basis points of the SAIF-assessable
deposits. It was anticipated that after the recapitalization of the SAIF,
premiums paid by SAIF-insured institutions would be reduced to match those
currently being assessed BIF-insured commercial banks. The legislation also
provided for the merger of the BIF and the SAIF, with such merger being
conditioned upon the prior elimination of the thrift charter.

The legislation discussed above had been, for some time, included as
part of a fiscal 1996 federal budget bill, but was eliminated prior to the
bill being enacted on April 26, 1996. In light of the legislation's
elimination and the uncertainty of the legislative process generally,
management cannot predict whether legislation reducing SAIF premiums and/or
imposing a special one-time assessment will be adopted, or, if adopted, the
amount of the assessment, if any, that would be imposed on the Bank.

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In June 1995, the Bank acquired approximately $77.2 million of deposits
from a Puerto Rico commercial bank. While the Bank since the acquisition has
paid deposit insurance premiums at SAIF rates for these deposits, the Bank
believes, and the FDIC has recently concurred, that all of such deposits are
BIF insured and should be subject to deposit insurance assessments at BIF
rates. The Bank's deposit insurance assessment from the FDIC will be
adjusted beginning with the quarter ended September 30, 1996. At the current
SAIF assessment rate, the adjustment on the $77.2 million of deposits amounts
to $44,375 per quarter. In addition to the future quarterly adjustments, the
Bank will receive a set-off from insurance premiums for the September 1996
quarter of approximately $206,440 (plus interest). The amount of any such
adjustment (less interest) will reflect the difference between premiums paid
on such deposits at SAIF assessment rates and the premiums that were actually
due at BIF rates. The FDIC will assess future premiums for deposit insurance
on the acquired deposits and adjusted growth on such deposits calculated
pursuant to applicable FDIC regulations at BIF rates. BIF rates are currently
at zero for healthy well-capitalized institutions like the Bank as compared
to comparable SAIF rates of 23 basis points.

If legislation were to be enacted in the future which would assess a
one-time special assessment of 85 basis points on SAIF-insured institutions,
the Bank believes it would pay approximately $2.4 million, net of related tax
benefits, based upon its total SAIF deposits as of March 31, 1996. In
addition, the enactment of such legislation might have the effect of
immediately reducing the Bank's capital by such an amount. Nevertheless,
management does not believe, based upon the foregoing assumptions (including
the proposed reduction in SAIF premiums upon recapitalization of the SAIF),
that a one-time assessment of this nature would have a material adverse
effect on R&G Financial's consolidated financial condition or cause
non-compliance with the Bank's regulatory capital requirements.

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

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

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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 June 30, 1996, the Bank met each of
its capital requirements.

In August 1995, the FDIC and other federal banking agencies published a
final rule modifying their existing risk-based capital standards to provide
for consideration of interest rate risk when assessing capital adequacy of a
bank. Under the final rule, the FDIC must explicitly include a bank's
exposure to declines in the economic value of its capital due to changes in
interest rates as a factor in evaluating a bank's capital adequacy. In
addition, in August 1995, the FDIC and the other federal banking agencies
published a joint policy statement for public comment that describes the
process the banking agencies will use to measure and assess the exposure of a
bank's net economic value to changes in interest rates. Under the policy
statement, the FDIC will consider results of supervisory and internal
interest rate risk models as one factor in evaluating capital adequacy. The
FDIC intends, at a future date, to incorporate explicit minimum requirements
for interest rate risk in its risk-based capital standards through the use of
a model developed from the policy statement, a future proposed rule and the
public comments received therefrom.

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

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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 Commissioner 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 ten percent (10%) of the total deposits or the total paid-in
capital, whichever is greater. As of June 30, 1996, the Bank had credited
$1.0 million to such reserve fund, which was first established in late 1994
in connection with the Bank's conversion from a federally chartered savings
bank to a Puerto Rico commercial bank.

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, and (iii) money
deposited in other banks provided said deposits are authorized by the
Commissioner, subject to immediate collection.

Under the Puerto Rico Banking Law, the Bank is permitted to make loans
to any one person, firm, partnership or corporation, up to an aggregate
amount of fifteen percent (15%) of the paid-in capital and reserve fund of
the Bank. As of June 30, 1996, the legal lending limit for the Bank under
this provision was approximately $3.3 million and its maximum extension of
credit to any one borrower, including affiliates thereof, was $2.2 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 that are wholly secured by
bonds, securities and other evidences of indebtedness of the

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United States or the Commonwealth, or by current debt bonds, not in default,
of municipalities or instrumentalities of the Commonwealth. The Puerto Rico
Banking Law also authorizes the Bank to conduct certain financial and related
activities directly or through subsidiaries. The Puerto Rico Banking Law also
prohibits Puerto Rico banks from making loans secured by their own stock, and
from purchasing their own stock, unless such purchase is necessary to prevent
losses because of a debt previously contracted in good faith. The stock so
purchased by the bank must be sold in a private or public sale within one
year from the date of purchase.

The rate of interest that the Bank may charge on mortgage and other
types of loans to individuals in Puerto Rico is subject to Puerto Rico's
usury laws. Such laws are administered by the Interest Rate Board, which
consists of the President of the Government Development Bank, the President
of the Puerto Rico Housing Bank and the Puerto Rico Secretaries of Commerce,
Treasury and Consumer Affairs and three public interest representatives. The
Interest Rate Board promulgates regulations which specify maximum rates on
various types of loans to individuals. The Interest Rate Board has adopted a
regulation, Regulation 26-A, which fixes the maximum rate (which is adjusted
on a weekly basis) which may be charged on residential first mortgage loans.
Effective April 1996, the Interest Rate Board eliminated the regulations that
set forth the maximum interest rates that could be charged on non-federal
government guaranteed loans. Interest rates on consumer loans and commercial
loans are not subject to any limitations by Regulation 26-A.

REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, 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

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Opportunity Act, Federal Truth-in-Lending Act and the Real Estate Settlement
Procedures Act and the regulations promulgated thereunder.

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

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

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

R&G Mortgage is also subject to regulation by the Commissioner, 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 Commissioner 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 Commissioner
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

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control, the Commissioner is obligated to make such inquires as he deems
necessary to review the transaction. Under the Mortgage Banking Law, the
determination of the Commissioner whether or not to authorize a proposed
change of control is final and non-appealable.

As is the case with the Bank, the rate of interest that R&G Mortgage may
charge on mortgage loans to individuals is subject to Puerto Rico's usury
laws. Such laws are administered by the Interest Rate Board which promulgates
regulations that specify maximum rates on various types of loans to
individuals. Regulation 26-A promulgated by the Interest Rate 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 Interest Rate
Board eliminated the regulations that set forth the maximum interest rates
that could be charged on non-federal government guaranteed loans.

BENEFICIAL OWNERSHIP OF SECURITIES

R&G Financial was organized in March 1996 in anticipation of becoming
the holding company for R&G Mortgage and the Bank. On July 19, 1996,
following the receipt of all requisite approvals from the Federal Reserve
Board, Mr. Victor J. Galan, R&G Financial's Chairman of the Board and Chief
Executive Officer, contributed his 100% ownership of the common stock of R&G
Mortgage and his approximately 88.1% ownership of the common stock of the
Bank (other than qualifying director shares) to R&G Financial in exchange for
5,189,044 Class A Shares (66,667 of which were converted into Class B Shares
and sold in R&G Financial's initial public offering).

The following table sets forth the beneficial ownership as of September
10, 1996 and pro forma after giving effect to the Bank Stockholder Exchange
Transaction with respect to: (i) each director and executive officer of R&G
Financial, R&G Mortgage and the Bank; and (ii) all directors and executive
officers of R&G Financial, R&G Mortgage and the Bank as a group. Other than
with respect to Mr. Victor J. Galan, no stockholder of R&G Financial has
reported beneficial ownership of more than 5% of the capital stock of R&G
Financial.

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<TABLE>
<CAPTION>
Pro Forma R&G
Financial
R&G Financial Ownership after
Ownership as of Bank Stockholder
September 10, Exchange
Bank Ownership as 1996(1)(2) Transaction(3)
of September 10, --------------------- ------------------
Name of Beneficial Owners 1996 Shares Percent Shares Percent
- ------------------------------------------------------------ ----------------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
R&G Financial's Directors and Officers
Victor J. Galan........................................... 0 5,122,377(4) 67.78 5,122,377 65.18
Ana M. Armendariz......................................... 1,000 -- -- 1,210 .02
Ramon Prats............................................... 2,400 20,000(5) 0.27 22,904 .29
Juan J. Diaz.............................................. 1,000 -- -- 1,210 .02
Victor L. Galan........................................... 1,000 -- -- 1,210 .02
Enrique Umpierre-Suarez................................... 1,702 4,000 0.05 6,059 .07
Pedro Ramirez............................................. 7,540 1,000 0.01 10,123 .12
Laureno Carus Abarca...................................... 8,400 -- -- 10,164 .12
Eduardo McCormack......................................... 1,531 2,400 0.03 4,253 .05
Gilberto Rivera-Arreaga................................... 1,000 -- -- 1,210 .02
Benigno R. Fernandez...................................... 1,060 -- -- 1,283 .02
Additional R&G Mortgage Directors and Officers
Nelida Galan.............................................. 0 -- -- --
Additional Bank Directors and Officers
Jeanne Ubinas............................................. 12,708 -- -- 15,377 .20
Osvaldo Domenech.......................................... 385 -- -- 466 .01
Jose L. Ortiz............................................. 0 -- -- --
All Directors and Officers of R&G Financial, R&G Mortgage
and the Bank as a group (15 persons)....................... 40,726 5,149,777(6) 68.14 5,197,846 66.14(6)
</TABLE>

- ------------------------
(1) Based upon information furnished by the respective individuals. Under
regulations promulgated pursuant to the Exchange Act, shares are deemed to
be beneficially owned by a person if he or she directly or indirectly has or
shares (i) voting power, which includes the power to vote or to direct the
voting of the shares, or (ii) investment power, which includes the power to
dispose or to direct the disposition of the shares. Unless otherwise
indicated, the named beneficial owners has sole voting and dispositive power
with respect to the shares.

(2) Based on 5,122,377 Class A Shares issued to Mr. Victor J. Galan, 2,415,000
Class B Shares sold in R&G Financial's initial public offering and 20,000
Class B Shares issued to the Vice Chairman of the Board of the Company, as
described in Note 5.

(3) Assumes an additional 300,962 Class B Shares are issued in the Merger.

(4) Represents Class A Shares.

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(5) Reflects Class B Shares issued immediately following the closing of R&G
Financial's initial public offering in consideration for Mr. Prats' past and
ongoing contributions to R&G Mortgage and the Bank, which shares were not
registered in such offering.

(6) Does not give effect to Class B Shares which may be issued upon exercise of
outstanding options. See "Management - Stock Option Plan."

GENERAL INFORMATION

This Prospectus/Information Statement is being furnished to the holders of
Bank common stock in connection with the Special Meeting. This
Prospectus/Information Statement also serves as a prospectus of R&G Financial
in connection with the issuance of Class B Shares to holders of Bank common
stock upon consummation of the Merger.

This Prospectus/Information Statement and the other documents enclosed
herewith are first being mailed to stockholders of the Bank on or about
December ___, 1996.

THE SPECIAL MEETING

TIME AND PLACE

The Special Meeting will be held at R-G Plaza, Board of Directors'
Conference Room, 280 Jesus T. Pinero Avenue, Hato Rey, San Juan, Puerto Rico,
on December ___, 1996, at __:__ __.m.

MATTERS TO BE CONSIDERED

At the Special Meeting, stockholders of the Bank will (i) consider and
vote upon a proposal to approve the Agreement, and (ii) consider and act upon
such other matters as may properly come before the Special Meeting.

SHARES OUTSTANDING AND ENTITLED TO VOTE; RECORD DATE

The close of business on November ___, 1996 has been fixed by the Bank
Board as the Record Date for the determination of holders of Bank common
stock entitled to notice of and to vote at the Special Meeting. At the close
of business on the Record Date, there were 2,089,653 shares of Bank common
stock outstanding and entitled to vote. Each share of Bank common stock
entitles the holder thereof to one vote at the Special Meeting on all matters
properly presented thereat.

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VOTE REQUIRED

A quorum, consisting of the holders of a majority of the issued and
outstanding shares of Bank common stock, must be present in person or by
proxy before any action may be taken at the Special Meeting. The affirmative
vote of the holders of 75% of the aggregate number of issued and outstanding
shares of common and preferred stock of the Bank is necessary to approve the
Agreement.

VOTING; NO SOLICITATION OF PROXIES

The Bank is not soliciting proxies in connection with the Special
Meeting because it expects the Agreement to be approved by virtue of R&G
Financial's existing ownership position in the Bank. R&G Financial owns
approximately 88.1% of the outstanding Bank common stock and 100% of the
outstanding Bank preferred stock (both of which represent, in the aggregate,
90% of the Bank's outstanding stock.) R&G Financial has indicated its
intention to vote FOR the Agreement and the transactions contemplated
thereby, including the Merger. Bank stockholders who attend the Special
Meeting and desire to vote on the matters up for consideration will be
provided with ballots.

THE MERGER

The following information relating to the Merger does not purport to be
complete and is qualified in its entirety by reference to the Agreement, a
copy of which is attached to this Prospectus/Information Statement as Annex I.

GENERAL

In accordance with the terms of and subject to the conditions set forth
in the Agreement, Interim will be merged with and into the Bank, with the
Bank as the surviving corporation of the Merger. Upon consummation of the
Merger, the Bank shall succeed to all the rights, obligations and properties
of Interim, the separate corporate existence of which shall cease as a result
of the Merger.

The Agreement provides that at the Effective Date of the Merger, each
outstanding share of Bank common stock (other than (i) shares held by any
objecting Bank stockholders who seek appraisal rights under the Puerto Rico
Banking Law and (ii) any shares held by R&G Financial) shall, by virtue of
the Merger and without any action on the part of the holder thereof, be
converted into the right to receive 1.21 Class B Shares. The exchange ratio
was determined based on an independent valuation of the Bank dated as of
September 27, 1996. No fractional Class B Shares shall be issued in the
Merger. In lieu thereof, at the time of surrender of the certificate or
certificates representing such holder's shares of Bank common stock, an
amount of cash (without interest) determined by multiplying the fractional
share interest to which such holder would otherwise be entitled by the
closing price of the Class B Shares on the Nasdaq Stock Market as of the
close of business on the

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day prior to the Effective Date. As of September 26, 1996, the day prior to
the valuation of the Bank, the closing price of the Class B Shares on the
NASDAQ was $17.75. No assurance can be given as to the market price of the
Class B Shares as of the effective date of the Merger, which may be higher or
lower than such price as of September 26, 1996.

REASONS FOR THE TRANSACTION; BACKGROUND; RECOMMENDATION OF THE BOARD OF
DIRECTORS

The Bank Board has approved the Agreement and the transactions
contemplated thereby and believes that the Merger is fair to and in the best
interests of the Bank and its stockholders. In addition, R&G Financial has
authorized the transactions contemplated by the Agreement, including the
organization of Interim and the issuance of 300,962 additional Class B Shares
in connection with the Merger and Bank Stockholder Exchange Transaction.

R&G Financial, as an 88.1% holder of the Bank's outstanding common
stock, initially determined to proceed with the transactions contemplated by
the Agreement in connection with its planning for the initial public
offering. R&G Financial desired to pursue the Bank Stockholder Exchange
Transaction in order to acquire the remaining Bank common stock not owned by
it and thereby fully consolidate its ownership of the Bank. The transaction
would also simplify the financial statement presentation of the consolidated
companies in R&G Financial's public reporting. R&G Financial also believes
that the transaction is advantageous to Bank stockholders because it permits
them to exchange an illiquid investment security for one which is now traded
daily on the NASDAQ Stock Market. Bank stockholders will have the ability to
hold their R&G Financial Class B Shares received in the Bank Stockholder
Exchange Transaction and continue as stockholders of R&G Financial or they
will be able to sell such shares at current market prices. R&G Financial and
the Bank determined to use the services of an independent investment banker
to perform the valuation to be utilized in the Bank Stockholder Exchange
Transaction. See "- Valuation Report of Independent Investment Banker."

R&G Financial originally intended to conduct the Bank Stockholder
Exchange Transaction in conjunction with initial public offering of Class B
Shares. A Special Meeting of Bank stockholders was called for July 29, 1996
and all Bank stockholders were provided with the notice required by
applicable Puerto Rico law as well as a copy of the Preliminary Prospectus
included in the initial Registration Statement filed by R&G Financial with
the SEC. Such Special Meeting was held as scheduled and the Bank
stockholders approved of the Agreement by a vote of 93% of the total vote
eligible to be cast, with no Bank stockholders dissenting. However, because
the Special Meeting was held and the vote was taken prior to the
effectiveness of the R&G Financial Registration Statement, after discussions
with the SEC, the Bank decided to rescind the prior vote and schedule a new
meeting. While R&G Financial was unable to complete the Bank Stockholder
Exchange Transaction in conjunction with its initial public offering, which
closed on August 22, 1996, the actions taken by R&G Financial and the Bank
will permit (except with respect to affiliates of R&G Financial and the Bank)
all Class B Shares that will be issued in the Bank Stockholder Exchange
Transaction to be freely transferable without restriction. See "- Resale of
Class B Shares."

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VALUATION REPORT OF INDEPENDENT INVESTMENT BANKER

Because of the lack of a public trading market for the Bank's common
stock, in order to effectuate the exchange of shares of Bank common stock
for Class B Shares of R&G Financial, the Bank has obtained an independent
preliminary valuation of the interests of the Bank stockholders. At the
request of the Bank's Board of Directors, the valuation was prepared by FBR,
the underwriter of R&G Financial's initial public offering, in reliance upon
information contained in this Prospectus/Information Statement, including
the R&G Financial Consolidated Financial Statements. FBR also considered
the following factors, among others: the present and projected operating
results and financial condition of R&G Financial, R&G Mortgage and the Bank
and the economic and demographic conditions in R&G Financial's existing
market area; certain historical financial and other information relating to
R&G Financial, R&G Mortgage and the Bank; a comparative evaluation of the
operating and financial statistics of R&G Financial with those of other
similarly situated publicly-traded companies located in Puerto Rico and
other regions of the United States; the aggregate amount and trading history
of the outstanding Class B Shares; the impact of R&G Financial's initial
public offering on stockholder's equity and earnings potential; and the
trading market for securities of comparable companies and general conditions
in the market for such securities. In its review of the reasonableness and
adequacy of the FBR's valuation, the Board of Directors of the Bank reviewed
the methodologies and the appropriateness of the assumptions used by FBR in
addition to the factors enumerated above. As a result of such review, a
majority of the Board of Directors of the Bank has determined the valuation
to be acceptable. The Chairman of the Board and Chief Executive Officer of
R&G Financial and the Bank did not participate in the discussion or vote on
the resolution to accept the valuation.

In preparing the valuation, which was based on financial information on
the Bank as of June 30, 1996, FBR considered a number of factors. The
valuation used market and financial characteristics of similar companies to
R&G Mortgage and the Bank to determine the relative market values of each
entity. In addition, market and financial characteristics for banks and
thrift institutions of similar size as well as mortgage banks were
considered. In determining relative value for R&G Mortgage and the Bank,
among other things, FBR took into account the minority nature of the position
held by the minority Bank stockholders as well as the non-public nature of
both R&G Mortgage and the Bank. Once FBR determined the market values of
each entity, the value of the minority Bank stockholders' approximately 11.9%
interest in the Bank could be estimated and the percentage of R&G Financial,
using a market price of $17.75 per share (the closing price of the Class B
Shares on the NASDAQ on September 26, 1996, the day prior to the valuation),
representing the same value was calculated. On the basis of the foregoing,
each share of Bank common stock was valued at $21.48, resulting in an
exchange ratio of 1.21 Class B Shares for each share of Bank common stock, or
an aggregate of 300,962 Class B Shares. No assurance can be given as to the
market price of the Class B Shares as of the effective date of the Merger,
which may be higher or lower than such price as of September 26, 1996. An
earlier preliminary valuation of the Bank based on March 31, 1996 financial
data which was made prior to the R&G Financial initial public offering, and
which used an assumed R&G

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Financial initial price per share of $15.00, resulted in a valuation of
$17.88 per share of Bank common stock which, based on the assumption noted,
would have been exchanged into 1.192 Class B Shares, or 296,396 Class B
Shares in the aggregate.

EXCHANGE OF BANK COMMON STOCK CERTIFICATES

At the Effective Date, each holder of a certificate or certificates
theretofore evidencing issued and outstanding shares of Bank common stock,
upon surrender of the same to R&G Financial's registrar and transfer agent
(the "Exchange Agent"), shall be entitled to receive in exchange therefor a
certificate or certificates representing the number of full Class B Shares
into which the shares of Bank common stock theretofore represented by the
certificate or certificates so surrendered shall have been converted by
virtue of the Merger. As promptly as practicable after the Effective Date
(and in no event later than the tenth business day following the Effective
Date), the Exchange Agent shall mail to each holder of record of an
outstanding certificate which immediately prior to the Effective Date
evidenced shares of Bank common stock, and which is to be exchanged for Class
B Shares by virtue of the Merger, a form of letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to
such certificate shall pass, only upon delivery of such certificate to the
Exchange Agent) advising such holder of the terms of the exchange effected by
the Merger and of the procedure for surrendering to the Exchange Agent such
certificate in exchange for a certificate or certificates evidencing Class B
Shares and cash in lieu of any fractional share interest. Upon surrender to
the Exchange Agent of one or more certificates evidencing shares of Bank
common stock, together with a properly completed and executed letter of
transmittal, the Exchange Agent will mail to the holder thereof after the
Effective Date a certificate or certificates representing the number of full
Class B Shares into which the aggregate number of shares of Bank common stock
previously represented by such certificate or certificates surrendered shall
have been converted pursuant to the Agreement, plus cash in lieu of any
fractional share interest. R&G Financial shall be entitled, after the
Effective Date, to treat certificates representing shares of Bank common
stock as evidencing ownership of the number of full Class B Shares into which
the shares of Bank common stock represented by such certificates shall have
been converted pursuant to the Agreement, notwithstanding the failure on the
part of the holder thereof to surrender such certificates.

After the Effective Date, there shall be no further transfer on the
records of the Bank of certificates representing shares of Bank common stock.
If any such certificates are presented to the Bank or the transfer agent for
the Bank common stock for transfer after the Effective Date, they shall be
cancelled against delivery of certificates for Class B Shares in accordance
with the Agreement.

No dividends which may in the future be declared on the Class B Shares
will be remitted to any person entitled to receive Class B Shares under the
Agreement until such person surrenders the certificate or certificates
representing Bank common stock, at which time such dividends shall be
remitted to such person, without interest.

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CONDITIONS TO THE MERGER

The Agreement provides that consummation of the Merger is subject to the
satisfaction of certain conditions at or before the Effective Date. The
Agreement provides that the Merger shall not become effective until (i) the
Merger has received the approval of the FDIC and the Secretary of State of
the Commonwealth of Puerto Rico and all applicable waiting periods have
expired; (ii) R&G Financial, the Bank and Interim shall have obtained all
other consents, permissions and approvals and taken all actions required by
law or agreement or deemed necessary by such parties prior to the
consummation of the Agreement; (iii) the SEC and any applicable state
securities commission shall have declared effective this Registration
Statement; and (iv) the parties shall have received a satisfactory opinion of
counsel or tax ruling with respect to the Puerto Rico income tax consequences
of the Merger; and (v) the Agreement shall have been approved by the
requisite vote of the Bank's stockholders and by R&G Financial, as the sole
stockholder of Interim.

EFFECTIVE DATE OF THE MERGER; TERMINATION AND AMENDMENT

The Effective Date of the Merger shall be the date of the filing of the
Agreement with the Secretary of State of the Commonwealth of Puerto Rico,
which will be filed only after the receipt of approval of the Agreement by
the requisite vote of the stockholders of Bank and the satisfaction or waiver
of all other conditions to the Merger set forth in the Agreement.

The Agreement may be modified or terminated at any time on or prior to
the Effective Date by the mutual written consent of the parties thereto.

INTERESTS OF CERTAIN PERSONS IN THE MERGER

No director or executive officer of the Bank has any direct or indirect
material interest in the Merger, except insofar as ownership of Bank common
stock might be deemed such an interest.

RESALE OF CLASS B SHARES

The Class B Shares issued pursuant to the Merger will be freely
transferable under the Securities Act of 1933, as amended (the "Securities
Act"), except for shares issued to any Bank stockholder who may be deemed to
be an affiliate of R&G Financial for purposes of Rule 144 promulgated under
the Securities Act ("Rule 144") or an affiliate of the Bank for purposes of
Rule 145 promulgated under the Securities Act ("Rule 145") (each an
"Affiliate"). Affiliates will include persons (generally executive officers,
directors and 10% shareholders) who control, are controlled by or are under
common control with (i) R&G Financial or the Bank at the time of the Special
Meeting or (ii) R&G Financial at or after the Effective Date.

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Rules 144 and 145 will restrict the sale of Class B Shares received in
the Merger by Affiliates and certain of their family members and related
interests. Generally speaking, during the two years following the Effective
Date, those persons who are Affiliates of the Bank at the time of the Special
Meeting, provided they are not Affiliates of R&G Financial at or following
the Effective Date, may publicly resell any Class B Shares received by them
in the Merger, subject to certain limitations as to, among other things, the
amount of Class B Shares sold by them in any three-month period and as to the
manner of sale. After the two-year period, such Affiliates may resell their
shares without such restrictions so long as there is adequate current public
information with respect to R&G Financial as required by Rule 144. Persons
who are Affiliates of R&G Financial after the Effective Date may publicly
resell the Class B Shares received by them in the Merger subject to similar
limitations and subject to certain filing requirements specified in Rule 144.

The ability of Affiliates to resell Class B Shares received in the
Merger under Rule 144 or 145 as summarized herein generally will be subject
to R&G Financial's having satisfied its reporting requirements under the
Exchange Act for specified periods prior to the time of sale. Affiliates
also would be permitted to resell Class B Shares received in the Merger
pursuant to an effective registration statement under the Securities Act or
another available exemption from the Securities Act registration
requirements. This Prospectus/Information Statement does not cover any
resales of Class B Shares received by persons who may be deemed to be
Affiliates of R&G Financial or the Bank in the Merger.

CERTAIN TAX CONSEQUENCES

The Bank and R&G Mortgage filed a request for a ruling determination
with the Secretary of the Treasury of Puerto Rico on July 1, 1996 requesting
the following rulings: (i) that the transfer by Victor J. Galan and the
other stockholders of the Bank of all of the shares of stock in the Bank (and
in Mr. Galan's case, all of the shares in R&G Mortgage also) to R&G
Financial, solely in exchange for stock thereof, will constitute a tax free
exchange; (ii) that no gain or loss will be recognized by Victor J. Galan,
the other stockholders of the Bank, or R&G Financial as a result of such
transfers or exchanges; (iii) that the basis of the stock of the Bank and R&G
Mortgage to be received by R&G Financial on the transfers will be the same
basis that such stock had in the hands of the transferors immediately prior
to the exchanges; (iv) that the basis of the stock of R&G Financial received
by Victor J. Galan and the other stockholders will be the same as their
respective bases in the stock of the Bank and R&G Mortgage transferred to R&G
Financial, (v) that the holding period of the stock of R&G Financial in the
hands of Victor J. Galan

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and the other stockholders will include the period during which they held the
stock of the Bank and of R&G Mortgage exchanged therefor; and (vi) that any
stockholder of the Bank who exercises his rights as a dissenter will have to
recognize gain or loss equal to the difference between the amount of cash
received and the adjusted basis of the stock surrendered in the exchange.
There can be no assurance that the Secretary of the Treasury of Puerto Rico
will issue the above rulings.

There is a reasonable expectation on the part of McConnell Valdes, tax
counsel of the Bank and R&G Mortgage, that the Secretary of the Treasury of
Puerto Rico will issue the rulings described above confirming that the
exchanges involving Victor J. Galan and R&G Financial are tax-free
transactions for Puerto Rico income tax purposes. However, until the
Secretary of the Treasury of Puerto Rico issues its ruling letter, it is
unclear whether the exchange by the Bank stockholders, other than Victor J.
Galan, of their shares of stock of the Bank for Class B Shares of R&G
Financial will be regarded as a tax-free transaction for Puerto Rico income
tax purposes. If such exchange is regarded as a taxable transaction in the
ruling letter, all stockholders of the Bank (other than Victor J. Galan)
would have to recognize a taxable gain. THE COMPANY EXPECTS TO PROCEED WITH
THE MERGER EVEN IN THE EVENT OF AN ADVERSE RULING FROM THE SECRETARY OF THE
TREASURY OF PUERTO RICO WITH RESPECT TO BANK STOCKHOLDERS OTHER THAN VICTOR
J. GALAN. Under any circumstance, stockholders who exercise their
dissenters' rights and receive cash in exchange for their shares of the Bank
will recognize a taxable gain in such transaction.

BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON
THE PARTICULAR CIRCUMSTANCES OF EACH BANK STOCKHOLDER, EACH SUCH STOCKHOLDER
IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE APPLICABLE
CONSEQUENCES OF THE MERGER IN HIS OR HER PARTICULAR CIRCUMSTANCE. THE RULING
DISCUSSED HEREIN RELATES SOLELY TO THE PUERTO RICO INCOME TAX CONSEQUENCES OF
THE MERGER.

ACCOUNTING TREATMENT OF THE MERGER

It is expected that the Merger will be accounted for as a purchase under
generally accepted accounting principles. Under the purchase method of
accounting, the acquired assets and liabilities as of the effective date of
the acquisition are recorded at their respective fair market values and are
fully integrated with those of R&G Financial. Financial statements of R&G
Financial issued after consummation of the transaction shall reflect the full
integration of such values. The minority interest in the Bank is presently
reflected on R&G Financial's Consolidated Statement of Financial Condition
and in the Consolidated Statements of Income as "Minority interest in the
Bank." Financial statements of R&G Financial issued before consummation of a
transaction recorded under the purchase method are not restated retroactively
to reflect the historical financial position or results of operations of the
Bank.

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APPRAISAL RIGHTS

Stockholders of record of the Bank as of the Record Date have the right
under the Puerto Rico Banking Law to vote against the Merger and, if the Merger
is consummated, to receive compensation equal to the value of their shares in
accordance with Section 15(d) of the Puerto Rico Banking Law. The text of
Section 15(d) of the Puerto Rico Banking Law is set forth in full in Annex III
attached to this Prospectus/Information Statement.

A stockholder electing to exercise his or her appraisal rights (a
"Dissenting Stockholder") must record his opposition to the Merger at the time
of the Special Meeting, or within twenty days thereafter, and demand payment of
his shares of Bank common stock. If the Merger is completed (which notice will
be conveyed by R&G Financial through its Exchange Agent), a Dissenting
Stockholder may, within sixty days after the Merger, upon written ten-day notice
on R&G Financial, petition the Puerto Rico Superior Court to appoint three
appraisers to estimate and determine the value of such Dissenting Stockholders'
shares of Bank common stock, and the Court is required to make such appointment.
The Court is required to designate the date and place where the appraisers shall
first meet and to provide them with instructions as to such procedure to be
followed as the Court deems pertinent. The Court is also required to specify
the date and manner in which the value of said shares shall be paid to the
Dissenting Stockholder. The appraisers are required to deliver a copy of their
report to the Bank and another to the Dissenting Stockholder, if he demands it.
All expenses incurred in determining the value of any such shares of Bank common
stock are the expense of the Bank. When the Bank has paid the value of the
shares of Bank common stock held by a Dissenting Stockholder, as the same may
have been fixed by the appraisers, the Puerto Rico Banking Law provides that
said shares shall be cancelled and such Dissenting Stockholders shall cease to
be a stockholder of the Bank or to have any interest therein.

The above summary of Section 15(d) of the Puerto Rico Banking Law does not
purport to be complete and is qualified in its entirety by reference to such
provisions in Annex III hereto. Failure to comply with the procedures set forth
in Section 15(d) of the Puerto Rico Banking Law may result in the loss of
appraisal rights.

DESCRIPTION OF R&G FINANCIAL CAPITAL STOCK

R&G Financial is authorized to issue up to 25,000,000 shares of R&G
Financial Common Stock (10,000,000 Class A Shares and 15,000,000 Class B Shares)
and up to 10,000,000 shares of preferred stock, par value $1.00 per share ("R&G
Financial Preferred Stock"). The capital stock of R&G Financial does not
represent or constitute a deposit account and is not insured by the FDIC.

The following description of the R&G Financial capital stock does not
purport to be complete and is qualified in all respects by reference to the
Certificate of Incorporation, as

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amended ("Certificate") and Bylaws of R&G Financial and the Puerto Rico
General Corporation Law of 1995.

R&G FINANCIAL COMMON STOCK

GENERAL. Each share of R&G Financial Common Stock has the same relative
rights and is identical in all respects with each other share of R&G Financial
Common Stock, except with respect to voting rights. The R&G Financial Common
Stock is not subject to call for redemption and, upon receipt by R&G Financial
of the shares of the Bank common stock surrendered in exchange for Class B
Shares, each Class B Share of R&G Financial offered hereby will be fully paid
and non-assessable.

VOTING RIGHTS. Except as provided in any resolution or resolutions adopted
by the Board of Directors of R&G Financial establishing any series of R&G
Financial Preferred Stock, the holders of R&G Financial Common Stock possess
exclusive voting rights in R&G Financial. Each holder of R&G Financial Class A
Shares is entitled to two votes and each holder of Class B Shares is entitled to
one vote for each share held on all matters voted upon by stockholders. No
stockholders are permitted to cumulate votes in elections of directors.

DIVIDENDS. Subject to the rights of the holders of any series of R&G
Financial Preferred Stock, the holders of the R&G Financial Common Stock are
entitled to such dividends as may be declared from time to time by the Board of
Directors of R&G Financial out of funds legally available therefor. Holders of
Class A Shares and Class B Shares will be entitled to share ratably, as a single
class, in any dividends paid on the Common Stock (except that if dividends are
declared which are payable in Class A Shares or Class B Shares, dividends shall
be declared which are payable at the same rate in each such class of stock and
the dividends payable in Class A Shares shall be payable to the holders of that
class of stock and the dividends payable in Class B Shares shall be payable to
the holders of that class of stock). If R&G Financial issues Preferred Stock,
the holders thereof may have a priority over the holders of the Common Stock
with respect to dividends.

PREEMPTIVE RIGHTS. Holders of R&G Financial Common Stock do not have any
preemptive rights with respect to any shares which may be issued by R&G
Financial in the future; thus, R&G Financial may sell shares of R&G Financial
Common Stock without first offering them to the then holders of the R&G
Financial Common Stock.

LIQUIDATION. In the event of any liquidation, dissolution or winding up of
R&G Financial, the holders of the R&G Financial Common Stock would be entitled
to receive, after payment of all debts and liabilities of R&G Financial, all
assets of R&G Financial available for distribution, subject to the rights of the
holders of any R&G Financial Preferred Stock which may be issued with a priority
in liquidation or dissolution over the holders of the R&G Financial Common
Stock.

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R&G FINANCIAL PREFERRED STOCK

The Board of Directors of R&G Financial is authorized to issue R&G
Financial Preferred Stock and to fix and state voting powers, designations,
preferences or other special rights of such shares and the qualifications,
limitations and restrictions thereof. The R&G Financial Preferred Stock may be
issued in distinctly designated series, may be convertible into R&G Financial
Common Stock and may rank prior to the R&G Financial Common Stock as to dividend
rights, liquidation preferences, or both.

The authorized but unissued shares of R&G Financial Preferred Stock (as
well as the authorized but unissued and unreserved shares of R&G Financial
Common Stock) are available for issuance in future mergers or acquisitions, in a
future public offering or private placement or for other general corporate
purposes. Except as otherwise required to approve the transaction in which the
additional authorized shares of R&G Financial Preferred Stock (as well as R&G
Financial Common Stock) would be issued, shareholder approval generally would
not be required for the issuance of these shares. Depending on the
circumstances, however, shareholder approval may be required pursuant to the
requirements for continued listing of the Class B Shares on the NASDAQ or the
requirements of any exchange on which the R&G Financial Common Stock may then be
listed.

OTHER PROVISIONS

Certain provisions of R&G Financial's Certificate and Bylaws which deal
with matters of corporate governance and rights of shareholders might be deemed
to have a potential anti-takeover effect. These provisions, which are described
under "Comparison of the Rights of Stockholders" below, provide, among other
things, (i) that the Board of Directors of R&G Financial shall be divided into
three classes; (ii) that special meetings of shareholders may only be called by
the Chairman of the Board or by a majority of the Board of Directors of R&G
Financial; (iii) that shareholders generally must provide R&G Financial advance
notice of shareholder proposals and nominations for director and provide certain
specified related information; and (iv) for the authority of the R&G Financial
Board to issue shares of authorized but unissued R&G Financial Common Stock and
R&G Financial Preferred Stock and to establish the terms of any one or more
series of R&G Financial Preferred Stock, including voting rights.

The foregoing provisions of the Certificate and Bylaws of R&G Financial
could have the effect of discouraging an acquisition of R&G Financial or
purchases of shares of R&G Financial Common Stock in furtherance of an
acquisition, and could accordingly, under certain circumstances, discourage
transactions which might otherwise have a favorable effect on the price of R&G
Financial Common Stock.

TRANSFER AGENT

The transfer agent and registrar for the R&G Financial Class B Shares is
American Stock Transfer & Trust Company, New York, New York.

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COMPARISON OF THE RIGHTS OF STOCKHOLDERS

The rights of holders of R&G Financial Common Stock are governed by the
Puerto Rico General Corporation Law of 1995 and R&G Financial's Certificate and
Bylaws while the rights of holders of Bank common stock are governed by the
Puerto Rico Banking Law and the Bank's Articles of Incorporation ("Articles")
and Bylaws. Upon consummation of the Merger, stockholders of the Bank will
become stockholders of R&G Financial and their rights as stockholders of R&G
Financial will be governed by the Certificate and Bylaws of R&G Financial and
the Puerto Rico General Corporation Law of 1995.

THE FOLLOWING SUMMARY IS NOT INTENDED TO BE A COMPLETE STATEMENT OF THE
DIFFERENCES AFFECTING THE RIGHTS OF THE BANK'S STOCKHOLDERS, BUT RATHER
SUMMARIZES THE MORE SIGNIFICANT DIFFERENCES AFFECTING THE RIGHTS OF SUCH
STOCKHOLDERS AND CERTAIN IMPORTANT SIMILARITIES; THE SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE ARTICLES AND BYLAWS OF THE BANK, THE CERTIFICATE
AND BYLAWS OF R&G FINANCIAL AND APPLICABLE LAWS AND REGULATIONS.

AUTHORIZED CAPITAL STOCK

THE BANK. The Bank's Articles authorize the issuance of up to 10,000,000
shares of Bank common stock, of which 2,089,653 shares were outstanding as of
the Record Date, and up to 2,000,000 shares of preferred stock, $1.00 par value
per share, of which 600,000 shares are issued and outstanding, all of which are
owned by R&G Financial. Each series of Bank preferred stock may have such
rights and preferences as the Bank's Board may fix and determine by resolution.

R&G FINANCIAL. R&G Financial's Certificate authorizes the issuance of up
to 10,000,000 Class A Shares, of which 5,122,377 shares were outstanding as of
the Record Date and were held by Victor J. Galan, the Chairman of the Board and
Chief Executive Officer, and up to 15,000,000 Class B Shares, of which 2,435,000
were outstanding as of the Record Date. R&G Financial's Certificate also
authorizes up to 10,000,000 shares of Preferred Stock, of which no shares are
issued and outstanding. The R&G Financial Preferred Stock is issuable in
series, each series having such rights and preferences as the R&G Financial
Board may fix and determine by resolution.

ISSUANCE OF CAPITAL STOCK

Under applicable Puerto Rico law, the Bank and R&G Financial may issue
shares of their capital stock and rights or options for the purchase of shares
of their capital stock on such terms and for such consideration as may be
determined by the respective Boards. Neither applicable Puerto Rico law nor the
Bank's Articles and Bylaws nor R&G Financial's Certificate or Bylaws require
stockholder approval of any such actions. However, the Bylaws of the NASD
generally require corporations, such as R&G Financial, with securities which are
quoted on the NASDAQ, to obtain stockholder approval of certain issuances of
common stock and most stock compensation plans for directors, officers and key
employees

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of the corporation. Stockholder approval of stock-related compensation plans
also may be sought in certain instances in order to qualify such plans for
favorable securities law treatment under current laws and regulations.

Holders of capital stock of the Bank and R&G Financial are not entitled to
pre-emptive rights with respect to any shares of their respective capital stock
which may be issued.

VOTING RIGHTS

THE BANK. Each share of Bank common stock is entitled to one vote per
share on all matters properly presented at meetings of stockholders of the Bank.
Holders of Bank common stock are not permitted to cumulate votes in elections of
directors.

R&G FINANCIAL. Each Class A Share is entitled to two votes per share and
each Class B Share is entitled to one vote per share on all matters properly
presented at meetings of stockholders of R&G Financial. Holders of R&G
Financial Common Stock are not permitted to cumulate votes in elections of
directors.

PAYMENT OF DIVIDENDS

THE BANK. The ability of the Bank to pay dividends on its capital stock is
governed by the Puerto Rico Banking Law. The Puerto Rico Banking Law provides
that when the expenditures of a Puerto Rico commercial bank are greater than
receipts, the excess of expenditures over receipts shall be charged against the
undistributed profits of the bank and the balance, if any, shall be charged
against the required reserve fund of the bank. If there is no sufficient
reserve fund to cover such balance in whole or in part, the outstanding amount
shall be charged against the bank's capital account. The Puerto Rico Banking
Law provides that until said capital has been restored to its original amount,
and the reserve fund is restored to twenty percent (20%) of the original
capital, the bank may not declare any dividends. In addition, the Federal
Deposit Insurance Act and FDIC regulations restrict the payment of dividends
when a bank is undercapitalized, when the bank has failed to pay FDIC insurance
assessments, or when there are safety and soundness concerns regarding such
bank.

R&G FINANCIAL. R&G Financial will be subject to those restrictions set
forth in the Puerto Rico General Corporation Law of 1995, which provides that
dividends may be paid out only from the corporation's surplus (an amount equal
to the corporation's net assets in excess of the corporation's capital) or in
the absence of such surplus, from the corporation's net earnings for such fiscal
year and/or the preceding fiscal year. In addition, the Federal Reserve Board
has issued a policy statement that provides that insured banks and bank holding
companies should generally pay dividends only out of current operating earnings.

BOARD OF DIRECTORS

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The Bank's Articles and Bylaws and the Certificate and Bylaws of R&G
Financial respectively require each Board to be divided into three classes as
nearly equal in number as possible and that the members of each class shall be
elected for a term of three years and until their successors are elected and
qualified, with one class being elected annually.

The Bank's Articles and R&G Financial's Certificate respectively provide
that the number of directors shall be determined in the manner provided in their
respective Bylaws, which permit a range in the number of directors from five to
15 and allow for an increase or decrease in such number by a vote of a majority
of the directors present at a meeting, as long as any decrease in the number
would not shorten the term of any incumbent director.

Under the Bank's Bylaws, any vacancy in the Bank's Board (including vacancy
resulting from an increase in the number of directors) may be filled by the
affirmative vote of a majority of the remaining directors and directors so
chosen shall hold office for a term expiring at the next election of directors
by stockholders. Under R&G Financial's Certificate, any vacancy occurring in
the R&G Financial Board, including any vacancy created by reason of an increase
in the number of directors, may be filled by a majority vote of the directors
then in office, whether or not a quorum is present, or by a sole remaining
director, and any directors so chosen shall hold office for the remainder of the
term to which the director has been selected and until such director's successor
shall have been elected and qualified.

Under the Bank's Bylaws, any director may be removed only for cause and
only by the holders of a majority of the votes entitled to be cast at a meeting
of the stockholders called for that purpose. R&G Financial's Certificate
provides that any director may be removed from office, with or without cause, by
an affirmative vote of not less than a majority of the votes eligible to be cast
by stockholders at a duly constituted meeting of stockholders called expressly
for such purpose.

The Puerto Rico Banking Law requires that each director of a Puerto Rico
commercial bank must be a resident of Puerto Rico and be registered in the
bank's stockholder registry books on the date of election as the owner of shares
of the bank having an aggregate par value of not less than $1,000. The Puerto
Rico Banking Law also requires that each director prior to qualification for
office deliver to the bank the certificates of his or her qualifying shares and
take an oath that he will properly and faithfully discharge his or her duties in
accordance with the Puerto Rico Banking Law and other applicable laws and
regulations. The Puerto Rico General Corporation law of 1995 does not impose
any similar qualification requirements on directors of R&G Financial.

INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES

THE BANK. The Bank's Articles and Bylaws do not contain any provision
relating to indemnification of directors and officers of the Bank. The Puerto
Rico Banking Law exempts directors of a Puerto Rico commercial bank from
personal liability for their acts

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as directors, unless such acts constitute willful violations of laws or the
articles of incorporation and bylaws of the bank or constitute willful
infractions of any lawful resolution adopted by the shareholders of the bank.

R&G FINANCIAL. R&G Financial's Certificate provides that R&G Financial
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding, except
actions by or in right of R&G Financial, whether civil, criminal, administrative
or investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of R&G Financial against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding to the fullest extent authorized by the Puerto Rico General
Corporation Law of 1995, provided that R&G Financial shall not be liable for any
amounts which may be due to any persons in connection with a settlement of any
action, suit or proceeding effected without its prior written consent or any
action, suit or proceeding initiated by any person seeking indemnification
without its prior written consent. R&G Financial's Certificate also provides
that reasonable expenses incurred by a director, officer, employee or agent of
R&G Financial in defending any civil, criminal, suit or proceeding described
above may be paid by R&G Financial in advance of the final disposition of such
action, suit or proceeding. R&G Financial's Certificate provides that such
indemnification and advancement of expenses shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of expenses
may be entitled under any statute, by-law, agreement, vote of stockholders or
disinterested directors or otherwise.

SPECIAL MEETING OF STOCKHOLDERS

The Bank's Bylaws provide that special meetings of the stockholders of the
Bank may be called at any time by the President or by the Board of Directors,
and shall be called by the Chairman of the Board, the President or the Secretary
upon written request of the holders of not less than twenty percent (20%) of the
paid-in capital of the Bank entitled to vote at the meeting. The Bylaws of R&G
Financial provide that special meetings may be called only by the Chairman of
the Board of Directors or by the Board of Directors pursuant to a resolution
approved by the affirmative vote of a majority of directors then in office.

STOCKHOLDER NOMINATIONS

THE BANK. The Bank's Bylaws provide that nominations by stockholders for
election as a director must be made in writing and delivered or mailed to the
Secretary of the Bank at least five (5) days prior to the date of the annual
meeting. If the nominating committee of the Board of Directors fails to act or
refuses to act at least twenty (20) days prior to the annual meeting,
nominations for directors may be made at the annual meeting by any stockholder
entitled to vote and shall be voted upon.

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R&G FINANCIAL. R&G Financial's Bylaws provide that nominations by
stockholders for election as a director may be made by any stockholder entitled
to vote generally in an election of directors. Such nominations must be made in
writing and delivered or mailed to the Secretary of R&G Financial (i) not later
than 90 days prior to the anniversary date of the mailing of proxy materials by
R&G Financial in connection with the immediately preceding annual meeting of
stockholders of R&G Financial or, in the case of the first annual meeting of
stockholders of R&G Financial, nominations by the stockholder must be so
delivered or received no later than the close of business on December 31, 1996,
notwithstanding a determination by R&G Financial to schedule such annual meeting
at a date later than March 31, 1997, and (ii) with respect to an election to be
held at a special meeting of stockholders for the election of directors, the
close of business on the tenth day following the date on which notice of such
meeting is first given to stockholders. A stockholder's notice shall set forth
the information specified in R&G Financial's Bylaws.

STOCKHOLDER PROPOSALS

THE BANK. The Bank's Bylaws provide that a proposal by stockholders for
submission to a vote of stockholders at an annual meeting must be submitted in
writing and filed with the Secretary of the Bank at least five (5) days before
the date of the annual meeting. All business so submitted will be the only
business considered at the annual meeting. Any other proposal made by a
stockholder at the annual meeting may be discussed and considered but unless
made in writing and filed with the Secretary of the Bank at least five (5) days
in advance of the annual meeting, such proposal shall be laid over for action at
an adjourned, special or annual meeting of stockholders taking place thirty (30)
days or more thereafter.

R&G FINANCIAL. R&G Financial's Bylaws provide that a proposal by
stockholders for submission to a vote of stockholders at an annual meeting must
be made in writing and delivered or mailed to the Secretary of R&G Financial not
less than 90 days prior to the anniversary date of the mailing of proxy
materials by R&G Financial in connection with the immediately preceding annual
meeting. In the case of the first annual meeting of stockholders of R&G
Financial, notice by the stockholder must be so delivered or received no later
than the close of business on December 31, 1996, notwithstanding a determination
by R&G Financial to schedule such annual meeting at a date later than March 31,
1997.

INSPECTION OF BOOKS AND RECORDS BY STOCKHOLDERS

THE BANK. The Puerto Rico Banking Law does not have any provision relating
to the rights of the stockholders of a Puerto Rico commercial bank to inspect
the books and records of such bank. The Bank's Articles and Bylaws similarly do
not contain any provision relating to inspection of the Bank's books and records
(other than the right to inspect voting lists prepared as required by the Bank's
Bylaws in connection with stockholder meetings) by the Bank's stockholders.

R&G FINANCIAL. The Puerto Rico General Corporation Law of 1995 provides
that the stockholders of record of a Puerto Rico corporation have the right,
upon written

135

<PAGE>

demand under oath stating the purpose thereof, during business hours to
inspect for any proper purpose the corporation's stock ledger, list of
stockholders, and the corporation's other books and records. The Puerto Rico
General Corporation Law of 1995 describes as a "proper purpose" a purpose
reasonably related to a person's interest as a stockholder.

MERGERS AND BUSINESS COMBINATIONS

THE BANK. Under Puerto Rico Banking Law and the Bank's Articles, the
approval of the holders of three-fourths of the Bank's capital stock is required
for a reorganization involving a merger or other business combination (including
a consolidation or a sale of substantially all of the Bank's assets).

R&G FINANCIAL. Under the Puerto Rico General Corporation Law of 1995, R&G
Financial can accomplish a merger or consolidation or a transfer of all its
assets with the approval of the holders of a majority of its issued and
outstanding voting capital stock.

ACTION IN LIEU OF MEETING AND BY COMMUNICATIONS EQUIPMENT

THE BANK. The Puerto Rico Banking Law does not permit the Board of
Directors of the Bank to take action without a meeting, or to take action by
means of a telephone conference or similar communications equipment.

R&G FINANCIAL. The Puerto Rico General Corporation Law of 1995 and R&G
Financial's Bylaws permit actions which may be taken by the Board of Directors
to be taken without a meeting, if a consent in writing, setting forth the
actions so taken, is signed by all of the directors. In addition, the Puerto
Rico General Corporation Law of 1995 and R&G Financial's Bylaws, in contrast to
the Puerto Rico Banking Law, permit any action that may be taken at a meeting of
directors to be undertaken by means of a telephone conference or similar
communications equipment pursuant to which all persons participating in the
meeting can hear each other at the same time.

DISSENTERS' RIGHTS OF APPRAISAL

The rights of appraisal of dissenting stockholders of the Bank are
discussed under "The Merger - Appraisal Rights." Under the Puerto Rico General
Corporation Law of 1995 applicable to R&G Financial stockholders, stockholders
of a Puerto Rico corporation also have appraisal rights in connection with
mergers or consolidations if: (i) the stockholder was a holder of record at the
time of the vote; (ii) the stockholder did not vote in favor of the merger or
consolidation; (iii) the stockholder continuously held such shares through the
effective date of the merger and consolidation; and (iv) the stockholder
complies with certain notice requirements set forth in the Puerto Rico General
Corporation Law of 1995.

Notwithstanding the foregoing, such appraisal rights are not present under
the Puerto Rico General Corporation Law of 1995 if the corporation's share are
traded on a national securities exchange or on the Nasdaq Stock Market National
Market System, and the

136

<PAGE>

stockholders receive in connection with the merger or consolidation the
following: (i) shares of stock of the corporation surviving or resulting
from the merger or depositary receipts with respect to the same; (ii) shares
of stock of any other corporation that are traded on a national securities
exchange or on the Nasdaq Stock Market National Market System, or are held by
record by more than 2,000 stockholders; (iii) cash in lieu of fractional
shares of the corporation described in the foregoing clause; or (iv) any
combination of the shares and cash in lieu of fractional shares described in the
foregoing clauses.

AMENDMENT OF GOVERNING INSTRUMENTS

THE BANK. No amendment of the Bank's Articles may be made unless, to the
extent required by applicable law, it is approved by the affirmative vote of the
holders of not less than two-thirds (2/3) of the total number of outstanding
shares of the Bank (other than amendments relating to the provision in the
Bank's Articles relating to approval of business combinations, which requires
the affirmative vote of holders representing not less than three-fourths of the
Bank's total number of outstanding shares), notwithstanding that applicable law
would otherwise permit such amendment with the approval of fewer shares or
without the approval of any shares. The Bylaws of the Bank may be altered,
amended or repealed and new Bylaws may be adopted at any annual or special
meeting of stockholders pursuant to applicable provisions of law and of the
Bank's Articles.

R&G FINANCIAL. R&G Financial's Certificate provides that no amendment,
addition, alteration, change or repeal of the Certificate may be made unless it
is first approved by the R&G Financial Board pursuant to a resolution adopted by
the affirmative vote of a majority of the directors then in office, and, to the
extent required by applicable law, thereafter is approved by the holders of a
majority of the shares of R&G Financial entitled to vote generally in an
election of directors, except that the approval of at least 75% of the shares of
R&G Financial entitled to vote generally in an election of directors, voting
together as a single class, shall be required to amend, adopt, alter, change of
repeal any provision inconsistent with Articles VII (directors), VIII (bylaws),
IX (limitation on liability of directors and officers) and X (amendment), unless
such amendment is approved by the affirmative vote of two-thirds (2/3) of R&G
Financial's Board of Directors then in office. R&G Financial's Bylaws provide
that the Board of Directors or the stockholders may adopt, alter, amend or
repeal the Bylaws of R&G Financial. Such action by the Board of Directors shall
require the affirmative vote of a majority of the directors then in office at
any regular or special meeting of the Board of Directors. Such action by the
stockholders shall require the affirmative vote of the holders of a majority of
the shares of R&G Financial entitled to vote generally in an election of
directors, voting together as a single class, except that the approval of 75% of
the shares of R&G Financial entitled to vote generally in an election of
directors, shall be required to amend, adopt, alter, change or repeal any
provision of the Bylaws of R&G Financial which is inconsistent with Articles
VII, VIII, IX, and X of the Certificate and which is not approved by the
affirmative vote of two-thirds (2/3) of the members of R&G Financial's Board of
Directors then in office.

137

<PAGE>

LEGAL OPINION

The validity of the Class B Shares offered hereby will be passed upon for
R&G Financial by Elias, Matz, Tiernan & Herrick L.L.P., Washington, D.C.

EXPERTS

The Consolidated Financial Statements of R&G Financial as of December 31,
1995 and 1994, and for each of the years in the three-year period ended December
31, 1995, including in this Prospectus/Information Statement have been audited
by Price Waterhouse, independent accounts, as stated in their report appearing
herein and elsewhere in this Registration Statement and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.

The Financial Statements of the Bank as of December 31, 1995 and 1994, and
for each of the years in the three-year period ended December 31, 1995, have
been audited by Price Waterhouse, independent accounts, as stated in their
report appearing herein and elsewhere in this Registration Statement and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.

Representatives of Price Waterhouse are expected to be at the Special
Meeting and will be available to respond to questions, and will also have the
opportunity to make a statement at such time if they desire to do so.

138

<PAGE>

INDEX TO R&G FINANCIAL CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . F-2

Financial Statements:
Consolidated Statement of Financial Condition as of June 30, 1996
(Unaudited), December 31, 1995 and 1994. . . . . . . . . . . . . . F-3
Consolidated Statements of Income for the six months ended June 30,
1996 and 1995 (Unaudited) and for the three years ended
December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and 1995 (Unaudited) and for the three years ended
December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Changes in Stockholder's Equity for the
six months ended June 30, 1996 (Unaudited) and for the three
years ended December 31, 1995. . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . F-8

All financial statement schedules are omitted because the required
information either is not applicable or is shown in the consolidated
financial statements or in the notes thereto.

F-1

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of
R&G Financial Corporation and its Stockholder

In our opinion, the accompanying consolidated statement of financial
condition, and the related consolidated statements of income, of changes in
stockholder's equity and of cash flows present fairly, in all material
respects, the financial position of R&G Financial Corporation (the Company)
and its subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.

As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1995 the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 122 -- "Accounting for Mortgage Servicing Rights, an
amendment of FASB Statement No. 65." In addition, effective January 1, 1994
the Company adopted SFAS No. 115 -- "Accounting for Certain Investments in
Debt and Equity Securities.

/s/ PRICE WATERHOUSE

Certified Public Accountants (of Puerto Rico)
License No. 10 expires Dec. 1, 1998
Stamp #1379293 of the P.R. Society of
Certified Public Accountants has been
affixed to the file copy of this report.

San Juan, Puerto Rico
June 12, 1996, except for Note 1 to the Consolidated Financial Statements which
is as of July 19, 1996.

F-2

<PAGE>

R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

ASSETS

<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------
1996 1995 1994
------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Cash and due from banks................................................. $21,520,637 $32,559,429 $21,158,101
Money market investments:
Securities purchased under agreements to resell....................... 13,429,913 21,694,675 10,232,890
Time deposits with other banks........................................ 22,426,693 44,930,015 14,231,371
Federal funds sold.................................................... -- 5,011,048 --
Mortgage loans held for sale, at lower of cost or market................ 18,319,736 21,318,340 22,020,566
Mortgage-backed securities held for trading, at fair value.............. 136,575,958 113,808,624 124,521,837
Mortgage-backed securities available for sale, at fair value............ 44,468,857 61,008,432 13,300,325
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value: 1995 -- $40,784,831; 1994 -- $78,844,972)..... 39,472,739 41,730,889 84,122,035
Investment securities held for trading, at fair value................... 989,826 -- --
Investment securities available for sale, at fair value................. 23,107,710 3,279,610 1,877,910
Investment securities held to maturity, at amortized cost
(estimated market value: 1995 -- $1,996,307; 1994 -- $2,108,318)....... 8,685,216 2,046,046 2,182,176
Loans receivable, net................................................... 598,182,075 473,840,637 301,614,199
Accounts receivable, including advances to investors, net............... 6,361,582 5,578,965 8,480,309
Accrued interest receivable............................................. 5,266,000 4,051,702 2,870,559
Mortgage servicing rights............................................... 9,810,060 8,209,661 4,417,813
Excess servicing receivable............................................. 809,173 847,938 979,005
Premises and equipment.................................................. 6,856,119 6,973,325 5,621,007
Other assets............................................................ 9,269,411 6,316,826 4,868,671
------------- ------------ ------------
$965,551,705 $853,206,162 $622,498,774
------------- ------------ ------------
------------- ------------ ------------

LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deposits.............................................................. $563,147,365 $518,186,563 $380,148,414
Securities sold under agreements to repurchase........................ 98,293,546 98,483,188 108,921,552
Notes payable......................................................... 142,882,861 81,130,032 45,814,597
Advances from FHLB.................................................... 11,000,000 6,007,135 13,567,834
Long-term debt........................................................ 4,524,476 5,323,899 4,524,173
Other secured borrowings.............................................. 53,531,846 55,983,501 --
Accounts payable and accrued liabilities.............................. 11,586,794 12,068,490 5,601,444
Other liabilities..................................................... 2,500,866 2,431,577 1,497,012
------------- ------------ ------------
887,467,754 779,614,385 560,075,026
------------- ------------ ------------
Subordinated notes...................................................... 3,250,000 3,250,000 3,250,000
------------- ------------ ------------
Minority interest in the Bank........................................... 4,365,363 3,956,597 3,203,749
------------- ------------ ------------
Stockholder's equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, none issued and outstanding.............................. -- --
Common stock:
Class A -- $.01 par value, 10,000,000 shares
authorized, 5,189,044 shares issued and outstanding................ 51,890 51,890 51,890
Class B -- $.01 par value, 15,000,000 shares
authorized, none issued and outstanding............................ -- -- --
Additional paid-in capital............................................ 362,710 362,710 362,710
Retained earnings..................................................... 69,592,059 64,351,564 54,569,219
Capital reserves of the Bank.......................................... 1,021,166 666,767 --
Unrealized (loss) gains on securities available for sale.............. (559,237) 952,249 986,180
------------- ------------ ------------
70,468,588 66,385,180 55,969,999
------------- ------------ ------------
$965,551,705 $853,206,162 $622,498,774
------------- ------------ ------------
------------- ------------ ------------
</TABLE>

The accompanying notes are an integral part of this statement.

F-3

<PAGE>

R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
Six month
period ended
June 30, Year ended December 31,
-------------------------- -----------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans.................................................... $29,572,089 $20,437,173 $45,673,241 $36,766,741 $27,087,896
Money market and other investments....................... 1,804,874 731,362 1,805,345 941,677 695,848
Mortgage-backed securities............................... 2,968,545 3,169,224 6,033,069 4,655,376 2,107,130
----------- ----------- ----------- ----------- -----------
Total interest income.................................... 34,345,508 24,337,759 53,511,655 42,363,794 29,890,874
----------- ----------- ----------- ----------- -----------
Less -- interest expense:
Deposits................................................. 13,044,579 9,769,092 21,829,433 14,460,943 10,364,694
Securities sold under agreements to repurchase......... 2,583,639 3,524,909 6,436,327 4,416,824 273,968
Notes payable.......................................... 2,961,970 1,488,150 3,363,930 3,769,855 4,630,941
Secured borrowings..................................... 2,140,032 -- -- -- --
Other.................................................. 169,466 441,804 608,984 578,685 368,276
----------- ----------- ----------- ----------- -----------
20,899,686 15,223,955 32,238,674 23,226,307 15,637,879
----------- ----------- ----------- ----------- -----------
Net interest income...................................... 13,445,822 9,113,804 21,272,981 19,137,487 14,252,995

(Provision) credit for loan losses....................... (356,525) 50,000 (950,000) -- --
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses...... 13,089,297 9,163,804 20,322,981 19,137,487 14,252,995
----------- ----------- ----------- ----------- -----------
Other income:
Net gain (loss) on sale of loans....................... 3,992,254 2,209,961 6,262,460 (1,349,340) 29,026,142
Unrealized gain (loss) on trading securities........... (621,341) 2,294,711 2,121,611 (4,464,718) --
Change in provision for cost in excess of
market value of loans held for sale................... -- 70,000 855,834 (855,834) --
Net gain on trading account............................ 586,772 -- -- -- --
Net gain on sales of investments....................... 329,225 -- -- -- 394,342
Loan administration and servicing fees................. 6,496,442 5,234,908 11,029,995 11,046,019 9,326,518
Gain on sale of servicing rights....................... -- -- -- 2,914,850 --
Service charges, fees and other........................ 1,819,006 1,251,470 3,171,949 2,522,394 1,178,561
----------- ----------- ----------- ----------- -----------
12,602,358 11,061,050 23,441,849 9,813,371 39,925,563
----------- ----------- ----------- ----------- -----------
25,691,655 20,224,854 43,764,830 28,950,858 54,178,558
----------- ----------- ----------- ----------- -----------
Operating expenses:
Employee compensation and benefits..................... 5,954,752 3,363,424 8,283,809 5,251,435 8,590,181
Office occupancy and equipment......................... 2,895,115 2,010,379 4,711,312 4,488,335 3,395,055
Other administrative and general....................... 6,516,141 6,378,156 13,730,724 13,268,875 14,560,892
----------- ----------- ----------- ----------- -----------
15,366,008 11,751,959 26,725,845 23,008,645 26,546,128
----------- ----------- ----------- ----------- -----------
Income before minority interest, income taxes and
cumulative effect of change in accounting
principle............................................... 10,325,647 8,472,895 17,038,985 5,942,213 27,632,430
----------- ----------- ----------- ----------- -----------
Minority interest in the Bank............................ 408,766 344,978 742,527 499,928 812,427
----------- ----------- ----------- ----------- -----------
Income before income taxes and cumulative effect
of change in accounting principle....................... 9,916,881 8,127,917 16,296,458 5,442,285 26,820,003
----------- ----------- ----------- ----------- -----------
Income taxes:
Current................................................ 4,773,888 2,942,308 3,555,868 2,517,465 9,486,814
Deferred............................................... (951,901) (68,396) 2,291,478 (1,661,877) 146,437
----------- ----------- ----------- ----------- -----------
3,821,987 2,873,912 5,847,346 855,588 9,633,251
----------- ----------- ----------- ----------- -----------
Income before cumulative effect of change in
accounting principle.................................... 6,094,894 5,254,005 10,449,112 4,586,697 17,186,752
Cumulative effect of change in accounting
principle -- adoption of SFAS No. 115, net of
deferred income taxes of $627,210...................... -- -- -- 866,147 --
----------- ----------- ----------- ----------- -----------
Net income........................................... $6,094,894 $5,254,005 $10,449,112 $5,452,844 $17,186,752
----------- ----------- ----------- ----------- -----------
Earnings per common share:
Income before cumulative effect of change in
accounting principle.................................. $1.17 $1.01 $2.01 $.88 $3.31
Cumulative effect of change in accounting
principle............................................. -- -- -- .17 --
----------- ----------- ----------- ----------- -----------
Net income........................................... $1.17 $1.01 $2.01 $1.05 $3.31

</TABLE>
The accompanying note are an integral part of this statement.

F-4

<PAGE>

R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Six month
period ended
June 30, Year ended December 31,
------------------------- ----------------------------------------
1996 1995 1995 1994 1993
----------- ------------ ----------- ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $6,094,894 $5,254,005 $10,449,112 $5,452,844 $17,186,752
----------- ------------ ----------- ------------ -----------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization........................... 990,294 700,326 1,794,454 1,335,505 1,323,638
Amortization of premium on investments and
mortgage-backed securities, net........................ 116,132 58,589 89,111 140,411 119,478
Amortization of deferred loan origination fees
and accretion of discount on loans..................... (253,401) 24,944 (366,332) (276,631) (303,922)
Amortization of excess servicing receivable............. 38,765 65,534 131,067 29,828 92,596
Amortization of servicing rights........................ 653,206 948,695 1,497,803 869,201 2,627,695
Change in provision for cost in excess of
market value of loans held for sale.................... -- (70,000) (855,834) 855,834 --
Provision (credit) for loan losses...................... 356,525 (50,000) 950,000 -- --
Provision for bad debts in accounts receivable.......... 150,000 150,000 572,092 358,442 528,635
Gain on sales of mortgage loans......................... (95,096) (177,484) (264,953) (201,797) (3,973,935)
Gain on sale of investment securities................... (329,225) -- -- -- (394,342)
Unrealized loss (gain) on trading securities............ 621,341 (2,294,711) (2,121,611) 4,464,718 --
Gain on sale of mortgage servicing rights............... -- -- -- (2,914,850) --
Cumulative effect of change in accounting principle..... -- -- -- (866,147) --
Minority interest in earnings of the Bank............... 408,766 344,978 742,527 499,928 812,427
(Increase) decrease in mortgage loans held for sale..... 2,998,604 (5,835,364) 1,558,060 60,006,212 (66,495,738)
Net (increase) decrease in mortgage-backed securities
held for trading....................................... (23,467,171) (17,252,925) 17,035,709 (36,782,335) --
(Increase) decrease in receivables...................... (2,146,915) 3,524,185 1,148,109 (4,035,534) (2,736,002)
Decrease (increase) in other assets..................... (2,389,083) (3,574,402) (1,812,808) 3,248,178 (886,033)
(Decrease) increase in notes payable.................... 11,752,829 (1,703,297) 7,915,435 (111,698,229) 57,540,715
Increase (decrease) in accounts payable and
accrued liabilities.................................... 1,633,389 2,003,189 2,417,219 (6,931,523) 929,910
(Decrease) increase in deferred taxes................... (951,901) (68,396) 2,291,477 (1,661,877) 1,407,585
Increase (decrease) in income taxes payable............. (75,236) 2,197,871 1,734,062 (6,185,086) 1,188,953
Increase (decrease) in other liabilities................ 69,289 137,776 934,566 (693,187) (1,026,483)
----------- ------------ ----------- ------------ -----------
Total adjustments..................................... (9,918,888) (20,870,492) 35,390,153 (100,438,939) (9,244,823)
----------- ------------ ----------- ------------ -----------
Net cash (used in) provided by operating activities... (3,823,994) (15,616,487) 45,839,265 (94,986,095) 7,941,929
----------- ------------ ----------- ------------ -----------
Cash flows from investing activities:
Purchases of investment securities........................ (30,531,762) -- (377,000) (6,044,808) (50,259,340)
Proceeds from sale and maturities of investment
securities available for sale............................ 17,281,780 -- -- 3,691,493 28,179,364

</TABLE>
(CONTINUED)

The accompanying notes are an integral part of this statement.

F-5

<PAGE>

Six month
period ended
June 30, Year ended December 31,
------------------------- ----------------------------------------
1996 1995 1995 1994 1993
----------- ------------ ----------- ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Principal repayments on mortgage-backed securities....... $4,576,531 $4,226,800 $8,636,250 $8,521,682 $6,053,722
Proceeds from sale of loans.............................. 4,929,156 12,345,507 20,201,648 27,201,541 147,950,784
Net originations of loans................................ (132,344,517) (82,808,291) (210,377,522) (163,236,567) (200,456,251)
Proceeds from sales of mortgage servicing rights......... -- -- -- 2,914,850 --
Acquisition of Caribbean Federal -- net of cash acquired. -- -- -- -- 11,254,879
(Purchases) redemptions of FHLB stock, net............... (795,600) (1,401,700) (1,401,700) (156,700) 1,399,500
Acquisition of premises and equipment.................... (1,051,423) (1,333,876) (2,926,306) (2,087,651) (2,209,461)
Proceeds from sales of premises and equipment............ 350,000 -- -- -- --
Net (increase) decrease in foreclosed real estate........ (735,167) (61,827) 83,488 81,339 (301,747)
Acquisition of servicing rights.......................... (564,287) (600,050) (5,289,651) (1,000,166) (476,662)
----------- ------------ ----------- ------------ -----------
Net cash used by investing activities.................. (138,885,289) (69,633,437) (191,450,793) (130,114,987) (58,865,212)
----------- ------------ ----------- ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of notes payable.................. 50,000,000 -- 27,400,000 23,600,000 --
Proceeds from issuance long-term debt.................... -- -- 2,000,000 1,732,956 2,578,817
Payments of long-term debt............................... (799,423) (600,003) (1,200,274) -- --
Increase in deposits -- net.............................. 44,832,079 103,817,079 137,928,057 67,680,706 98,544,357
(Decrease) increase in securities sold under agreements
to repurchase -- net.................................... (189,642) 15,613,561 (10,437,272) 108,750,639 --
Proceeds from secured borrowings......................... -- -- 55,983,501 -- --
Payments on secured borrowings........................... (2,451,655) -- -- -- --
Advances from FHLB....................................... 6,000,000 -- -- 5,000,000 --
Repayment of advances from FHLB.......................... (1,000,000) -- (7,500,000) (3,000,000) (8,920,328)
Proceeds from issuance of common stock to
minority shareholders................................... -- 5,060 10,321 1,309 879
Cash dividends on common stock........................... (500,000) -- -- -- --
----------- ------------ ----------- ------------ -----------
Net cash provided by financing activities.............. 95,891,359 118,835,697 204,184,333 203,765,610 92,203,725
----------- ------------ ----------- ------------ -----------
Net (decrease) increase in cash and cash equivalents..... (46,817,924) 33,585,773 58,572,805 (21,335,472) 41,280,442
Cash and cash equivalents at beginning of period......... 104,195,167 45,622,362 45,622,362 66,957,834 25,677,392
----------- ------------ ----------- ------------ -----------
Cash and cash equivalents at end of period............... $57,377,243 $79,208,135 $104,195,167 $45,622,362 $66,957,834
----------- ------------ ----------- ------------ -----------
----------- ------------ ----------- ------------ -----------
Cash and cash equivalents include:
Cash and due from banks.................................. $21,520,637 $26,735,482 $32,559,429 $21,158,101 $35,239,945
Securities purchased under agreements to resell.......... 13,429,913 22,531,517 21,694,675 10,232,890 4,301,320
Time deposits with other banks........................... 22,426,693 29,941,136 44,930,015 14,231,371 27,416,569
Federal funds sold....................................... -- -- 5,011,048 -- --
----------- ------------ ----------- ------------ -----------
$57,377,243 $79,208,135 $104,195,167 $45,622,362 $66,957,834
----------- ------------ ----------- ------------ -----------
----------- ------------ ----------- ------------ -----------
</TABLE>

The accompanying notes are an integral part of this statement.

F-6

<PAGE>

R&G FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996 (UNAUDITED) AND
THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

Preferred Stock Common Stock Class A Common Stock Class B
-------------------- -------------------- ---------------------

Shares Amount Shares Amount Shares Amount
-------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993........ $ 5,189,044 $51,890 $
Effect of implementation of
SFAS 115...........................
Net income -- 1994...................
Net change in unrealized gain
on securities available for sale,
net of tax.........................
---------- ---------- ---------- --------- --------- ----------
Balances at December 31, 1994........ 5,189,044 51,890
Transfer to capital reserves.........
Net income -- 1995...................
Net change in unrealized gain
on securities available for sale,
net of tax.........................
---------- ---------- ---------- --------- --------- ----------
Balances at December 31, 1995........ 5,189,044 51,890
Transfer to capital reserves
(unaudited)........................
Cash dividend declared on common
stock (unaudited)..................
Net income -- June 30, 1996
(unaudited)........................
Net change in unrealized gain
(loss) on securities available
for sale, net of tax
(unaudited)........................
---------- ---------- ---------- --------- --------- ----------
Balance at June 30, 1996
(unaudited)........................ $ 5,189,044 $51,890 $
---------- ---------- ---------- --------- --------- ----------

Unrealized gain
(loss) from
Additional Capital securities available Retained
paid-in capital reserves for sale earnings Total
------------- ---------- -------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993........ $362,710 $49,116,375 $49,530,975
Effect of implementation of
SFAS 115........................... $62,473 62,473
Net income -- 1994................... 5,452,844 5,452,844
Net change in unrealized gain
on securities available for sale,
net of tax......................... 923,707 923,707
------------- ---------- -------------- ------------- -------------
Balances at December 31, 1994........ 362,710 986,180 54,569,219 55,969,999
Transfer to capital reserves......... $666,767 (666,767)
Net income -- 1995................... 10,449,112 10,449,112
Net change in unrealized gain
on securities available for sale,
net of tax......................... (33,931) (33,931)
------------- ---------- -------------- ------------- -------------
Balances at December 31, 1995........ 362,710 666,767 952,249 64,351,564 66,385,180
Transfer to capital reserves
(unaudited)........................ 354,399 (354,399)
Cash dividend declared on common
stock (unaudited).................. (500,000) (500,000)
Net income -- June 30, 1996
(unaudited)........................ 6,094,894 6,094,894
Net change in unrealized gain
(loss) on securities available
for sale, net of tax
(unaudited)........................ (1,511,486) -- (1,511,486)
------------- ---------- -------------- ------------- -------------
Balance at June 30, 1996
(unaudited)........................ $362,710 $1,021,166 $(559,237) $69,592,059 $70,468,588
------------- ---------- -------------- ------------- -------------

</TABLE>

The accompanying notes are an integral part of this statement.

F-7

<PAGE>

R&G FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE SIX MONTHS
ENDED JUNE 30, 1996 AND 1995 IS UNAUDITED)

NOTE 1 -- REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

REPORTING ENTITY

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

As a result of this transaction, the accompanying consolidated financial
statements have been restated to reflect the consolidated financial condition
as of June 30, 1996 (unaudited) and December 31, 1995 and 1994, and the
related consolidated statements of income and retained earnings, and of cash
flows for the six months ended June 30, 1996 and 1995 (unaudited) and for each
of the three years in the period ended December 31, 1995 as if the above
transaction had been consummated as of January 1, 1993. The transaction has
been accounted for at historical cost in a manner similar to pooling of
interests accounting.

The Company intends to acquire as well the 12% minority ownership
interest in the Bank which, as of July 19, 1996 was held by approximately 200
other stockholders (the Minority Bank Stockholders) following the receipt of
all required regulatory approvals through the issuance of Class B $.01 par
value common stock (the Class B shares) of the Company. All Minority Bank
Stockholders will receive, in exchange for their aggregate 12% interest in the
Bank's common stock, a specified number of shares of the Company's Class B
shares to be determined based on an independent valuation of the Bank. Such
transaction will be accounted for under the purchase method of accounting;
based on presently available information, management of the Company does not
believe that this transaction will have a material effect on the Company's
Consolidated Financial Statements or earnings per share.

F-8

<PAGE>

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

The Bank provides a full range of banking services through fourteen
branches located mainly in the northern part of the Commonwealth of Puerto
Rico. As discussed in Note 19 to the consolidated financial statements, the
Bank is subject to the regulations of certain federal and local agencies, and
undergoes periodic examinations by those regulatory agencies. As of the close
of business on November 30, 1994 the Bank was converted from a federally
chartered savings bank to a commercial bank chartered under the laws of the
Commonwealth of Puerto Rico.

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

BASIS OF CONSOLIDATION

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

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL

The Company enters into purchases of securities under agreements to
resell the same securities. Amounts advanced under these agreements represent
short-term loans and are reflected as assets in the consolidated statement of
financial condition.
F-9

<PAGE>

INVESTMENT SECURITIES

Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115 -- "Accounting for Certain Investments in
Debt and Equity Securities." This Statement addresses the accounting and
reporting for investments in equity securities that have readily determinable
fair values and for all investments in debt securities. Under SFAS No. 115,
investments in debt and equity securities must be classified at acquisition
into one of three categories:

- HELD TO MATURITY -- debt securities for which there is a positive
intent and ability to hold to maturity. These securities are carried at
amortized cost.

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

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

Upon adoption of SFAS No. 115 on January 1, 1994, the Bank classified as
securities held for trading $2,599,329 of debt securities, and R&G Mortgage
classified approximately $89,597,000 of mortgage-backed securities as trading
securities, recognizing in earnings unrealized gains on these securities
amounting to approximately $866,000 net of $627,000 in deferred income taxes.
These unrealized gains are shown in the consolidated statements of income and
retained earnings under the "cumulative effect of change in accounting
principle -- adoption of SFAS No. 115."

On November 14, 1995, the Financial Accounting Standard Board staff
issued a special report, "A Guide for the Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (the
Report), as an aid in understanding and implementing SFAS 115. Under the
Report, an enterprise may conduct a one time reassessment of the
classifications of all securities held at that time from the issue date of the
report through December 31, 1995. Any reclassifications from the held to
maturity category made in conjunction with that reassessment will not call
into question an enterprise's intent to hold other debt securities to maturity
in the future. Pursuant to the Report, on December 29, 1995 the Company
reclassified mortgage-backed securities with an amortized cost of $52,448,077
from its held to maturity to its available for sale portfolio. The unrealized
gains of securities reclassified as available for sale of $565,132 was
reported net of estimated income tax of $220,401 as a separate component of
stockholder's equity in the consolidated statement of financial condition.

F-10

<PAGE>

At June 30, 1996 the net unrealized loss on securities available for sale
of $559,237 was reported net of estimated income tax benefits of $357,545 as a
separate component of stockholder's equity in the consolidated statement of
financial condition.

At December 31, 1995 and 1994, the net unrealized gains on securities
classified as available for sale of $1,561,064 and $1,616,689, respectively,
was reported net of estimated income tax of $608,815 and $630,509,
respectively, as a separate component of stockholder's equity in the
consolidated statement of financial condition in accordance with SFAS No. 115.

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

LOANS AND ALLOWANCE FOR LOAN LOSSES

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

Management believes that the allowance for loan losses is adequate. It is
the policy of the Bank to increase its valuation allowances for estimated
losses on loans when, based on management's evaluation, a loss becomes both
probable and estimable. Major loans and major lending areas are reviewed
periodically to determine potential problems at an early date. Also,
management's periodic evaluation considers factors such as loss experience,
current delinquency data, known and inherent risks in the portfolio,
identification of adverse situations which may affect the ability of debtors
to repay, the estimated value of any underlying collateral and assessment of
current economic conditions. Additions to allowances are charged to income.
Any recoveries are credited to the allowance.

Effective January 1, 1995, the Company adopted SFAS No. 114 --
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118 --
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." SFAS No. 114, as amended by SFAS No. 118, requires a creditor
to measure impairment of a loan based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or, as a
practical method, at the observable market price of the loan, or the fair
value of the collateral if the loan is collateral dependent. This Statement is
applicable to all loans, except large groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment, leases and loans that
are evaluated at fair value or at the lower of cost or fair value. The Bank
considers loans over $500,000 for individual impairment evaluations. Loans

F-11

<PAGE>

are considered impaired when, based on management's evaluation, a borrower
will not be able to fulfill its obligation under the original terms of the
loan. SFAS No. 118 amends the income recognition provisions that had been
included in SFAS No. 114. The adoption of SFAS No. 114 and SFAS No. 118 on
January 1, 1995 had no effect on the Company's financial condition or results
of operations for 1995. No loans were impaired as of June 30, 1996 or December
31, 1995.

INTEREST INCOME

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

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

MORTGAGE LOANS HELD FOR SALE

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

LOAN SERVICING FEES

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

F-12

<PAGE>

SERVICING RIGHTS

During 1995, the Company adopted SFAS No. 122 -- "Accounting for Mortgage
Servicing Rights -- an amendment of FASB Statement No. 65." Prior to
implementation of this Statement, the Company treated mortgage servicing
rights in accordance with SFAS No. 65, which did not allow the recognition of
servicing rights related to loans originated by an entity. SFAS No. 122 amends
SFAS No. 65 to permit prospectively the capitalization of servicing rights
acquired through loan origination activities and requires that a portion of
the cost of originating a mortgage loan be allocated to the mortgage servicing
right as a whole. To determine the fair value of the servicing rights, the
Company uses the market prices of comparable servicing sale contracts.

SFAS 122 also requires that all mortgage servicing rights be evaluated
for impairment. In determining impairment, servicing rights were disaggregated
into their predominant risk characteristic, interest rate. For purposes of
measuring impairment, mortgage servicing rights are stratified by pool on the
basis of interest rates. An impairment is recognized whenever the prepayment
pattern of the mortgage pool indicates that the fair value of the related
mortgage servicing rights is less than its carrying amount. An impairment is
recognized by charging such excess to income. The Company determined that no
reserve for impairment was required as of June 30, 1996 or December 31, 1995.
As of December 31, 1995, the fair value of capitalized mortgage servicing
rights was approximately $10,420,000. In determining fair value, the Company
considers the fair value of servicing rights with similar risk characteristics.

The adoption of this Statement had the effect of increasing net gain on
sales of loans by approximately $1,553,000 and net income by approximately
$1,054,000 for the year ended December 31, 1995, and increasing capitalized
servicing rights at December 31, 1995 by approximately $2,285,000. SFAS 122
prohibits retroactive application, therefore, mortgage servicing rights
related to loans originated prior to the adoption of the Statement continue to
be unrecognized in the Company's consolidated financial statements.

The cost of acquiring the rights to service mortgage loans is capitalized
and amortized over the period of net servicing revenue. The cost of loan
servicing rights purchased and amortization thereon is periodically evaluated
in relation to estimated future net servicing revenue.

SALE OF SERVICING RIGHTS

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

F-13

<PAGE>

EXCESS SERVICING FEES RECEIVABLE

Excess servicing fees receivable represents the present value of the
difference between the contractual interest rate of loans sold, adjusted for
normal servicing fees, and the agreed yield to investors over the estimated
remaining life of such loans. The receivable is realized through receipt of
the excess service fees over time. The cost of excess servicing and the
amortization thereon is periodically evaluated in relation to estimated future
net servicing revenue as a reduction of servicing income. Any impairment in
the value of the excess servicing fees receivable due to actual or anticipated
prepayment experience is recognized currently as a reduction of excess
servicing fees receivable. The resulting excess servicing fees receivable is
amortized over the estimated life using a method approximating the level-yield
method as a reduction of servicing income.

FORECLOSED REAL ESTATE HELD FOR SALE

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

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

PREMISES AND EQUIPMENT

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

In March 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 121 -- "Accounting for the Impairment of Long Lived Assets and for
Long-Lived Assets to be Disposed." This Statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets, to be held and used. Under
such Statement, long-lived assets and certain identifiable intangibles to be
held and used must be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review for recoverability, an estimate of the
future cash flows expected to result from the use of the asset and its
eventual disposition must be made. If the sum of the

F-14

<PAGE>

future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment loss is recognized.

Application of this Statement is required for financial statements for
fiscal years beginning after December 15, 1995. Based on presently available
information, management believes the application of this Statement in future
years should not have a material adverse effect on the Company's financial
condition or results of operations.

COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED

The cost in excess of fair value of net assets acquired results from the
acquisition of a mortgage banking institution and the Bank in prior years,
which is being amortized over a twelve year period. Accumulated amortization
amounted to $992,386, $930,059 and $805,408 as of June 30, 1996, December 31,
1995 and 1994, respectively.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

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

TRANSFERS OF RECEIVABLES WITH RECOURSE

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

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

INTEREST RATE RISK MANAGEMENT

The Company enters into interest rate caps, swaps, options and/or futures
(primarily based on Eurodollar certificates of deposits and U.S. Treasury note
contracts) to manage its interest rate exposure. Such instruments are
designated as hedges against future fluctuations in the interest rates of
specifically identified assets or liabilities. Options and futures are
reported at fair value under investments in the accompanying Consolidated
Statement of Financial Condition, with related gains or losses reported in the
Consolidated

F-15

<PAGE>

Statement of Income. Interest rate caps and swaps are not recognized in the
Consolidated Statement of Financial Condition and are not marked to market.
Net interest settlements on interest rate caps and swaps are recorded as
adjustments to interest income or expense.

EMPLOYEE BENEFITS

The Company or its subsidiaries has no post retirement benefits plan for
its employees as of June 30, 1996 and December 31, 1995.

INCOME TAXES

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

CAPITAL RESERVE

The Banking Act of the Commonwealth of Puerto Rico requires that a
minimum of 10% of net income of the Bank be transferred to capital surplus
until such surplus equals the greater of 10% of total deposits or paid-in
capital.

STOCK OPTION PLANS

In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. This Statement
encourages all entities to adopt a new method of accounting to measure
compensation cost of all employee stock compensation plans based on the
estimated fair value of the award at the date it is granted. Companies are,
however, allowed to continue to measure compensation cost for those plans
using the intrinsic value based method of accounting, which generally does not
result in compensation expense recognition for most plans. Companies that
elect to remain with the existing accounting are required to disclose in a
footnote to the financial statements pro forma net income, and if presented,
earnings per share, as if this Statement had been adopted. The accounting
requirements of this Statement are effective for transactions entered into
during fiscal years that begin after December 15, 1995; however, companies are
required to disclose information for awards granted in their first fiscal year
beginning after December 15, 1994. As discussed in Note 20 to the accompanying
consolidated financial statements, the Company adopted a Stock Option Plan in
June 1996 and intends to make awards thereunder in conjunction with the
Company's initial public offering. Management intends to utilize the intrinsic
value based method of accounting for compensation cost.

F-16

<PAGE>

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT
OF LIABILITIES

In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities
it has incurred, and stops recognizing financial assets when control has been
surrendered, and liabilities when extinguished.

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

This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996,
and must be applied prospectively. Earlier or retroactive application is not
permitted. Management has not estimated yet the effect, if any, of the
adoption of this Statement on the Consolidated Financial Statements of the
Company.

EARNINGS PER SHARE

Primary earning per common share is computed by dividing net income for
the year by the weighted average number of shares outstanding during the
period (5,189,044 for all periods presented in the accompanying consolidated
financial statements).

F-17

<PAGE>

STATEMENT OF CASH FLOWS

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

NOTE 2 -- ACQUISITION OF BRANCHES AND OTHER BANKING INSTITUTIONS:

On June 16, 1995, the Bank entered into a Purchase and Sale of Assets and
Assumption of Liabilities Agreement (the Agreement) with a commercial bank. As
provided by the Agreement, the Bank purchased seven branches, including
approximately $2,000,000 in assets (which excludes cash from the deposits
acquired) and approximately $77,340,000 in deposits, including $162,000
interest payable. The premium paid by the Bank over the value of deposits
acquired, which was determined based on negotiations between the parties to
the Agreement, approximated $1,351,000 which is being amortized over a 10 year
period. Accumulated amortization amounted to approximately $135,000 and
$68,000 at June 30, 1996 and December 31, 1995, respectively.

Effective June 30, 1993, the Bank paid approximately $6,050,000,
including acquisition costs, for all outstanding shares of common stock of
Caribbean Federal Savings Bank (Caribbean Federal) at such date. The fair
value of the assets acquired and liabilities assumed was $79,668,000 and
$73,647,000, respectively. This transaction was accounted under the purchase
method of accounting. The consolidated statement of income and retained
earnings for the year ended December 31, 1993 includes the results of
operations of Caribbean Federal after June 30, 1993.

NOTE 3 -- MORTGAGE LOANS HELD FOR SALE:

Mortgage loans held for sale consist of:

December 31,
--------------------------
June 30, 1996 1995 1994
------------- ------------ ------------
(Unaudited)
Conventional loans................. $ 8,291,600 $11,573,273 $ 7,734,095
FHA/VA loans....................... 10,028,136 9,329,694 15,142,305
Construction loans................. -- 415,373 --
------------- ------------ ------------
21,318,340 22,876,400
Allowance for loans held for sale.. -- -- (855,834)
------------- ------------ ------------
$18,319,736 $21,318,340 $22,020,566
------------- ------------ ------------
------------- ------------ ------------

F-18

<PAGE>

The aggregate amortized cost and approximate market value of loans held
for sale are as follows:

Amortized Gross unrealized Gross unrealized Approximate
cost holding gains holding losses market value
----------- --------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1995........... $21,318,340 $324,261 $(11,907) $21,630,694
----------- --------- ---------- -----------
June 30, 1996 (unaudited)... $18,319,736 $254,795 $(94,676) $18,479,855
----------- --------- ---------- -----------
----------- --------- ---------- -----------

</TABLE>

Substantially all of the loans are pledged to secure various borrowing
from lenders under mortgage warehousing lines of credit (see note 11).

The following table summarizes the components of gain on sale of
mortgage loans held-for-sale and mortgage-backed securities held-for-trading:

Six months ended
June 30, Year ended December 31,
------------------------ -----------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Proceeds from sales of mortgage loans
and mortgage-backed securities............ $88,194,877 $81,908,658 $176,280,086 $463,326,866 $783,957,656
Mortgage loans and mortgage-backed
securities sold........................... (85,957,986) (80,928,201) (172,717,771) (458,772,184) (757,233,908)
------------ ------------ ------------- ------------- -------------
Gain (loss) on sales, net................... 2,236,891 980,457 3,562,315 4,554,682 26,723,748
Deferred fees earned, net of loan
origination costs and commitment fees
paid...................................... 1,755,363 1,229,504 2,700,154 (5,904,022) 2,302,394
------------ ------------ ------------- ------------- -------------
Net gain (loss) on sale of mortgage loans.. $3,992,254 $2,209,961 $6,262,460 $(1,349,340) $29,026,142
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------

</TABLE>

Total gross fees on originated loans totalled approximately $6,120,000,
$9,488,000, $8,244,000 and $556,000 during the six month period ended June 30,
1996 and the years ended December 31, 1995, 1994 and 1993, respectively.

Gross gains of $2,563,800, $4,058,352 and $10,100,121, and gross losses
of $326,909, $496,037 and $5,545,439 were realized on the above sales during
the six month period ended June 30, 1996 and the years ended December 31, 1995
and 1994, respectively.

NOTE 4 -- INVESTMENT SECURITIES:

The carrying value and estimated fair value of investment securities by
category are shown below. The fair value of investment securities is based on
quoted market prices and dealer quotes, except for the investment in Federal
Home Loan Bank (FHLB) stock which is valued at its redemption value.

F-19

<PAGE>

December 31,
----------------------------------------------------------
June 30, 1996 1995 1994
---------------------------- ---------------------------- ---------------------------
Amortized cost Fair value Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ---------- -------------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held
to maturity
Puerto Rico Government
obligations:
Due within one year............ $ -- $ -- $ 377,000 $ 377,000 $ 460,000 $460,000
Due from one to five years..... 1,038,618 1,015,000 1,042,239 1,000,000 1,045,730 981,700
Due over ten years............. 603,528 596,029 626,807 619,307 676,446 666,618
---------- ---------- ---------- ---------- ---------- --------
1,642,146 1,611,029 2,046,046 1,996,307 2,182,176 2,108,318
Corporate securities --
Due within one year............ 3,719,547 3,719,547 -- -- -- --
Due from one to five years..... 3,323,524 3,323,524 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
7,043,070 7,043,070 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
$8,685,216 $8,654,099 $2,046,046 $1,996,307 $2,182,176 $2,108,318
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------

</TABLE>

<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
June 30, 1996 1995 1994
--------------------------- --------------------------- ---------------------------
Amortized cost Fair value Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ---------- -------------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
held to maturity
Mortgage backed securities:
GNMA certificates:
Due from one to five
years................... $ 105,694 $ 108,117 $118,268 $108,197 $173,796 $164,302
Due over ten years........ 23,077,413 21,886,629 24,616,649 23,680,662 26,618,812 24,224,202
---------- ---------- ---------- ---------- ---------- ----------
23,183,107 21,994,746 24,734,917 23,788,859 26,792,608 24,388,504
---------- ---------- ---------- ---------- ---------- ----------

Federal National Mortgage
Association (FNMA) --
Due over ten years......... 15,941,568 16,139,570 16,622,989 16,622,989 16,174,807 15,266,530
---------- ---------- ---------- ---------- ---------- ----------

Federal Home Loan
Mortgage Corporation
(FHLMC) participation
certificates --
Due from five to ten
years.................. -- -- -- -- 659,251 677,868
Due over ten years....... 348,066 338,648 372,983 372,983 40,495,369 38,512,070
---------- ---------- ---------- ---------- ---------- ----------
348,066 338,648 372,983 372,983 41,154,620 39,189,938
---------- ---------- ---------- ---------- ---------- ----------
$39,472,739 $38,472,964 $41,730,889 $40,784,831 $84,122,035 $78,844,972
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------

</TABLE>

F-20

<PAGE>

Expected maturities on debt securities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or repayment penalties.

<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
June 30, 1996 1995 1994
--------------------------- --------------------------- ---------------------------
Amortized cost Fair value Amortized cost Fair value Amortized cost Fair value
-------------- ---------- -------------- ---------- -------------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
available for sale
CMO residuals and other
mortgage-backed
securities............... $7,091,610 $7,871,551 $7,126,609 $8,122,542 $11,683,636 $13,300,325
----------- ----------- ---------- ---------- ----------- -----------
Federal National Mortgage
Association (FNMA) --
Due over ten years....... 15,425,377 14,990,973 14,845,760 14,946,338 -- --
----------- ----------- ---------- ---------- ----------- -----------

FHLMC participation
certificates:
Due from five to ten
years.................. 585,531 594,462 1,122,434 1,180,194 -- --
Due over ten years....... 21,788,422 21,011,871 36,352,565 36,759,358 -- --
----------- ----------- ---------- ---------- ----------- -----------
22,373,953 21,606,333 37,474,999 37,939,552 -- --
----------- ----------- ---------- ---------- ----------- -----------
$44,890,940 $44,468,857 $59,447,368 $61,008,432 $11,683,636 $13,300,325
----------- ----------- ---------- ---------- ----------- -----------
----------- ----------- ---------- ---------- ----------- -----------
INVESTMENT SECURITIES
AVAILABLE FOR SALE:
U.S. Government and
agencies securities...... $19,527,199 $19,032,500 $ -- $ -- $ -- $ --

FHLB stock................ 4,075,210 4,075,210 3,279,610 3,279,610 1,877,910 1,877,910
----------- ----------- ---------- ---------- ----------- -----------
$23,602,409 $23,107,710 $3,279,610 $3,279,610 $1,877,910 $1,877,910
----------- ----------- ---------- ---------- ----------- -----------
----------- ----------- ---------- ---------- ----------- -----------
</TABLE>

Mortgage backed securities available for sale include interest only
securities with an amortized cost of $2,363,941 as of June 30, 1996 and
December 31, 1995, and $6,920,968 as of December 31, 1994, which are
associated with the sale in prior years of collateralized mortgage
obligations, and not the Company's mortgage banking activities.

December 31,
-------------------------
June 30, 1996 1995 1994
------------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Mortgage-backed securities held for trading:
CMO Certificates..................... $15,147,000 $15,570,414 $50,241,136
CMO Residuals (all interest only).... 9,444,230 9,790,668 10,096,992
GNMA Certificates.................... 111,984,728 88,447,542 64,183,709
------------- ----------- -----------
$136,575,958 $113,808,624 $124,521,837
------------- ----------- -----------
------------- ----------- -----------
</TABLE>

F-21
<PAGE>

During 1996, the Company entered into various agreements with an
unrelated investment management firm whereby such firm has been appointed as
investment advisor with respect to a portion of the Company's securities
portfolio. Pursuant to such agreements, this investment advisory firm advises
and recommends management on the purchase and/or sale of otherwise eligible
investments as well as the execution of various hedging strategies to reduce
interest rate risk, mainly through the use of various financial instruments.
Such firm receives an annual management fee of .15% of the average aggregate
principal amount under management of the advisory firm (payable quarterly)
together with a quarterly performance fee of 25% of the net trading profits
earned during each calendar quarter. At June 30, 1996, this investment
advisory firm was managing Company assets with a market value of approximately
$32.1 million of which $13.1 million was designated for trading. Such assets
were invested as follows:

June 30, 1996
----------------------------
Amortized cost Fair value
--------------- -----------
(Unaudited)

Cash and due from banks.......................... $1,934,179 $1,934,179
---------- ----------
HELD-FOR-TRADING SECURITIES
U.S. Treasury Bills.............................. 989,826 989,826
Money market investments......................... 10,136,693 10,136,693
---------- ----------

11,126,519 11,126,519
---------- ----------

AVAILABLE-FOR-SALE SECURITIES
U.S. Government and agencies securities.......... 19,527,199 19,032,500
---------- ----------
$32,587,897 $32,093,198
---------- ----------
---------- ----------

F-22

<PAGE>

The above available for sale securities are being hedged with financial
futures contracts based on U.S. Treasury securities and Eurodollars which
are settled on a quarterly basis. Such firm also executes hedging
strategies on behalf of the Company for all mortgage-backed securities which
are available for sale (excluding CMOs) or held for trading.
Mortgage-backed securities held for trading and available for sale for which
hedging contracts are made had a fair value of approximately $171.4 million
as of June 30, 1996. Any contracts made are recorded at fair value within
assets being hedged. If at the inception of the futures contract it is not
probable a high correlation (80-125%) exists between changes in the market
value of the hedged securities and changes in the market value of the
futures contracts, gains or losses on such contracts are reported in the
statement of income as part of the net gain on trading account. Where, at
the inception of the contract, it is probable a high correlation (80-125%)
exists between changes in the market value of the hedged securities and
changes in the market value of the futures contracts, related gains or
losses on such contracts are reported as part of the unrealized gains or
losses on available for sale-securities in stockholders' equity when the
contracts have been designated as hedges for available for sale securities,
and reported in the statement of income as part of the unrealized gain or
loss on trading securities when the contracts have been designated as hedges
for held for trading securities. Management periodically evaluates the
results of futures contracts accounted for as hedges to determine if high
correlation is being achieved. If management's periodic evaluations
indicate high correlation has not occurred, a related gain or loss is
recognized in income for the period to the extent the results of the futures
contracts have not been offset by changes in the fair value of the available
for sale securities since the inception of the contracts. At June 30, 1996
no such contracts were outstanding.

Unrealized gains and losses of securities held to maturity and available
for sale follows:

<TABLE>
<CAPTION>
December 31,
---------------------------------------------
June 30, 1996 1995 1994
---------------------- -------------------- --------------------
Gross unrealized Gross unrealized Gross unrealized
---------------------- -------------------- --------------------
Gains Losses Gains Losses Gains Losses
---------- -------- ------- -------- ------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY:
Puerto Rico and United
States Government
obligations................... $ -- $ (31,119) $ -- $(49,739) $ -- $ (73,858)
Mortgage-backed securities 265,269 (1,265,042) -- (946,058) -- (5,277,063)
------- ----------- ---------- ---------- ---------- -----------

$265,269 $(1,296,161) $ -- $(995,797) $ -- $(5,350,921)
------- ----------- ---------- ---------- ---------- -----------

SECURITIES AVAILABLE FOR SALE:
US Government Obligations $ -- $ (494,699) $ -- $ -- $ -- $ --
Mortgage-backed securities 848,516 (1,270,599) 1,744,790 (183,726) 1,616,689 --
------- ----------- ---------- ---------- ---------- -----------
$848,516 $(1,765,298) $1,744,790 $(183,726) $1,616,689 $ --
------- ----------- ---------- ---------- ---------- -----------
------- ----------- ---------- ---------- ---------- -----------

</TABLE>

During the six month period ended June 30, 1996 proceeds from the sale of
securities available for sale totalled approximately $14,282,000; gains
realized in those sales totalled approximately $329,000. There were no sales
of securities held to maturity or available for sale during 1995. During 1994
proceeds from the sale of securities available for sale sold at

F-23

<PAGE>

their carrying value amounted to approximately $3,691,000; there were no
sales of securities held to maturity. Proceeds from sales of securities and
gains realized on those sales during 1993 amounted to $28,179,488 and
$489,267, respectively.

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

As discussed in notes 10, 11, 12, 13 and 15, investment securities,
mortgage loans, and deposits at interest with banks amounting to approximately
$264,934,000 and $212,307,000 were pledged to secure securities sold under
agreements to repurchase, advances from the FHLB, notes payable, long-term
debt, subordinated notes and irrevocable standby letters of credit issued by
the FHLB as of June 30, 1996 and December 31, 1995, respectively.

NOTE 5 -- LOANS AND ALLOWANCE FOR LOAN LOSSES:

Loans consists of the following:

<TABLE>
<CAPTION>
December 31,
---------------------------
June 30, 1996 1995 1994
------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Real estate loans:
Residential -- first mortgage............. $378,271,815 $282,497,680 $194,707,115
Residential -- second mortgage............ 14,377,467 14,371,526 13,298,580
Construction.............................. 7,991,512 15,045,844 12,038,774
Commercial................................ 71,778,065 67,385,930 44,092,487
------------ ------------ ------------
472,418,859 379,300,980 264,136,956
Undisbursed portion of loans in process...... (2,795,132) (5,726,693) (5,945,295)
Net deferred loan fees....................... (96,864) (265,768) (424,377)
------------ ------------ ------------
469,526,863 373,308,519 257,767,284
------------ ------------ ------------
Other loans:
Commercial................................ 33,289,651 27,816,427 14,102,191
Consumer:
Loans secured by deposits................ 8,934,114 7,496,575 5,828,564
Other.................................... 91,038,251 70,560,722 29,278,496
Unamortized discount...................... (298,719) (383,216) (590,939)
Unearned interest......................... (1,106,458) (1,448,139) (1,884,298)
------------ ------------ ------------
131,856,839 104,042,369 46,734,014
------------ ------------ ------------
Total loans............................. 601,383,702 477,350,888 304,501,298
Allowance for loan losses.................... (3,201,627) (3,510,251) (2,887,099)
------------ ------------ ------------
$598,182,075 $473,840,637 $301,614,199

</TABLE>

F-24

<PAGE>

The changes in the allowance for loan losses follow:

Six months ended June 30, Year ended December 31,
------------------------- ----------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year............. $3,510,251 $2,887,099 $2,887,099 $3,028,541 $1,230,329
Provision (credit) for loan
losses............................... 356,525 (50,000) 950,000 -- --
Allowance for acquired loans........... -- -- -- -- 1,682,734
Loans charged-off...................... (770,808) (196,598) (508,946) (100,142) (118,004)
Recoveries............................. 105,659 107,318 182,098 -- 262,438
Other.................................. -- -- -- (41,300) (28,956)
---------- ---------- ---------- ---------- -----------
Balance, end of year................... $3,201,627 $2,747,819 $3,510,251 $2,887,099 $3,028,541
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------

</TABLE>

As of June 30, 1996, loans on which the accrual of interest income had
been discontinued amounted to approximately $13,221,000. The additional
interest income that would have been recognized during the three month period
then ended amounted to approximately $284,000. As discussed in Note 29 to
Notes to Consolidated Financial Statements, it is possible that additional
non-accruing loans of approximately $3.2 million existed at June 30, 1996.

As of December 31, 1995, 1994 and 1993, loans on which the accrual of
interest income had been discontinued amounted to approximately $10,032,000,
$6,002,000 and $5,538,000, respectively. The additional interest income that
would have been recognized during 1995, 1994 and 1993 had these loans been
accruing interest amounted to approximately $261,000, $121,000 and $245,000,
respectively. The Company has no material commitments to lend additional funds
to borrowers whose loans were in non-accruing status at December 31, 1995.

NOTE 6 -- MORTGAGE LOAN SERVICING:

The Company's fees for servicing mortgage loans generally range from .25%
to .50% on the declining outstanding principal balances of the mortgage loans
serviced. Servicing fees are collected out of payments from mortgagors on a
monthly basis. The servicing agreements are terminable by permanent investors
for cause without penalty or after payment of a termination fee ranging from
.5% to 1% of the outstanding principal balance of the loans. At June 30, 1996,
the mortgage loans servicing portfolio amounted to $2,450,767,000, excluding
approximately $334,066,000 serviced for the Bank. At December 31, 1995 and
1994, the mortgage loans servicing portfolio amounted to approximately
$2,007,435,000 and $1,900,819,000, respectively, excluding approximately
$290,765,000 and $213,924,000, respectively, serviced for the Bank.

F-25

<PAGE>

The change in the mortgage servicing rights are as follows:

Six months ended June 30, Year ended December 31,
------------------------- ---------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period.......................... $8,209,661 $4,417,813 $4,417,813 $4,286,848 $6,437,881
Capitalization of rights.......... 1,689,318 898,261 2,285,331
Rights purchased.................. 564,287 600,050 3,004,320 1,000,166 476,662
Amortization:
Scheduled................... (653,206) (948,695) (1,497,803) (869,201) (827,695)
Unscheduled................. -- -- -- (1,800,000)
---------- ---------- ---------- ----------- -----------
Balance at end of period.......... $9,810,060 $4,967,429 $8,209,661 $4,417,813 $4,286,848
---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ----------- -----------

</TABLE>

In 1994, the Company sold the servicing rights for mortgage loans
previously originated by the Company and thus not recognized in financial
statements, with an outstanding principal balance of $220,990,000 at a gain of
$2,914,850. There were no sales of servicing rights during the six month
period ended June 30, 1996 nor the years ended December 31, 1995 or 1993.

Among the conditions established in its various servicing agreements, the
Company is committed to advance from its own funds any shortage of monies
required to complete timely payments to investors in GNMA mortgage-backed
securities issued and in its FHLMC portfolio. At June 30, 1996, the mortgage
loan portfolio serviced for GNMA, FNMA and FHLMC and subject to the timely
payment commitment amounted to approximately $1,457,400,000, $61,572,000 and
$305,631,000, respectively. At December 31, 1995, the mortgage loan portfolio
serviced for GNMA, FNMA and FHLMC and subject to the timely payment commitment
amounted to approximately $1,427,203,000, $46,961,000 and $312,082,000 (1994
- -- $1,409,991,000, $52,232,000, $301,195,000, respectively).

Total funds advanced as of June 30, 1996 in relation to such commitments
amount to $603,769, $1,350,735 and $316,817 for escrow advances, principal and
interest advances, and foreclosure advances, respectively. Total funds
advanced as of December 31, 1995 in relation to such commitments amount to
$1,119,900, $693,044 and $306,506 for escrow advances, principal and interest
advances, and foreclosure advances, respectively (1994 -- $148,264, $2,645,839
and $254,669, respectively).

In connection with mortgage servicing activities, the Company holds funds
in trust for investors representing amounts collected primarily for the
payment of principal, interest, real estate taxes and insurance premiums. Such
funds are deposited in separate custodial bank accounts and are not commingled
with the Company's operating and other funds. At June 30, 1996, December 31,
1995 and 1994, the related escrow funds amounting to approximately
$30,563,000, $30,839,000 and $21,391,000, respectively, are excluded from the
Company's assets and liabilities. These funds include at June 30, 1996,
December 31, 1995 and 1994, approximately $16,447,000, $13,948,000 and
$10,039,000, respectively, deposited in the Bank.

F-26

<PAGE>

NOTE 7 -- EXCESS SERVICING FEES RECEIVABLE:

The changes in excess servicing fees receivable are shown below:

Six months ended
June 30, Year ended December 31,
----------------------- ---------------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............... $847,938 $979,005 $979,005 $198,920 $291,516
Additions.................................... -- -- -- 809,913 --
Amortization:
Scheduled................................. (38,765) (65,534) (131,067) (29,828) (29,828)
Unscheduled............................... -- -- -- -- (62,768)
-------- -------- -------- -------- ---------
Balance at end of period..................... $809,173 $913,471 $847,938 $979,005 $198,920
-------- -------- -------- -------- ---------
-------- -------- -------- -------- ---------

</TABLE>

NOTE 8 -- PREMISES AND EQUIPMENT:

Premises and equipment consist of:

December 31,
------------------------
Estimated useful
lives (years) June 30, 1996 1995 1994
----------------- ------------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Furniture and fixtures......... 5 $8,851,690 $8,420,457 $7,043,208
Leasehold improvements......... 10 4,771,181 4,500,991 3,357,030
Autos.......................... 5 27,900 27,900 98,920
---------- ---------- -----------
13,650,771 12,949,348 10,499,158
Less -- Accumulated
depreciation and
amortization............... (6,794,652) (5,976,023) (4,878,151)
---------- ---------- -----------
$6,856,119 $6,973,325 $5,621,007
---------- ---------- -----------
---------- ---------- -----------

</TABLE>

F-27

<PAGE>

NOTE 9 -- DEPOSITS:

Deposits are summarized as follows:

<TABLE>
<CAPTION>
December 31,
--------------------------
June 30, 1996 1995 1994
------------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Passbook savings.......................................... $73,602,930 $73,471,042 $44,392,993
------------ ------------ ------------
NOW accounts.............................................. 22,633,889 21,233,410 16,600,752
Super NOW accounts........................................ 56,172,235 52,405,683 46,740,513
Regular checking accounts (non-interest bearing).......... 17,077,942 19,073,123 3,147,900
Commercial checking accounts (non-interest bearing)....... 34,892,985 33,925,790 32,408,079
------------ ------------ ------------
130,777,051 126,638,006 98,897,244
------------ ------------ ------------
Certificates of deposit:
Under $100,000...................................... 211,781,812 194,657,528 127,598,479
$100,000 and over................................... 145,581,288 122,144,426 108,094,229
------------ ------------ ------------
357,363,100 316,801,954 235,692,708
------------ ------------ ------------
Accrued interest payable.................................. 1,404,284 1,275,561 1,165,469
------------ ------------ ------------
$563,147,365 $518,186,563 $380,148,414
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

At June 30, 1996 the weighted average stated interest rate on all
deposits was 5.02%. The weighted average stated interest rate on all deposits
at December 31, 1995 and 1994 was 5.03% and 4.85%, respectively.

NOTE 10 -- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:

At December 31, 1995 and 1994, the Company had a liability of $98,483,188
and $108,921,552, respectively excluding interest payable amounting to
$169,821 and $170,913 relating to such agreements with interest ranging from
1.75% to 7.5% in 1995 and 3.00% to 6.88% in 1994. These agreements mature in
one to thirty days.

F-28

<PAGE>

Information on these agreements follows:

June 30, 1996
--------------------------------------
Approximate market and
Repurchase carrying value of
Type of security liability underlying securities
- ----------------- --------- ---------------------
(Unaudited)
<S> <C> <C>
FNMA............ $1,449,000 $1,505,742
GNMA............ 65,263,925 67,862,035
CMO Tranches.... 13,576,384 15,147,000
CMO Residuals... 9,253,237 9,444,230
FHLMC........... 8,751,000 9,317,107
----------- ------------
$98,293,546 $103,276,114
----------- ------------
----------- ------------

December 31,
----------------------------------------------------------------------------------
1995 1994
------------------------------------- --------------------------------------
Approximate market and Approximate market and
Repurchase carrying value of Repurchase carrying value of
Type of security liability underlying securities liability underlying securities
- ----------------- --------- --------------------- --------- ----------------------

<S> <C> <C> <C> <C>
FNMA............ $ $ $ $
GNMA............ 64,448,500 66,480,368 54,159,001 66,290,642
CMO Tranches.... 13,576,384 15,570,414 45,300,688 41,191,824
CMO Residuals... 9,933,304 9,790,668 7,731,863 10,096,992
FHLMC........... 10,525,000 10,872,213 1,730,000 1,775,621
----------- ------------ ------------ ------------
$98,483,188 $102,713,663 $108,921,552 $119,355,079
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------

</TABLE>

Maximum amount of borrowings outstanding at any month-end during 1995 and
1994 under the agreements to repurchase were $127,094,000 and $142,198,000,
respectively. The approximate average aggregate balance outstanding during the
periods were $107,026,000 and $97,572,000, respectively. The weighted average
interest rate of such agreements was 5.33% and 5.76% at December 31, 1995 and
1994, respectively; the average rate during 1995 and 1994 was 5.30% and 4.17%,
respectively.

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

Securities sold under agreements to repurchase are classified by dealer
as follows:

<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
----------------------------------------------- ---------------------------
Approximate
Approximate market value
market value Balance of of underlying
Balance of borrowing of underlying securities borrowing securities
-------------------- ------------------------ ---------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Citibank, N.A. ...................... $34,968,964 $37,151,127 $24,027,858 $25,800,678
Merrill Lynch........................ 7,400,000 7,698,525 16,685,000 17,145,249
Paine Webber, Inc of Puerto Rico..... 40,290,000 41,670,658 27,495,000 28,668,580
Lehman Brothers Puerto Rico, Inc. ... -- -- 18,690,000 19,571,548
Banco Popular of Puerto Rico......... -- --
BP Capital Markets................... 12,430,000 13,161,300 7,615,000 7,841,524
Banco Santander of Puerto Rico....... 3,204,582 3,594,504 3,970,330 3,686,084
----------- ------------ ----------- ------------
$98,293,546 $103,276,114 $98,483,188 $102,713,663
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------

</TABLE>

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

F-29

<PAGE>

NOTE 11 -- NOTES PAYABLE:

Notes payable consist of:

<TABLE>
<CAPTION> December 31, 1995
--------------------------
June 30, 1996 1995 1994
------------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Working capital loans, bearing interest averaging
8.88% in 1995 (1994 -- 5.55%).................................... $ 2,000,000 $4,000,000 $4,500,000
Warehousing lines, bearing interest at 3.0% in 1995 and 1994....... 39,882,861 26,130,032 17,714,597
Promissory notes maturing in 1997 paying semiannual interest
at a fixed annual rate of 4.67%.................................. 50,000,000 -- --
Promissory notes maturing in 1999 paying semiannual interests at
fixed annual rates ranging from 6.20% to 7.15%................... 23,600,000 23,600,000 23,600,000
Promissory notes maturing in 2000 paying semiannual interests at
fixed annual rates ranging from 5.55% to 5.67%................... 15,000,000 15,000,000 --
Promissory note maturing in 2000 paying quarterly interest at a
floating rate of 84% of the three month LIBID rate less .125%
(4.88% at December 31, 1995)..................................... 10,000,000 10,000,000 --
Promissory note maturing in 2003 paying semiannual interest at a
fixed annual rate of 5.50%....................................... 2,400,000 2,400,000 --
------------ ----------- -----------
$142,882,861 $81,130,032 $45,814,597
------------ ----------- -----------
------------ ----------- -----------

</TABLE>

As of June 30, 1996 and December 31, 1995, the Company had various credit
line agreements permitting the Company to borrow up to $79,425,000 and
$108,425,000, respectively. These borrowings are collateralized by mortgage
loans held for sale, certificates of deposit, an assignment of key man
insurance policies on the Company's president and a general assignment of
mortgage payments receivable. These borrowings bear interest at rates related
to the respective bank's prime rate or the Puerto Rico 936 funds market. Some
of these borrowings are also guaranteed by the sole stockholder of the
Company. Several credit line agreements impose certain restrictions on the
Company of which the most important include maintaining net worth and working
capital over certain defined minimums and limitations on indebtedness and
declaration of dividends. Management believes that at December 31, 1995 the
Company was in compliance with the loan agreements.

The following information relates to borrowing of the Company under the
credit line agreements:

<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Maximum aggregate borrowing outstanding at any month end............. $31,625,917 $134,271,363
----------- ------------
----------- ------------
Approximate average aggregate borrowing outstanding during the
year............................................................... $22,020,749 $55,725,728
----------- ------------
----------- ------------
Weighted average interest rate, during the year computed on a
monthly basis...................................................... 5.79% 6.30%
----------- ------------
----------- ------------
Weighted average interest rate at end of year........................ 3.00% 3.50%
----------- ------------
----------- ------------

</TABLE>

F-30

<PAGE>

Certain promissory notes include pledge agreements where the Company has
pledged certain negotiable securities as a guarantee for payment of some of
the notes totalling $41,000,000 at December 31, 1995. The pledge agreements
provide that the value of the pledged securities must not fall below 105% of
the principal balance of the promissory note plus accrued interest on such
amount. In the event that the securities' value falls below the stated
percentage, the Company must deliver additional negotiable securities. At June
30, 1996 securities pledged in compliance with this requirement consist of
mortgage backed securities with a carrying value of $45,602,000 and
approximate market value of $45,047,000. At December 31, 1995 securities
pledged in compliance with this requirement consist of mortgage backed
securities with a carrying value of approximately $44,866,000 and approximate
market value of $44,339,000. At June 30, 1996 and December 31, 1995 floating
rate notes of $10,000,000 are guaranteed by letters of credit issued by the
FHLB -- NY.

NOTE 12 -- LONG-TERM DEBT:

Long-term debt consists of the following:

<TABLE>
<CAPTION>
December 31,
-------------------
June 30, 1996 1995 1994
------------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Notes payable bearing annual interest ranging
from 7.46% to 10.50%, due in quarterly
installments of $41,683 and maturing in 1996...... $ -- $82,748 $249,483
Note payable bearing annual interest at 6.95%,
due in monthly installments of $41,667 and
maturing on September 1, 1998..................... 1,124,989 1,374,991 1,874,995
Note payable bearing annual interest at 7.46%
due in quarterly installments of $133,316
beginning on September 1, 1994 through June 1,
1999.............................................. 1,599,487 1,866,160 2,399,695
Note payable bearing annual interest at 7.50%
due in quarterly installments of $100,000
beginning on October 27, 1995 through
October 1, 2000................................... 1,800,000 2,000,000 --
---------- ---------- ----------
$4,524,476 $5,323,899 $4,524,173
---------- ---------- ----------
---------- ---------- ----------

</TABLE>

The scheduled aggregate annual maturities of these notes were
approximately as follows:

At June 30, At December 31,
Year ending December 31, 1996 1995
- -------------------------------- ----------- ---------------
(Unaudited)
1996........................... $ 716,593 $1,516,016
1997........................... 1,433,268 1,433,268
1998........................... 1,308,247 1,308,247
1999........................... 666,368 666,368
2000........................... 400,000 400,000
---------- ----------
$4,524,476 $5,323,899
---------- ----------
---------- ----------

These notes are cross-collateralized with assets and guarantees used as
collateral for lines of credit (see Note 11).

F-31

<PAGE>

NOTE 13 -- ADVANCES FROM THE FEDERAL HOME LOAN BANK:

Advances from the FHLB -- NY are as follows:

<TABLE>
<CAPTION>
December 31,
-------------------------
Maturity Interest Rate June 30, 1995 1994
-------- ------------- ----------- ------------ -----------
(Unaudited)
<S> <C> <C> <C> <C>
September 28, 1995.................... 4.68 $ $-- $2,500,000
September 30, 1995.................... 4.70 -- 3,500,000
November 25, 1995..................... 6.79 -- 1,500,000
April 23, 1996........................ 7.21 1,000,000 1,000,000
August 15, 1996....................... 6.65 5,000,000 5,000,000 5,000,000
August 28, 1996....................... 5.67 6,000,000 -- --
Market value adjustment............... -- 7,135 67,834
----------- ---------- -----------
$11,000,000 $6,007,135 $13,567,834
----------- ---------- -----------
----------- ---------- -----------

Weighted average stated interest rate....... 6.12% 6.74% 5.84%
----------- ---------- -----------
----------- ---------- -----------

</TABLE>

The Bank receives advances from the FHLB -- NY under an Advances,
Collateral Pledge and Security Agreement (the "Agreement"). Under the
Agreement, the Bank is required to maintain a minimum amount of qualifying
collateral with a market value of at least 110% of the outstanding advances.
In addition, the Bank maintains standby letters of credit with the FHLB -- NY
amounting to approximately $73,822,000 at June 30, 1996 ($17,492,000 at
December 31, 1995). At June 30, 1996 the specific collateral (in the form of
first mortgages notes, securities and cash deposits) amounting to
approximately $113,547,000 were pledged to the FHLB -- NY as part of the
Agreement and to secure standby letters of credit (at December 31, 1995 --
$62,263,000). At June 30, 1996 and December 31, 1995, the market value of
collateral indicated above was sufficient to comply with the provisions of
the Agreement. The market value adjustment to the face value of the Advance
from the FHLB -- NY represents an allocation of a portion of the excess price
paid to acquire another financial institution in prior years.

NOTE 14 -- OTHER SECURED BORROWINGS:

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

F-32
<PAGE>

The Company has recognized the transaction as a transfer of loans with
recourse not qualifying as a sale. Accordingly, the proceeds from the
transaction totalling approximately $55,984,000 have been reported as a
secured borrowing in the accompanying consolidated financial statements at
December 31, 1995. The outstanding principal of the related loans totalling
approximately $52,829,000 and $55,156,000 have been included as assets at
June 30, 1996 and December 31, 1995, respectively.

NOTE 15 -- SUBORDINATED NOTES:

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

At June 30, 1996 investments deposited in the trust in compliance with
this requirement consist of FHLMC Participation Certificates with a carrying
value of approximately $900,000 and approximate market value of $911,000, and
$1,609,000 in special deposit accounts. Investments deposited in the Trust as
of December 31, 1995 in compliance with this requirement consist of FHLMC
Participation Certificates with a carrying value of approximately $1,232,000
and approximate market value of $1,294,000, and $1,232,000 in special deposit
accounts.

NOTE 16 -- INCOME TAXES:

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

F-33

<PAGE>

of 1986 (the "Code"). Section 936 of the Code allowed the Bank to claim a
credit, (the "Section 936 Credit"), subject to qualification of the source
and nature of the income and certain other limitations, for the United States
income tax on income derived from sources outside of the United States that
was attributable to the active conduct of a trade or business in Puerto Rico
("Qualifying Income").

The credit granted under Section 936 was a full credit against the
United States income tax imposed on Qualifying Income. The Section 936
credit, as described, has been claimed by the Bank for its taxable years
beginning before November 30, 1994 therefore resulting in no United States
income taxation on its Qualifying Income.

For Puerto Rico income tax purposes prior to the conversion, the Bank
was taxed as a foreign corporation engaged in a trade or business in Puerto
Rico. As such, the Bank was subject to Puerto Rico income tax on all of its
income from sources within Puerto Rico and income from sources outside Puerto
Rico that was effectively connected with its Puerto Rico business.

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

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

F-34
<PAGE>

Deferred tax (assets) liabilities are as follows:

<TABLE>
<CAPTION>
December 31,
----------------------
June 30, 1996 1995 1994
-------------- ---------- ---------
(Unaudited)
<S> <C> <C> <C>
DEFERRED TAX LIABILITIES:
Deferred net loan origination costs................... $127,428 $235,910 $ --
Collateralized mortgage obligation residuals.......... 921,937 1,310,350 958,501
Mortgage servicing rights............................. 836,397 462,783 --
Unrealized gain on securities available for sale...... -- 608,815 630,509
Excess servicing...................................... 315,578 444,577 --
---------- --------- ---------
2,201,340 3,062,435 1,589,010
---------- --------- ---------
---------- --------- ---------

DEFERRED TAX ASSETS:
Unrealized loss on securities available for sale...... (357,545) -- --
Deferred net loan fees................................ -- -- (65,836)
Unrealized loss on securities held for trading........ (324,816) (87,711) (819,601)
Unrealized loss on loans held for sale................ -- -- (333,775)
Other foreclosed property reserve..................... (29,435) (12,479) --
Deferred gains on sale of loans and investments
securities for book purposes......................... (505,999) (322,663) --
---------- --------- ---------
(1,217,795) (422,853) (1,219,212)
---------- --------- ---------
Net deferred tax liability................................ $ 983,545 $2,639,582 $369,798
---------- --------- ---------
---------- --------- ---------
</TABLE>

F-35

<PAGE>

The provision for income taxes of the Company varies from amounts
computed by applying the applicable Puerto Rico statutory tax rate of 42% to
income before taxes as follows:

<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------------- ----------------
% of pretax % of pretax % of pretax
Amount income Amount income Amount income
-------- ------------ ------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Computed income tax at statutory rate ...... $7,176 42% $2,515 42% $11,625 42%
Effect on provision of:
Tax-exempt interest..................... (2,910) (17) (3,548) (59) (3,705) (14)
Other non-taxable income................ (2,099) (12)
Non-deductible expenses................. 1,458 9 3,584 60 1,430 5
Other................................... (69) (1) (33) (1) 137 1
------ ----- ------- ------ ------- ---
$3,556 21% $2,518 42% $9,487 34%
------ ----- ------- ------ ------- ---
------ ----- ------- ------ ------- ---
</TABLE>

The Puerto Rico Treasury Department is currently examining R&G
Mortgage's income tax returns for the years 1989 to 1992. As of December 31,
1995, R&G Mortgage has not received notification of any deficiencies for the
years under investigation. Based on presently available information,
management believes that the eventual outcome of this matter should not have
a material adverse effect on the financial condition or results of operations
of the Company.

In December 1995, R&G Mortgage was notified of Volume of Business tax
deficiencies of approximately $230,000, including surcharges and interest,
for the fiscal years 1991 to 1996. The notified deficiencies are related to
the allocation method of servicing fees income and other interest income to
the declared gross income used by R&G Mortgage. R&G Mortgage has not accepted
these deficiencies and is contending this matter vigorously.

In October 1994, a Puerto Rico Tax Reform Act (the Reform) was approved
to amend existing tax laws into the "1994 Puerto Rico Internal Revenue Code".
The Reform, among other changes, incorporates tax rate reductions for
corporations effective for taxable years beginning after June 30, 1995. The
maximum tax rate (normal and surtax) is reduced from 42% to 39%. In addition,
the Reform incorporates new accelerated methods of depreciation, repeals the
reserve method for bad debts deduction, and changes the rules for income tax
withholdings at source for certain payments. Managements believes, based on
presently available information, that the Reform will not have an adverse
effect on the Company's financial condition or results of operations.

F-36
<PAGE>

NOTE 17 -- OTHER OPERATING EXPENSES:

Other operating expenses consist of the following:

NOTE 18 -- RELATED PARTY TRANSACTIONS:

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

The Company leases its office facilities from an affiliate on a
month-to-month basis. The annual rental under this agreement is approximately
$968,000. R&G Mortgage guarantees the mortgage loans for the facilities being
used which principal balance amounts to approximately $4,797,937 as of
December 31, 1995.

HRU Data Center provided data processing services to R&G Mortgage
pursuant to a five year contract which expired in December 1994. HRU Data
Center was a service bureau controlled by R&G Mortgage and another mortgage
banking company. Each mortgage banking company had a 25% equity interest in
HRU Data Center and the remaining 50% is controlled by the individual who
operates the service bureau. R&G Mortgage discontinued the use of HRU Data
center effective January 31, 1995 and is currently using the Bank's data
center facility.

Loans to directors, officers and employees of the Company were made in
the ordinary course of business. Interest rates on such loans were
substantially the same as those prevailing at the time for comparable
transactions with unrelated parties and did not involve more than a normal
risk of collectibility. In July 1995 R&G Mortgage granted a $900,000
construction loan to a real estate development company owned by a director of
the Company. In November 1995 R&G Mortgage granted a mortgage loan to an
affiliate amounting to $1,439,400 bearing interest at 1% over prime value.
The loan is guaranteed by the Company's president and sole stockholder. At
June 30, 1996 the aggregate amount

F-37

<PAGE>

of loans outstanding to officers, directors, and principal stockholder's of
the Company and its subsidiaries was approximately $1,367,000. The aggregate
amount of loans outstanding to officers, directors and principal stockholders
the Company and its subsidiaries, including any associates of such persons,
was approximately $3,124,000 at December 31, 1995.

The activity of such loans was as follows:

Balance as of December 31, 1993 ................ $1,352,539
Loan originations .............................. 155,013
Loan repayments ................................ (631,107)
-----------
Balance as of December 31, 1994 ................ 876,445
Loan originations .............................. 2,464,411
Loan repayments ................................ (216,496)
-----------
Balance as of December 31, 1995 ................ 3,124,360
Loan originations (Unaudited) .................. 475,318
Loan repayments (Unaudited) .................... (2,232,255)
-----------
Balance as of June 30, 1996 (Unaudited) ........ $ 1,367,423
-----------
-----------

NOTE 19 -- REGULATORY REQUIREMENTS:

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

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

The Bank is incorporated under the Puerto Rico Banking Act of 1993, as
amended and is subject to extensive regulation and examination by the
Commissioner, the FDIC and certain requirements established by the Federal
Reserve Board.

The mortgage banking business conducted by R&G Mortgage is subject to
the rules and regulations of FHA, VA, FNMA, FHLMC, GNMA and the Commissioner
with respect to originating, processing, selling and servicing mortgage loans
and the issuance and sale of

F-38

<PAGE>

mortgage-backed securities. R&G Mortgage's affairs are also subject to
supervision and examination by FNMA, FHA, FHLMC, GNMA, HUD and VA at all
times to assure compliance with the applicable regulations, policies and
procedures. Mortgage origination activities are subject to, among others, the
Equal Credit Opportunity Act, Federal Truth-in-Lending Act and the Real
Estate Settlement Procedures Act and the regulations promulgated thereunder.

The FDIC capital standards for state chartered commercial banks require
that banks must maintain a minimum leverage ratio of Tier 1 (or core) capital
to total assets of at least 3% for the most highly rated banks (i.e., those
with a composite CAMEL rating of 1 under the rating system established by the
Federal Financial Institutions Examination Council). The minimum leverage
capital requirement for all other state commercial banks shall be 3% plus an
additional cushion of at least 100 to 200 basis points and, therefore, shall
consist of a ratio of Tier 1 capital to total assets of not less than 4%. In
addition to the minimum leverage capital standards, state non-member banks
generally are required to maintain a minimum ratio of qualifying total
capital to risk-weighted assets of 8%, with at least one-half of that total
capital amount consisting of Tier 1 capital. The total amount of
risk-weighted assets is computed by applying risk weighing factors to the
Bank's assets, which vary from 0% to 100% depending on the nature of the
assets.

Pursuant to provisions in the Federal Deposit Insurance Company
Improvement Act of 1991 (FDICIA), each federal banking agency was required to
revise its risk-based capital standards to take adequate amount of interest
rate risk, concentration of credit risk and the risk of non-traditional
activities. No final rule incorporating these risks has been promulgated by
the FDIC. An FDIC insured state chartered commercial bank is well capitalized
if: (i) has a total leverage ratio of 5.0% or greater; (ii) has a total
risk-based capital ratio of 10.0% or greater; and (iii) has a Tier 1
risk-based capital ratio of 6.0% or greater. Tier 1 risk-based capital ratio
is defined as the ratio of Tier 1 capital to risk-weighted assets.

At June 30, 1996 the Bank's regulatory capital position was as follows:
<TABLE>
<CAPTION>
(Unaudited)
% to Total % to Total Tier 1 % to Total
Core Adjusted Risk Based Adjusted Risk Based Weighted
Capital Assets Capital Assets Capital Assets
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Actual ................. $45,107 6.09% $49,490 11.02% $45,107 10.04%
Regulatory requirement . 44,405 5.00 44,918 10.00 26,951 6.00
-------- -------- --------- -------- -------- --------
Excess ................. $ 702 1.09% $ 4,572 1.02% 18,156 4.04
-------- -------- --------- -------- -------- --------
-------- -------- --------- -------- -------- --------
</TABLE>

F-39

<PAGE>

At December 31, 1995, the Bank's regulatory capital position was as follows:

<TABLE>
<CAPTION>
(Unaudited)
% to Total % to Total Tier 1 % to Total
Core Adjusted Risk Based Adjusted Risk Based Weighted
Capital Assets Capital Assets Capital Assets
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>

Actual .................. $39,835 6.25 $44,113 11.66 $39,835 10.53
Regulatory requirement .. 31,848 5.00 37,825 10.00 22,694 6.00
-------- -------- --------- -------- -------- --------
Excess .................. $7,987 1.25 $6,288 1.66 $17,141 4.53
-------- -------- --------- -------- -------- --------
-------- -------- --------- -------- -------- --------
</TABLE>

The United States Congress Banking Committee has actively considered
legislation to recapitalize the SAIF administered by the FDIC. The proposed
legislation would require a one-time charge to SAIF-insured institutions such
as the Bank. In light of the general uncertainty of the legislative process,
management cannot predict whether legislation reducing SAIF premiums and/or
imposing a special one-time assessment will be adopted, or, if adopted, the
amount of the assessment, if any, that would be imposed on the Bank. If
legislation were to be enacted in the future which would assess a one-time
special assessment of 80 to 85 basis points on SAIF-insured institutions as
previously proposed, management believes, based upon its total SAIF deposits,
the Bank's share of any proposed assessment, if approved, will not have a
material adverse effect on the Company's financial condition or regulatory
capital position, although it may adversely affect results of operations in
the year of the assessment. Given the proposed legislation is intended to
recapitalize the SAIF, if adopted, any assessment is also expected to result
in lower insurance premium rates subsequent to the year of the one-time
assessment, if any.

NOTE 20 -- STOCK OPTION PLAN:

In June 1996 the Board of Directors of the Company adopted a Stock
Option Plan, which is designed to attract and retain qualified personnel in
key positions, provide officers and key employees with a proprietary interest
in the Company as an incentive to contribute to the success of the Company,
and reward key employees for outstanding performance and the attainment of
targeted goals. The Stock Option Plan was approved by the Company's sole
stockholder in June 1996. An amount of Company common stock equal to 10% of
the aggregate number of Class B Shares sold in the Company's initial public
offering will be authorized under the Stock Option Plan, which may be filed
by authorized but unissued shares, treasury shares or shares purchased by the
Company on the open market or from private sources. The Stock Option Plan
provides for the grant of stock options at an exercise price equal to the
fair market value of the Class B Shares. Stock Options are available for
grant to key employees of the Company and any subsidiaries. No options are
expected to be issued until the commencement of the public offering.

F-40

<PAGE>

NOTE 21 -- PROFIT SHARING PLAN:

The Company established in 1993 a profit sharing plan which covers
substantially all regular employees. Annual contributions to this plan are
based on matching percentages based on the employee years of service and on
operational income, as defined by the plan, and are deposited in a trust.
Contributions to this plan during the six month period ended June 30, 1996
and the years ended December 31, 1995, 1994 and 1993 amounted to
approximately $54,000, $120,000, $108,000 and $161,000, respectively.

NOTE 22 -- COMMITMENTS AND CONTINGENCIES:

COMMITMENTS TO DEVELOPERS PROVIDING END LOANS

The Company has outstanding commitments for various projects in the
process of completion. Total commitments amounted to approximately
$362,454,890 and $337,641,500 at June 30, 1996 and December 31, 1995,
respectively. All commitments are subject to prevailing market prices at time
of closing with no market risk exposure against the Company or with firm
back-to-back commitments extended in favor of the mortgagee.

LOANS IN PROCESS

Loans in process pending final approval and/or closing amounting to
approximately $80,564,000 and $58,806,000 at June 30, 1996 and December 31,
1995, respectively.

COMMITMENTS TO BUY AND SELL GNMA CERTIFICATES

As of June 30, 1996 and December 31, 1995, the Company had open
commitments to issue GNMA certificates in the amount of $53,903,086 and
$41,101,832, respectively.

COMMITMENTS TO SELL MORTGAGE LOANS

As of June 30, 1996 the Company had commitments to sell mortgage loans
to third party investors amounting to $15.5 million ($30.0 million at
December 31, 1995).

LEASE COMMITMENTS

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

F-41

<PAGE>

Minimum annual rental commitments under noncancellable operating leases
for certain office space and equipment including a lease from an affiliate,
were as follows:

At At
June 30, December 31,
Year 1996 1995
- --------------------------------------- ------------- ---------------
(Unaudited)
1996 ................................. $ 924,044 $1,839,005
1997 ................................. 1,937,853 1,900,403
1998 ................................. 1,914,682 1,877,232
1999 ................................. 1,832,887 1,795,438
2000 ................................. 1,745,133 1,707,683
Later years .......................... 3,926,733 3,913,331
------------ ----------------
$12,281,332 $13,033,092
------------ ----------------
------------ ----------------

Rent expense for the six months ended June 30, 1996 and 1995 was
$1,057,000 and $887,000, respectively. Rent expenses amounted to
approximately $1,914,000 in 1995, $1,810,000 in 1994 and $1,460,000 in 1993.

LITIGATION

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

OTHERS

At December 31, 1995 the Company is liable under limited recourse
provisions resulting from the sale of loans to several investors principally
FHLMC. The principal balance of these loans, which are serviced by the
Company, amounts to approximately $217,226,000 at June 30, 1996 and
$238,242,000 at December 31, 1995. Liability, if any, under the recourse
provisions at June 30, 1996 and December 31, 1995 is estimated by management
to be insignificant.

NOTE 23-- SUPPLEMENTAL DISCLOSURE ON THE STATEMENT OF CASH FLOWS:

During 1995, 1994 and 1993, the Company paid interest amounting to
approximately $34,403,000, $24,179,000 and $15,055,000, respectively and
income taxes $1,820,000, $5,696,000 and $5,799,000, respectively.

F-42

<PAGE>

During 1995 and 1994 the Company retained for investment approximately
$17,631,000 and $51,492,000, respectively loans securitized from its own
mortgage loan portfolio.

NOTE 24 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
CONCENTRATIONS OF CREDIT RISK:

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

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

Contractual commitments to extend credit are legally binding agreements
to lend money to customers at predetermined interest rates for a specified
period of time. Since many of the loan commitments may expire without being
drawn upon, the total commitment amount does not necessarily represent future
cash requirements. To extend credit the Company evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. A geographic
concentration exists within the Company's mortgage loans portfolio since most
of the Company's business activity is with customers located in Puerto Rico.

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

F-43

<PAGE>

The total amounts of financial instruments with off-balance sheet risk
at December 31, 1995 follows:

<TABLE>
<CAPTION>
<S> <C>
Financial instruments whose contract amounts represent potential credit risk:
Commitments to extend credit excluding the undisbursed portion of loans in process:
Commitments to originate loans ......................................................... $12,037,063
------------
------------

Unused lines of credit ................................................................. $5,991,183
------------
------------

Financial instruments whose notional or contractual amounts exceed the amount of potential
credit risk:
Interest rate swap contracts .......................................................... $35,000,000
------------
------------

Interest rate caps .................................................................... $--
------------
------------
</TABLE>

A detail of interest rate swaps at December 31, 1995 follows:

Notional Pay Receive Rate
Amount Maturity Fixed Rate Floating
----------- ------------------ ----------- -----------------

$ 5,000,000 August 27, 1996 4.50% 3 months Libor
5,000,000 September 30, 1996 4.49% 3 months Libor
5,000,000 October 19, 1996 4.42% 3 months Libor
10,000,000 September 2, 1997 6.60% 3 months Libor
10,000,000 October 24, 2000 5.20% 3 months Libid

The following table summarizes the changes in notional amounts of swaps
outstanding during 1995:

Beginning balance ......................... $25,000,000
New Swaps .................................. 10,000,000
Maturities ................................. --
-------------
Ending balance ............................. $35,000,000
-------------
-------------

As of December 31, 1995, interest rate swap maturities are as follows:

1996 ................................... $15,000,000
1997 ................................... 10,000,000
2000 ................................... 10,000,000
-------------
$35,000,000
-------------
-------------

F-44

<PAGE>

Net interest settlements on SWAP requirements are recorded as an
adjustment to interest expense on deposits. Net interest payments and
receipts totalled approximately $10,300 and $115,000, respectively during the
six month periods ended June 30, 1996 and 1995, respectively. Net interest
receipts amounted to approximately $187,000 during 1995; net payments
amounted to approximately $65,000 and $387,000 during 1994 and 1993,
respectively.

An interest cap is a guarantee given by one party to another party, in
exchange for a premium, to ensure that if interest rates rise above an agreed
upon protected rate (in the Bank's case, the LIBOR rate) the issuer of the
cap will pay to the purchaser the difference between the market rate and the
protected rate. The Bank had interest rate cap contracts outstanding with
notional principal amounts of $3,440,000 which expired during 1995. There are
no interest rates cap contracts outstanding at December 31, 1995 or June 30,
1996.

NOTE 25 -- SUPPLEMENTAL INCOME STATEMENT INFORMATION:

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

Set forth below are the direct loan origination costs that were
capitalized as part of the carrying cost of mortgage loans inventory or
offset against mortgage loan sales and fees and interest income.

F-45

<PAGE>

NOTE 26 -- FAIR VALUE OF FINANCIAL INSTRUMENTS:

The estimated fair value of the Company's financial instruments as of
December 31, are as follows:

<TABLE>
<CAPTION>
1995 1994
-------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- -------------- ------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks ........................................ $32,559 $32,559 $21,158 $21,158
Money market investments ....................................... 71,636 71,636 24,464 24,464
Mortgage loans held for sale ................................... 21,318 21,631 22,020 22,020
Mortgage-backed securities held for trading .................... 113,809 113,809 124,522 124,522
Investment securities available for sale ....................... 61,008 61,008 13,300 13,300
Investment in Federal Home Loan Bank stock ..................... 3,280 3,280 1,878 1,878
Investment securities held to maturity ......................... 43,777 42,781 86,304 80,953
Loans, net ..................................................... 473,841 492,119 301,614 294,303
Accounts receivable ............................................ 10,479 10,479 12,330 12,330
FINANCIAL LIABILITIES
Deposits:
Non interest bearing demand ................................ $52,998 $52,998 $35,556 $35,556
Savings and NOW accounts .................................... 147,111 147,111 107,734 107,734
Certificates of deposit ..................................... 316,802 321,609 235,693 233,686
Securities sold under agreements to repurchase ................. 98,483 98,483 108,922 108,922
Notes payable .................................................. 81,130 81,130 45,815 45,815
Advances from FHLB ............................................. 6,007 6,051 13,568 13,681
Long-term debt ................................................. 5,324 5,324 4,524 4,524
Other secured borrowings ....................................... 55,984 55,984
Accounts payable and accrued liabilities ....................... 14,500 14,500 7,098 7,098
Subordinated notes ............................................. 3,250 3,741 3,250 3,331
UNRECOGNIZED FINANCIAL INSTRUMENTS --
Interest rate swap agreements in a net receivable position*. $14 $1,215 $10 $471
---------- ------------- ------------- --------------
---------- ------------- ------------- --------------
</TABLE>
- ------------------------
* The amount shown under "carrying amount" represents net accrual arising
from those unrecognized financial instruments.

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

SHORT-TERM FINANCIAL INSTRUMENTS

Short-term financial instruments, which include cash and due from banks,
money market investments, accounts receivables, securities sold under
agreements to repurchase, notes payables and accounts payable and accrued
interest, have been valued at their carrying amounts reflected in the
Consolidated Statement of Financial Condition as these are

F-46

<PAGE>

reasonable estimates of fair value given the relatively short period of time
between origination of the instruments and their expected realization.

INVESTMENT SECURITIES

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

LOANS

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

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

Mortgage loans held for sale, except for loans from the Bank totalling
$9,329,694 in 1995 and $15,142,305 in 1994 have been valued based on market
quotations or commitments selling prices in the secondary market. Loans held
for sale from the Bank have been valued using the same methodology described
in the first paragraph above.

DEPOSITS

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

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

LONG-TERM DEBT AND OTHER SECURED BORROWINGS

Long-term debt and other secured borrowings have been valued at their
carrying amounts reflected in the Consolidated Statement of Financial
Condition as these are

F-47

<PAGE>

reasonable estimates of fair value; most of the long-term debt amounts are at
floating market interest rates.

ADVANCES FROM FHLB AND SUBORDINATED NOTES

The fair value of the advances from FHLB and subordinated notes was
determined using discounted cash flow analysis over the remaining term of the
obligations using market rates for similar instruments.

INTEREST RATE SWAP AGREEMENTS

The fair value of interest rate swap agreements was determined taking
into account the current interest rates at December 31, 1995. This value
represents the estimated amount the Bank would pay to terminate the contract
or agreement taking into account current interest rates and, when
appropriate, the current credit worthiness of the counterparts.

LIMITATIONS

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

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

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

F-48

<PAGE>

NOTE 27 -- R&G FINANCIAL CORPORATION (HOLDING COMPANY ONLY) FINANCIAL
INFORMATION:

The following condensed financial information presents the financial
position of R&G Financial (the Holding Company) only as of June 30, 1996
(unaudited):

STATEMENT OF CONDITION

ASSETS
Investment in R-G Premier Bank, at equity .................... $27,667,359
Investment in R&G Mortgage, at equity ........................ 42,801,229
-----------
Total assets ............................................... $70,468,588
-----------
-----------
STOCKHOLDER'S EQUITY ........................................... $70,468,588
-----------
-----------

The Holding Company had no operations during the six month period ended
June 30, 1996.

The payment of dividends by the Bank to the Holding Company may be
affected by certain regulatory requirements and policies, such as the
maintenance of certain minimum capital levels.

F-49

<PAGE>

NOTE 28 -- INDUSTRY SEGMENTS:

The following summarized financial information presents the results of
the Company's operations for the six month periods ended June 30, 1996 and
1995 and the three year period ended December 31, 1995 for its traditional
banking and mortgage banking activities:

<TABLE>
<CAPTION>
Six month period ended June 30,
------------------------------------------------------------------------------
1996 1995
-------------------------------------- -------------------------------------
Bank Mortgage Total Bank Mortgage Total
---------- ---------- ----------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net interest income after provision
of loan losses ................................ $11,525,214 $1,564,083 $13,089,297 $8,080,897 $1,082,907 $9,163,804
Other income:
Net gain (loss) on sale of loans .............. 95,096 3,897,158 3,992,254 177,484 2,032,477 2,209,961
Unrealized gain (loss) on trading securities... (13,379) (607,962) (621,341) 599,883 1,694,828 2,294,711
Change in provision for cost in excess of
market value of loans held for sale ......... -- -- -- 70,000 -- 70,000
Net gain on trading account ................... 558,440 28,332 586,772 -- -- --
Net gain on sales of investments .............. 329,225 -- 329,225 -- -- --
Loan administration and servicing fees ........ -- 6,496,442 6,496,442 -- 5,234,908 5,234,908
Service charges, fees and other ............... 1,677,666 141,340 1,819,006 995,643 255,827 1,251,470
---------- ---------- ----------- ---------- ---------- ----------
14,172,262 11,519,393 25,691,655 9,923,907 10,300,947 20,224,854
---------- ---------- ----------- ---------- ---------- ----------
Operating expenses:
Salaries and employee benefits ................ 3,082,803 2,871,949 5,954,752 1,633,347 1,730,077 3,363,424
Office occupancy and equipment ................ 1,942,548 952,567 2,895,115 1,132,391 877,988 2,010,379
Other administrative and general .............. 3,755,357 2,760,784 6,516,141 2,604,662 3,773,494 6,378,156
---------- ---------- ----------- ---------- ---------- ----------
8,780,708 6,585,300 15,366,008 5,370,400 6,381,559 11,751,959
---------- ---------- ----------- ---------- ---------- ----------
Income before income taxes and
minority interest ............................. $5,391,554 $4,934,093 $10,325,647 $4,553,507 $3,919,388 $8,472,895
---------- ---------- ----------- ---------- ---------- ----------
---------- ---------- ----------- ---------- ---------- ----------
</TABLE>

F-50

<PAGE>

Year ended December 31,
-------------------------------------------------------------------------------------------
1995 1994
------------------------------------------- ----------------------------------------------
Bank Mortgage Total Bank Mortgage Total
-------------- ------------ ------------- ------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Net interest income after
provision of loan losses..... $17,943,694 $2,379,287 $20,322,981 $15,089,132 $4,048,355 $19,137,487
Other income:
Net gain (loss) on sale
of loans................... 631,824 5,630,636 6,262,460 201,797 (1,551,137) (1,349,340)
Unrealized gain (loss)
on trading securities...... 617,788 1,503,823 2,121,611 (214,166) (4,250,552) (4,464,718)
Change in provision for
cost in excess of market
value of loans held
for sale................... 855,834 -- 855,834 (855,834) -- (855,834)
Net gain on sales of
investments................ -- -- -- -- -- --
Loan administration and
servicing fees............. -- 11,029,995 11,029,995 -- 11,046,019 11,046,019
Gain on sale of servicing
rights..................... -- -- -- -- 2,914,850 2,914,850
Service charges, fees and
other...................... 2,368,128 803,821 3,171,949 1,736,656 785,738 2,522,394
----------- ---------- ----------- ----------- ----------- -----------
22,417,268 21,347,562 43,764,830 15,957,585 12,993,273 28,950,858
----------- ---------- ----------- ----------- ----------- -----------

Operating expenses:
Salaries and employee
benefits................... 4,330,248 3,953,561 8,283,809 3,193,435 2,058,000 5,251,435
Office occupancy and
equipment.................. 2,860,176 1,851,136 4,711,312 2,315,668 2,172,667 4,488,335
Other administrative and
general.................... 6,406,237 7,324,487 13,730,724 4,516,158 8,752,717 13,268,875
----------- ---------- ----------- ----------- ----------- -----------
13,596,661 13,129,184 26,725,845 10,025,261 12,983,384 23,008,645
----------- ---------- ----------- ----------- ----------- -----------

Income before income
taxes, minority interest
and cumulative effect of
change in accounting
principle.................. $8,820,607 $8,218,378 $17,038,985 $5,932,324 $9,889 $5,942,213
----------- ---------- ----------- ----------- ----------- -----------
----------- ---------- ----------- ----------- ----------- -----------

Year ended December 31, 1993
---------------------------------------------
Bank Mortgage Total
-------------- -------------- -------------
Net interest income after provision of loan losses................................ $10,635,898 $3,617,097 $14,252,995
Other income:
Net gain (loss) on sale of loans................................................ 3,976,982 25,049,160 29,026,142
Unrealized gain (loss) on trading securities.................................... -- -- --
Change in provision for cost in excess of market value of loans held for sale... -- -- --
Net gain on sales of investments................................................ 394,342 -- 394,342
Loan administration and servicing fees.......................................... -- 9,326,518 9,326,518
Service charges, fees and other................................................. 847,360 331,201 1,178,561
------------ ----------- -----------
15,854,582 38,323,976 54,178,558
------------ ----------- -----------

Operating expenses:
Salaries and employee benefits.................................................. 1,904,885 6,685,296 8,590,181
Office occupancy and equipment.................................................. 1,448,416 1,946,639 3,395,055
Other administrative and general................................................ 3,417,926 11,142,966 14,560,892
------------ ----------- -----------
6,771,227 19,774,901 26,546,128
------------ ----------- -----------

Income before income taxes, minority interest and cumulative effect of change in
accounting principle........................................................... $9,083,355 $18,549,075 $27,632,430
------------ ----------- -----------
------------ ----------- -----------
</TABLE>

F-51

<PAGE>

NOTE 29-- SUBSEQUENT EVENTS (UNAUDITED)

On June 29, 1996, the Company settled with the Puerto Rico Treasury
Department (PRTD) the income tax examination discussed in Note 16. While the
Company believes that it had valid defenses for its positions, management
believes that it was in the Company's best interest to settle the case rather
than entering into an expensive, protracted negotiation with the PRTD. The
settlement reached was for $1.6 million. The effect of this settlement was to
record additional income tax expense for the six months ended June 30, 1996
of approximately $400,000. The remainder of the settlement was reserved for
during prior periods.

F-52

<PAGE>

INDEX TO R-G PREMIER BANK FINANCIAL STATEMENTS

Page
----
Report of Independent Accountants . . . . . . . . . . . . . . . . . F-54

Financial Statements:

Statement of Financial Condition as of June 30, 1996 (Unaudited),
December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . F-55

Statements of Income for the six months ended June 30, 1996 and
1995 (Unaudited) and for the three years ended December 31,
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-56

Statements of Cash Flows for the six months ended June 30, 1996
and 1995 (Unaudited) and for the three years ended December 31,
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-57

Statements of Changes in Stockholder's Equity for the six months
ended June 30, 1996 (Unaudited) and for the three years ended
December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . F-59

Notes to Financial Statements . . . . . . . . . . . . . . . . . . F-60

F-53

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of
R-G Premier Bank of Puerto Rico

In our opinion, the accompanying statement of financial condition and the
related statements of income, of cash flows and of changes in stockholders'
equity present fairly, in all material respects, the financial position of R-G
Premier Bank of Puerto Rico at December 31, 1995 and 1994, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Bank's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PRICE WATERHOUSE

February 2, 1996,
except for Note 1 to the
Financial Statements which
is as of July 19, 1996

F-54

<PAGE>
R-G PREMIER BANK OF PUERTO RICO
STATEMENT OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31,
------------- ---------------------------
(Unaudited) 1995 1994
------------ ------------
<S> <C> <C> <C>
ASSETS
------

Cash and due from banks $ 17,398,725 $ 18,097,476 $ 11,810,462
Money market investments:
Securities purchased under agreements to resell 13,429,913 21,694,675 10,232,890
Time deposits with other banks 21,988,883 44,930,015 14,131,371
Federal funds purchased - 5,011,048 -
Investment securities held for trading, at fair value 2,152,341 1,846,875 1,918,767
Investment securities available for sale, at fair value 63,501,357 61,008,432 13,300,325
Investment securities held to maturity, at amortized cost 48,157,955 43,776,935 86,304,211
Investments in Federal Home Loan Bank stock 4,075,210 3,279,610 1,877,910
Loans held for sale 8,291,600 9,329,694 14,286,471
Loans receivable, net 545,352,692 417,245,078 301,614,199
Accrued interest receivable 5,266,000 4,051,702 2,870,559
Premises and equipment - net 4,901,273 4,978,948 3,418,843
Other assets 7,631,558 5,595,295 3,216,185
------------ ------------ ------------
$742,147,507 $640,845,783 $464,982,193
------------ ------------ ------------
------------ ------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

LIABILITIES:
Deposits $563,147,365 $518,186,563 $380,148,414
Securities sold under agreements to repurchase,
including accrued interest payable 10,240,205 10,572,807 11,639,326
Notes payable 101,000,000 51,000,000 23,600,000
Advances from Federal Home Loan Bank 11,000,000 6,007,135 13,567,834
Accounts payable and accrued expenses 3,499,461 2,318,785 826,587
Deferred income taxes 554,219 1,803,036 1,189,399
Other liabilities 3,530,224 3,995,320 2,882,382
------------ ------------ ------------

692,971,474 593,883,646 433,853,942
------------ ------------ ------------

SUBORDINATED NOTES 3,250,000 3,250,000 3,250,000
------------ ------------ ------------

STOCKHOLDERS' EQUITY:
Preferred stock - $1.00 par value ($25 liquidation
value), 9.50% non-cumulative; 2,000,000 shares
authorized, 400,000 shares issued and outstanding 10,000,000 10,000,000 -
Common stock - $1.00 par value; 10,000,000 shares
authorized, 2,089,653 shares issued and outstanding
(1994 - 2,088,903) 2,089,653 2,089,653 2,088,903
Additional paid-in capital 9,322,149 9,322,149 9,312,578
Capital reserve 1,021,166 666,767 -
Retained earnings 24,052,302 20,681,319 15,490,590
Unrealized gain (loss) on securities available for
sale, net (559,237) 952,249 986,180
------------ ------------ ------------

45,926,033 43,712,137 27,878,251
------------ ------------ ------------

$742,147,507 $640,845,783 $464,982,193
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

The accompanying notes are an integral part of this statement.

F-55

<PAGE>

R-G PREMIER BANK OF PUERTO RICO

STATEMENTS OF INCOME

SIX MONTH PERIOD ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ---------------------------------------
-------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans $22,541,212 $15,641,404 $36,275,188 $25,665,363 $19,001,437
Mortgage-backed securities 2,968,545 3,169,224 6,033,069 4,655,376 2,107,130
Investment securities, deposits
at interest with banks and other 1,804,874 731,362 1,805,345 941,677 695,848
----------- ----------- ----------- ----------- -----------
27,314,631 19,541,990 44,113,602 31,262,416 21,804,415
----------- ----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits 13,034,251 9,884,401 22,062,866 14,396,226 9,977,327
Notes payable 2,203,764 819,619 1,978,195 265,163 -
Securities sold under agreements to repurchase 83,529 311,021 418,260 537,647 80,760
Interest rate exchange agreements 10,329 (115,309) (187,143) 64,717 387,367
Subordinated capital notes 165,996 169,557 338,746 330,846 354,787
Advances from Federal Home Loan Bank 181,664 357,360 647,984 578,685 368,276
Other - 84,444 - - -
----------- ----------- ----------- ----------- -----------
15,679,533 11,511,093 25,258,908 16,173,284 11,168,517
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME 11,635,098 8,030,897 18,854,694 15,089,132 10,635,898
(PROVISION) CREDIT FOR LOAN LOSSES (356,525) 50,000 (950,000) - -
----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,278,573 8,080,897 17,904,694 15,089,132 10,635,898
----------- ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Service charges, fees and other 2,089,077 1,402,323 3,998,891 2,740,748 2,396,292
Gain on sale of securities and mortgage loans 424,321 647,576 1,567,166 201,797 4,368,277
Unrealized gain (loss) on trading securities (13,379) 129,791 143,788 (214,166) -
Net gain on trading account 558,440 - - - -
(Provision) credit for cost in excess of market
value of loans available for sale - 70,000 855,834 (855,834) -
----------- ----------- ----------- ----------- -----------
3,058,459 2,249,690 6,565,679 1,872,545 6,764,569
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES:
Salaries and employees' benefits 3,082,803 1,633,347 4,330,248 3,193,435 1,904,885
Occupancy and equipment 1,942,548 1,132,391 2,860,176 2,315,668 1,448,416
Insurance 651,417 491,228 1,119,283 838,653 587,206
Professional services 207,273 279,491 628,383 490,193 604,353
Other 3,202,366 2,114,517 5,750,571 3,948,070 2,925,065
----------- ----------- ----------- ----------- -----------

9,086,407 5,650,974 14,688,661 10,786,019 7,469,925
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 5,250,625 4,679,613 9,781,712 6,175,658 9,930,542
----------- ----------- ----------- ----------- -----------
PROVISION FOR INCOME TAXES:
Current tax expense 1,807,700 2,446,213 2,940,552 2,517,465 4,056,922
Deferred tax expense (credit) (282,457) (756,146) 635,331 (347,638) (207,441)
----------- ----------- ----------- ----------- -----------
1,525,243 1,690,067 3,575,883 2,169,827 3,849,481
----------- ----------- ----------- ----------- -----------

NET INCOME $ 3,725,382 $ 2,989,546 $ 6,205,829 $ 4,005,831 $ 6,081,061
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>

The accompanying notes are an integral part of these statements.

F-56
<PAGE>

R-G PREMIER BANK OF PUERTO RICO

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ---------------------------------------------
----------------------------
1996 1995 1995 1994 1993
------------- ------------ ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,725,382 $ 2,989,546 $ 6,205,829 $ 4,005,831 $ 6,081,061
------------- ------------ ------------- ------------- -------------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision (credit) for loan losses 356,525 (50,000) 950,000 - -
Provision (credit) for cost in excess of
market value of loans available for sale (70,000) (855,834) 855,834 -
Depreciation and amortization 731,638 481,179 1,180,153 861,153 528,940
Amortization of premium on investment and
mortgage-backed securities - net 116,132 58,589 89,111 140,411 119,478
Amortization of deferred loan origination
fees and accretion of discount on loans
purchased (253,401) 24,944 (366,332) (276,631) (303,922)
Unrealized (gain) loss on trading securities 13,379 (129,791) (143,788) 214,166
Gain on sale of securities (329,225) (470,092) (470,092) - (394,342)
Gain on sale of mortgage loans (95,096) (177,484) (1,167,074) (201,797) (3,973,935)
Changes in assets and liabilities (net of
effects from purchase of Caribbean Federal
in 1993):
(Increase) decrease in:
Accrued interest receivable (1,214,298) (850,642) (1,181,143) (694,035) (486,163)
Other assets (1,385,434) (2,245,749) (2,462,598) 629,021 (217,241)
Increase (decrease) in:
Interest payable 121,121 9,506 84,573 389,993 (220,322)
Income taxes currently payable (527,578) 1,701,777 1,118,746 - 2,768,433
Deferred income taxes payable (282,457) (756,146) 635,331 (347,638) (207,441)
Accounts payable and accrued expenses 1,708,254 3,447,922 25,119 (2,775,448) (7,295,800)
Other liabilities (472,231) 251,866 1,112,938 692,183 (258,354)
------------- ------------ ------------- ------------- -------------
Total adjustments (1,512,671) 1,225,879 (1,450,890) (512,788) (9,940,669)
------------- ------------ ------------- ------------- -------------
Net cash provided by (used in) operating
activities 2,212,711 4,215,425 4,754,939 3,493,043 (3,859,608)
------------- ------------ ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in securities purchased under
agreements to resell 8,264,762 (12,298,627) (11,461,785) (5,931,570) (4,301,320)
Decrease (increase) in time deposits with other
banks 22,941,132 (15,809,765) (30,798,644) 13,285,198 (27,416,569)
Decrease (increase) in federal funds purchased 5,011,048 - (5,011,048) - -
Proceeds from sale and maturities of investment
securities 17,281,780 4,670,977 4,670,977 3,691,493 28,179,364
Purchases of investment securities (29,939,277) - (377,000) (6,044,808) (49,693,984)
Principal repayments of mortgage-backed securities 4,576,531 4,226,800 8,636,250 8,521,682 6,053,722
Net (disbursements) repayments and (purchases) of
loans (133,383,281) (86,486,955) (203,519,717) (149,385,387) (201,419,893)
Proceeds from sale of mortgage loans 4,929,156 12,345,507 76,654,134 27,201,541 147,950,784
Acquisition of Caribbean Federal, net of cash
acquired - - - - 11,254,879
Acquisition of equipment and leasehold
improvements (569,625) (1,288,259) (2,740,258) (1,409,593) (1,460,761)
(Purchase) redemption of Federal Home Loan Bank
stock (795,600) (1,401,700) (1,401,700) (156,700) 1,399,500
Net decrease (increase) in foreclosed real estate (735,167) (105,315) 83,488 81,339 (301,747)
------------- ------------ ------------- ------------- -------------
Net cash used by investing activities (102,418,541) (96,147,337) (165,265,303) (110,146,805) (89,756,025)
------------- ------------ ------------- ------------- ------------
</TABLE>

(Continued)

The accompanying notes are an integral part of these statements.

F-57

<PAGE>

R-G PREMIER BANK OF PUERTO RICO

STATEMENTS OF CASH FLOWS (CONT.)

The accompanying notes are an integral part of these statements.

F-58

<PAGE>

R-G PREMIER BANK OF PUERTO RICO
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
FROM
PREFERRED STOCK COMMON STOCK ADDITIONAL SECURITIES
-------------------- --------------------- PAID-IN CAPITAL RETAINED AVAILABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL RESERVES EARNINGS FOR SALE TOTAL
------- ----------- --------- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1992 1,495,122 $1,495,122 $6,334,715 $ 5,723,154 $13,552,991
Net proceeds from
issuance of common
shares 102,058 102,058 1,148,821 1,250,879
Net income - 1993 6,081,061 6,081,061
------- ----------- --------- ---------- ---------- ----------- ----------- ----------- -----------
Balances at
December 31, 1993 1,597,180 1,597,180 7,483,536 11,804,215 20,884,931
Net proceeds from
issuance of common
shares 172,267 172,267 1,829,042 2,001,309
Stock dividends on
common shares 319,456 319,456 (319,456) -
Net income - 1994 4,005,831 4,005,831
Net change in
unrealized gain on
securities available
for sale, net of tax $ 986,180 986,180
------- ----------- --------- ---------- ---------- ----------- ----------- ----------- -----------
Balances at
December 31, 1994 2,088,903 2,088,903 9,312,578 15,490,590 986,180 27,878,251
Net proceeds from
issuance of common
shares 750 750 9,571 10,321
Transfer to capital
reserves $ 666,767 (666,767) -
Cash dividends
declared on
preferred stock (348,333) (348,333)
Net proceeds from
issuance of
preferred shares 400,000 $10,000,000 10,000,000
Net income - 1995 6,205,829 6,205,829
Net change in
unrealized gain on
securities available
for sale, net of tax (33,931) (33,931)
------- ----------- --------- ---------- ---------- ----------- ----------- ----------- -----------
Balances at
December 31, 1995 400,000 10,000,000 2,089,653 2,089,653 9,322,149 666,767 20,681,319 952,249 43,712,137
Transfer to capital
reserves (unaudited) 354,399 (354,399) -
Net income - June 30,
1996 (unaudited) 3,725,382 3,725,382
Net change in
unrealized gain
(loss) in securities
available for sale,
net of tax
(unaudited) (1,511,486) (1,511,486)
------- ----------- --------- ---------- ---------- ----------- ----------- ----------- -----------
Balance at June 30,
1996 (unaudited) 400,000 $10,000,000 2,089,653 $2,089,653 $9,322,149 $ 1,021,166 $24,052,302 ($ 559,237) $45,926,033
------- ----------- --------- ---------- ---------- ----------- ----------- ----------- -----------
------- ----------- --------- ---------- ---------- ----------- ----------- ----------- -----------
</TABLE>

The accompanying notes are an integral part of these statements.

F-59

<PAGE>

R-G PREMIER BANK OF PUERTO RICO

NOTES TO FINANCIAL STATEMENTS

(Information pertaining to the six months ended June 30, 1996 and 1995 is
unaudited)

NOTE 1 - REPORTING ENTITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

R-G Premier Bank of Puerto Rico (the Bank) provides a full range of banking
services through fourteen branches located mainly in the north of the
Commonwealth of Puerto Rico. The Bank is subject to the regulations of certain
federal and local agencies, and undergoes periodic examinations by those
regulatory agencies.

As of the close of business on November 30, 1994, the Bank was converted from a
federally chartered savings bank to a commercial bank chartered under the laws
of the Commonwealth of Puerto Rico, and changed its name to R-G Premier Bank of
Puerto Rico. As a result of the charter conversion, each share of common stock
of the savings bank outstanding was converted into one share of common stock
of the Bank. Therefore, all of the savings bank's shareholders continued to
have the same proportional ownership interest in the Bank. In addition,
pursuant to such charter conversion the assets and liabilities of the savings
bank became the assets and liabilities of the Bank.

Prior to the conversion of the Bank, R&G Mortgage Corporation (R&G), a Puerto
Rico mortgage banking company, owned 1,840,942 common shares of the Bank. This
represented aproximately 88% of the savings bank total common shares outstanding
and included 143,472 common shares issued on November 29, 1994 for approximately
$2,000,000. On November 30, 1994, prior to the conversion, R&G distributed all
of its savings bank's stock to its sole shareholder. As a result, this
shareholder became directly the majority owner of the Bank.

On July 19, 1996 R&G Financial Corporatin (R&G Financial), a company formed
in March 1996 for the sole purpose of becoming the parent company of the
Bank and &RG, acquired the 88% ownership interest of the Bank and the 100%
ownership interest in R&G held by this shareholder by exchanging 5,189,044
newly issued shares of Class A $.01 par value common stock of R&G Financial
for such ownership interests. As a result, the Bank became majority owned
by R&G Financial. R&G Financial intends to acquire as well the 12% minority
ownership interest in the Bank which, as of July 19, 1996 was held by
approximately 200 other stockholders following the receipt of all required
regulatory approvals.

The accounting and reporting policies of the Bank conform with generally
accepted accounting

F-60

<PAGE>

principles and general practices within the banking industry. The following is
a description of the significant accounting policies followed by the Bank:

INVESTMENT SECURITIES

Effective January 1, 1994, the Bank adopted Statement of Financial Accounting
Standards (SFAS) No. 115 - "Accounting for Certain Investments in Debt and
Equity Securities." This Statement addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. Under SFAS 115, investments in debt and
equity securities are classified in three categories and accounted for as
follows:

- HELD TO MATURITY- debt securities for which the Bank has the positive
intent and ability to hold to maturity. These securities are carried
at amortized cost.

- TRADING- debt and equity securities that are bought and held
principally for the purpose of selling them in the near term. These
securities are carried at fair value, with unrealized gains and losses
included in earnings.

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

Upon adoption of SFAS 115 on January 1, 1994, the Bank classified as securities
held for trading $2,599,329 of debt securities with an unrealized gain of
$30,581. At December 31, 1994, the net unrealized gains on securities
classified as available for sale of $1,616,689 was reported net of estimated
income tax of $630,509, as a separate component of stockholders' equity in
accordance with SFAS 115.

On November 14, 1995, the Financial Accounting Standard Board staff issued a
special report, "A Guide for the Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities" (the Report), as an aid
in understanding and implementing SFAS 115. Under the Report an enterprise may
conduct a one time reassessment of the classifications of all securities held at
that time from the issue date of the report through December 31, 1995. Any
reclassifications from the held to maturity made in conjunction with that
reassessment will not call into question an enterprise's intent to hold other
debt securities to maturity in the future. Pursuant to this report on December
29, 1995, the Bank reclassified mortgage-backed securities with an amortized
cost of $52,448,077 from its held to maturity to its available for sale
portfolio. The unrealized gains of securities reclassified as available for
sale of $565,132 was reported net of estimated income tax of $220,401, as a
separate component of stockholders' equity.

F-61

<PAGE>

The amortization of premiums are deducted and the accretion of discounts are
added to interest income over the life of the related securities using a method
that approximates the interest method. Realized gains or losses for securities
classified as either available for sale or held to maturity are reported in
earnings. Cost of securities is determined on the specific identification
method.

LOANS AND ALLOWANCE FOR LOAN LOSSES

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

Management believes that the allowance for loan losses is adequate. It is the
policy of the Bank to increase its valuation allowances for estimated losses on
loans when, based on management's evaluation, a loss becomes both probable and
estimable. Major loans and major lending areas are reviewed periodically to
determine potential problems at an early date. Also, management's periodic
evaluation considers factors such as loss experience, current delinquency data,
known and inherent risks in the portfolio, identification of adverse situations
which may affect the ability of debtors to repay, the estimated value of any
underlying collateral and assessment of current economic conditions. Additions
to allowances are charged to income. Such provisions are based on management's
estimated value of any underlying collateral, as applicable, considering the
current and anticipated operating conditions of the borrower.

Effective January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 114,
as amended by SFAS No. 118, requires a creditor to measure impairment of a loan
based on the present value of expected future cash flows discounted at the loans
effective interest rate, or as a practical method at the observable market price
of the loan or the fair value of the collateral if the loan is collateral
dependent. This Statement is applicable to all loans, except large groups of
smaller - balance homogeneous loans that are collectively evaluated for
impairment, leases and loans that are evaluated at fair value or at the lower of
cost or fair value. SFAS No. 118 amends the income recognition provisions that
had been included in SFAS No. 114. The adoption of SFAS No. 114 and SFAS No. 118
on January 1, 1995 had no effect on the Bank's financial condition or results of
operations for 1995. No loans are impaired as of December 31, 1995.

F-62

<PAGE>

INTEREST INCOME

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

MORTGAGE LOANS HELD FOR SALE

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

DERIVATIVE FINANCIAL INSTRUMENTS

The Bank enters into interest rate caps and swaps to manage its interest rate
exposure. Such instruments are designated as hedges against future fluctuations
in the interest rates of specifically identified assets or liabilities and are
not marked to market. Net interest settlements on interest rate caps and swaps
are recorded as adjustments to interest income or expense.

FORECLOSED REAL ESTATE HELD FOR SALE

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

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

F-63
<PAGE>

SERVICING RIGHTS

Effective January 1, 1995, the Bank adopted SFAS No. 122 - "Accounting for
Mortgage Servicing Rights." Prior to implementation of this Statement, the Bank
treated mortgage servicing rights in accordance with SFAS No. 65. SFAS No. 122
amends SFAS 65 to permit prospectively the capitalization of servicing rights
acquired through loan origination activities after the adoption of SFAS 122. As
discussed in Note 18 to the financial statements, R&G services mortgage loans
for the benefit of the Bank subsequent to their origination by the Bank. Once
the Bank enters into a commitment to sell such loans, servicing rights
originated by the Bank are sold to R&G and accordingly, the adoption of this
Statement did not have a significant effect on the Bank's financial condition or
result of operations for 1995.

PREMISES AND EQUIPMENT

Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is provided on the straight-line method over the estimated useful
life of each type of asset. Amortization of leasehold improvements is computed
on the straight-line method over the terms of the leases or estimated useful
lives of the improvements, whichever is shorter. Cost of maintenance and
repairs which do not improve or extend the life of the respective assets is
expensed as incurred. Cost of renewals and betterments is capitalized. When
assets are sold or disposed of, their cost and related accumulated depreciation
are removed from the accounts and any gain or loss is reflected in current
earnings.

In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
121 - "Accounting for the Impairment of Long Lived Assets and for Long-Lived
Assets to be Disposed." This Statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets, to be held and used. Under such Statement, long-lived
assets and certain identifiable intangibles to be held and used must be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review
for recoverability, an estimate of the future cash flows expected to result from
the use of the asset and its eventual disposition must be made. If the sum of
the future cash flows (undiscounted and without interest charges) is less than
the carrying amount of the asset, an impairment is recognized.

Application of this Statement is required for financial statements for fiscal
years beginning after December 15, 1995. Based on presently available
information, management believes the application of this Statement in future
years should not have a material adverse effect on the Bank's financial
condition or results of operations.

F-64
<PAGE>

LOAN-SERVICING RIGHTS SOLD

As explained in Note 18 to the financial statements, the Bank sells to R&G
servicing rights of mortgage loans originated. Amounts received from loan-
servicing rights sold prior to July 1, 1994 are deferred and amortized over the
estimated servicing period of the loans. Servicing rights on mortgage loans
originated by the Bank after that date are sold to R&G once there is a
commitment to sell the loans to third parties in the secondary market.

INCOME TAXES

The Bank follows an asset and liability approach that requires the recognition
of deferred tax assets and liabilities for the expected future tax consequences
of events that have been recognized in the Bank's financial statements and tax
returns.

CAPITAL RESERVE

The Banking Act of the Commonwealth of Puerto Rico requires that a minimum of
10% of net income for the year be transferred to capital surplus until such
surplus equals the greater of 10% of total deposits or paid-in capital.

STATEMENT OF CASH FLOWS

For purposes of the statement of cash flows, cash and due from banks are
considered cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

NOTE 2 - ACQUISITION OF CARIBBEAN FEDERAL:

On December 22, 1992 the Bank entered into a Merger Agreement and Plan of
Reorganization (the Agreement) with Caribbean Federal Savings Bank (Caribbean
Federal) for the acquisition of

F-65
<PAGE>

all of Caribbean Federal's common stock. Caribbean Federal was a federally-
chartered stock savings bank organized under the laws of the United States and
operating in Puerto Rico. As provided by the agreement, an interim bank
("Interim") was formed as a wholly-owned subsidiary of the Bank. Effective June
30, 1993, Interim merged with Caribbean Federal resulting Caribbean Federal as
the surviving corporation and wholly-owned subsidiary of the Bank. Immediately
thereafter, Caribbean Federal was liquidated by way of a merger with and into
the Bank. This transaction was accounted under the purchase method of
accounting.

In accordance with the terms of the Agreement, the Bank paid $6,049,571,
including acquisition costs, for all outstanding shares of Caribbean Federal at
June 30, 1993. The fair value of the assets acquired and liabilities assumed
was $79,668,000 and $73,647,000, respectively. The cost of the investment over
the fair value of net assets acquired (goodwill) approximated $32,000 which is
being amortized over a 10 year period.

NOTE 3 - ACQUISITION OF BRANCHES:

On June 16, 1995, the Bank entered into a Purchase and Sale of Assets and
Assumption of Liabilities Agreement (the Agreement) with a commercial bank. As
provided by the Agreement, the Bank purchased seven branches, including
approximately $2,000,000 in assets (which excludes cash from the deposits
acquired) and approximately $77,340,000 in deposits. The premium paid by the
Bank over the value of deposits acquired, which was determined based on
negotiations between the parties to the Agreement, approximated $1,351,000 which
is being amortized over a 10 year period. Accumulated ammortization amounted to
approximately $136,000 and $68,000 at June 30, 1996 and December 31, 1995,
respectively.

NOTE 4 - INVESTMENT SECURITIES:

The carrying value and estimated fair value of investment securities by category
are shown below. The fair value of investment securities is based on quoted
market prices and dealer quotes, except for the investment in Federal Home Loan
Bank (FHLB) stock which is valued at its redemption value.

<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
June 30, 1996 1995 1994
---------------------------- ---------------------------- ----------------------------
Securities Held to Maturity Amortized cost Fair value Amortized cost Fair value Amortized cost Fair value
--------------------------- --------------- ---------- -------------- ---------- -------------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Puerto Rico Government obligations:
Due within one year $ - $ - $ 377,000 $ 377,000 $ 460,000 $ 460,000
Due from one to five years 1,038,618 1,015,000 1,042,239 1,000,000 1,045,730 981,700
Due over ten years 603,528 596,029 626,807 619,307 676,446 666,618
---------- ---------- ---------- ---------- ----------- -----------
1,642,146 1,611,029 2,046,046 1,996,307 2,182,176 2,108,318
---------- ---------- ---------- ---------- ----------- -----------
Corporate securities:
Due within one year 3,719,547 3,719,547 - - - -
Due from one to five years 3,323,524 3,323,524 - - - -
---------- ---------- ---------- ---------- ----------- -----------

F-66

<PAGE>

7,043,070 7,043,070 - - - -
---------- ---------- ---------- ---------- ----------- -----------
8,685,216 8,654,099 2,046,046 1,996,307 2,187,176 2,108,318
---------- ---------- ---------- ---------- ----------- -----------
Mortgage backed securities:
GNMA certificates:
Due from one to five years 105,694 108,117 118,268 108,197 173,796 164,302
Due over ten years 23,077,413 21,886,629 24,616,649 23,680,662 26,618,812 24,224,202
---------- ---------- ---------- ---------- ----------- -----------
23,183,107 21,994,746 24,734,917 23,788,859 26,792,608 24,388,504
---------- ---------- ---------- ---------- ----------- -----------
Federal National Mortgage Association
(FNMA):
Due over ten years 15,941,568 16,139,570 16,622,989 16,622,989 16,174,807 15,266,530
---------- ---------- ---------- ---------- ----------- -----------
Federal Home Loan Mortgage Corporation
(FHLMC) participation certificates:
Due from five to ten years - - - - 659,251 677,868
Due over ten years 348,066 338,648 372,983 372,983 40,495,369 38,512,070
---------- ---------- ---------- ---------- ----------- -----------
348,066 338,648 372,983 372,983 41,154,620 39,189,938
---------- ---------- ---------- ---------- ----------- -----------
$39,472,739 $38,472,964 $43,776,935 $42,781,138 $86,304,211 $80,953,290
---------- ---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ---------- ----------- -----------
</TABLE>

Expected maturities on debt securities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or repayment penalties.

There were no sales of securities held to maturity during 1995 and 1994,
respectively. Proceeds from sales of securities and gains realized on those
sales during 1993 amounted to $28,179,488 and $489,267, respectively.

<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
June 30, 1996 1995 1994
--------------------------- --------------------------- --------------------------
Securities Available for Sale Amortized cost Fair value Amortized cost Fair value Amortized cost Fair value
----------------------------- -------------- ---------- -------------- ---------- -------------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
US Government and agencies securities $19,527,199 $19,032,500 $ - $ - $ - $ -
---------- ---------- ---------- ---------- ----------- -----------
Collateralized mortgage obligation
residuals and other mortgage-backed
securities 7,091,610 7,871,551 7,126,609 8,122,542 11,683,636 13,300,325
---------- ---------- ---------- ---------- ----------- -----------
Federal National Mortgage Association
(FNMA)
Due over ten years 15,425,377 14,990,973 14,845,760 14,946,338 - -
---------- ---------- ---------- ---------- ----------- -----------
Federal Home Loan Mortgage Corporation
(FHLMC) participation certificates:
Due from five to ten years 585,531 594,462 1,122,434 1,180,194
Due over ten years 21,788,422 21,011,871 36,352,565 36,759,358
---------- ---------- ---------- ---------- ----------- -----------
22,373,953 21,606,333 37,474,999 37,939,552 - -
---------- ---------- ---------- ---------- ----------- -----------
$64,418,139 $63,501,357 $59,447,368 $61,008,432 $11,683,636 $13,300,325
---------- ---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ---------- ----------- -----------
FHLB stock $ 4,075,210 $ 4,075,210 $ 3,279,610 $ 3,279,610 $ 1,877,910 $ 1,877,910
---------- ---------- ---------- ---------- ----------- -----------
---------- ---------- ---------- ---------- ----------- -----------
</TABLE>

The collateralized mortgage obligation residuals and other mortgage backed
securities are guaranteed by R&G.

F-67
<PAGE>

In February 1996, the Bank entered into an agreement with an unrelated
investment management firm whereby such firm has been appointed as investment
advisor with respect to a portin of the Bank's securities portfolio. Pursuant
to such agreement, this investment advisory firm advises and recommends
management on the purchase and/or sale of otherwise eligible investments as well
as the execution of various hedging strategies to reduce interest rate risk,
mainly through the use of various financial instruments. Such firm receives an
annual management fee of .15% of the average aggregate principal amount under
management of the advisory firm (payable quarterly) together with a quarterly
performance fee of 25% of the net trading profits earned during each calendar
quarter. At June 30, 1996, this investment advisory firm was managing Bank
assets with a market value of approximately $31.1 million of which $12.1 million
was designated for trading. Such assets were invested as follows:

June 30, 1996
----------------------------
Amortized cost Fair value
-------------- ----------
(Unaudited)
Cash and due from banks $1,934,179 $1,934,179
--------- ---------

Held for trading securities:
U.S. Treasury Bills 397,341 397,341
Money market investments 9,698,883 9,698,883
--------- ---------

10,096,224 10,096,224
---------- ----------

Available for sale securities:
U.S. Government and agencies securities 19,527,199 19,032,500
---------- ----------

$31,557,602 $31,062,903
---------- ----------
---------- ----------

The above available for sale securities are being hedged with financial futures
contracts which are settled on a quarterly basis based on US Treasury securities
and Eurodollars. Such firm also executes hedging strategies on behalf of the
Bank for all mortgage backed securities (excluding CMO's) which are available
for sale. Mortgage backed securities available for sale for which hedging
contracts are made had a fair value of approximately $36.5 million at June 30,
1996. Contracts made are recorded at fair value within investments available
for sale. If at the inception of the futures contracts it is not probable a
high correlation (80-125%) exists between changes in the market value of the
hedged

F-68

<PAGE>

securities and changes in the market value of the futures contracts, gains or
losses on such contracts are reported in the statement of income as part of
the net gain on trading. When at the inception of the contracts it is
probable a high correlation (80-125%) exists between changes in the market
value of the futures contracts and changes in the fair value of the available
for sale securities, gains or losses on such contracts are reported as part
of the unrealized gains or losses on available for sale securities in
stockholders' equity. After inception of the contracts, management
periodically evaluates the results of futures contracts accounted for as
hedges to determine if high correlation is being achieved. If management's
periodic evaluations indicate high correlation has not ocurred, a related
gain or loss is recognized in income for the period to the extent the results
of the futures contracts have not been offset by changes in the fair values
of the available for sale securities since inception of the contracts. At
June 30, 1996 no futures contracts were outstanding.

Proceeds from sales of securities available for sale during the six month
periods ended June 30, 1996 and 1995 were $14,281,780 and $4,670,977,
respectively. Gross gains of $329,225 and $470,092, respectively, were
realialized on those sales; no losses were realized.

Proceeds from sales of securities available for sale (sold to R&G) and gains
realized on those sales during 1995 amounted to $4,670,977 and $470,092,
respectively. The aggregate proceeds from the sale of investment securities
available for sale during 1994 amounted to approximately $3,691,000. There were
no gains or losses realized on these sales during 1994.

Unrealized gains and losses of securities held to maturity and available for
sale follows:

<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
June 30, 1996 1995 1994
------------- ---- ----
Gross unrealized Gross unrealized Gross unrealized
---------------- ---------------- ----------------
Gains Losses Gains Losses Gains Losses
----- ------ ----- ------ ----- ------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Securities held to maturity:

Puerto Rico and United States
Government obligations $ - ($ 31,119) $ - ($49,739) $ - ($ 73,858)

Mortgage-backed securities 265,269 (1,265,042) (946,058) (5,277,064)
-------- ---------- ----------- -------- ---------- ----------
$265,269 ($1,296,161) $ - ($995,797) $ - ($5,350,922)
-------- ---------- ----------- -------- ---------- ----------
-------- ---------- ----------- -------- ---------- ----------
</TABLE>

F-69

<PAGE>

Page 11

December 31
------------------------------------------------------
June 30, 1996 1995 1994
------------- ---- ----
Gross unrealized Gross unrealized Gross unrealized
---------------- ---------------- ----------------
Gains Losses Gains Losses Gains Losses
----- ------ ----- ------ ----- ------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>

Securities available for sale:

U.S. Government and
agencies securities $ - ($ 494,699) $ - $ - $ - $ -

Mortgage-backed securities 848,516 (1,270,599) 1,744,790 (183,726) - (1,616,689)
-------- ---------- ----------- -------- ---------- ----------

($848,516) ($1,765,298) $1,744,790 ($183,726) $ ($1,616,689)
-------- ---------- ----------- -------- ---------- ----------
-------- ---------- ----------- -------- ---------- ----------
</TABLE>

NOTE 5 - PLEDGED ASSETS:

Investment securities, mortgage loans and deposits at interest with banks
amounting to approximately $173,863,000 and $120,741,000 are pledged at June 30,
1996 December 31, 1995 to secure irrevocable standby letters of credit serving
as collateral of certificates of deposit, advances from the FHLB, notes payable
and subordinated notes.

F-70

<PAGE>

NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES:

The composition of the loan portfolio is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
JUNE 30, 1996 1995 1994
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Real estate loans:
Residential - first mortgage $325,442,432 $227,341,521 $194,707,115
Residential - second mortgage 14,377,467 14,371,526 13,298,580
Construction 7,991,512 15,045,844 12,038,774
Commercial 71,778,065 65,946,530 44,092,487
------------ ------------ ------------
419,589,476 322,705,421 264,136,956

Undisbursed portion of loans in process (2,795,132) (5,726,693) (5,945,295)
Net deferred loan fees (96,864) (265,768) (424,377)
------------ ------------ ------------
416,697,480 316,712,960 257,767,284
------------ ------------ ------------
Other loans:
Commercial 33,289,651 27,816,427 14,102,191
Consumer:
Loans secured by deposits 8,934,114 7,496,575 5,828,564
Other 91,038,251 70,560,722 29,278,496
Unamortized discount (298,719) (383,216) (590,939)
Unearned interest (1,106,458) (1,448,139) (1,884,298)
------------ ------------ ------------
131,856,839 104,042,369 46,734,014
------------ ------------ ------------
Total loans 548,554,319 420,755,329 304,501,298
Allowance for loan losses (3,201,627) (3,510,251) (2,887,099)
------------ ------------ ------------
$545,352,692 $417,245,078 $301,614,199
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

As of June 30, 1996 loans on which the accrual of interest income had been
discontinued amounted to approximately $13,221,000. The additional interest
income that would have been recognized during the six month period then ended
totalled approximately $284,000. As discussed in note 26 to the financial
statements, it is possible that additional non-accuring loans of approxiately
$3.2 million were existent at June 30, 1996.

F-71

<PAGE>

As of December 31, 1995, loans on which the accrual of interest income had been
discontinued amounted to approximately $10,032,000 (1994 - $6,002,000; 1993 -
$5,538,000). The additional interest income that would have been recognized
during 1995 had these loans been accruing interest amounted to approximately
$823,000 (1994 - $562,000; 1993 - $441,000). The Bank has no material
commitments to lend additional funds to borrowers whose loans were in non-
accruing status at December 31, 1995.

The Bank originates adjustable and fixed interest rate loans. At December 31,
1995 adjustable and fixed rate loans amounted to approximately $60,221,000 and
$362,631,000, respectively. The adjustable rate loans have interest rate
adjustment limitations and are generally tied to various market indexes.

Loans held for sale amount to $8,291,600 and $9,329,694 at June 30, 1996 and
December 31, 1995, respectively (1994 - $15,142,305). At June 30, 1996 and
December 31, 1995 the related fair value was above cost by approximately $57,000
and $201,000, respectively. At December 31, 1994 the fair value was below cost
by approximately $856,000 and the Bank recorded a related valuation allowance.

At December 31, 1995, 1994 and 1993, mortgage loans serviced by other
institutions for the benefit of the Bank amounted to approximately $256,547,000,
$229,370,000 and $185,568,000, respectively (including $250,147,000 by R&G in
1995, $221,680,000 in 1994 and $176,155,000 in 1993).

In December 1995, the Bank sold approximately $55,156,000 mortgage loans to
various commercial banks at a gain of approximately $1,119,000.

The changes in the allowance for loan losses follow:

<TABLE>
<CAPTION>
Six month period ended
June 30, Year ended December 31,
1996 1995 1995 1994 1993
---------- ---------- ---------- --------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $3,510,251 $2,887,099 $2,887,099 $3,028,541 $1,230,329
Provision (credit) for loan
losses 356,525 (50,000) 950,000 - -
Allowance for acquired loans - - - - 1,682,734
Loans charged-off (770,808) (196,598) (508,946) (100,142) (118,004)
Recoveries 105,659 107,318 - - 262,438
Other - - 182,098 (41,300) (28,956)
---------- ---------- ---------- --------- ----------
Balance, end of year $3,201,627 $2,747,819 $3,510,251 $2,887,099 $3,028,541
---------- ---------- ---------- --------- ----------
---------- ---------- ---------- --------- ----------
</TABLE>

F-72

<PAGE>

NOTE 7 - ACCRUED INTEREST RECEIVABLE:

Accrued interest receivable consists of the following:
<TABLE>
<CAPTION>
December 31,
JUNE 30, 1996 1995 1994
---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Loans $4,233,999 $3,441,208 $2,251,397
Mortgage-backed securities 490,781 520,256 565,124
Investment securities 512,338 41,856 44,114
Other 28,882 48,382 9,924
---------- ---------- ----------
$5,266,000 $4,051,702 $2,870,559
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

NOTE 8 - PREMISES AND EQUIPMENT:

Premises and equipment consist of:

<TABLE>
<CAPTION>
Estimated
useful lives December 31,
(YEARS) JUNE 30, 1996 1995 1994
------------- ------------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Land and building 40 $ 200,000 $ 200,000 $ 200,000
Furniture and equipment 5 6,022,342 5,650,388 4,440,015
Leasehold improvements 10 2,742,259 2,544,588 1,439,229
Autos 5 27,900 27,900 27,900
---------- ---------- ----------
8,992,501 8,422,876 6,107,144
LESS - Accumulated depreciation and
amortization (4,091,228) (3,443,928) (2,688,301)
---------- ---------- ----------
$4,901,273 $4,978,948 $3,418,843
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

F-73

<PAGE>

NOTE 9 - OTHER ASSETS:
Other assets consist of:

<TABLE>
<CAPTION>
December 31,
JUNE 30, 1996 1995 1994
------------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Accounts receivable $ 2,115,074 $2,425,499 $1,475,326
Deferred charges 993,872 732,407 573,259
Foreclosed real estate held for sale 995,049 259,882 343,370
Prepaid expenses 990,397 449,071 428,677
Goodwill and other intangibles 1,436,245 1,520,362 280,277
Other 1,100,921 208,074 115,276
---------- ---------- ----------
$7,631,558 $5,595,295 $3,216,185
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

NOTE 10 - DEPOSITS AND RELATED INTEREST EXPENSE:
Deposits are summarized as follows:

<TABLE>
<CAPTION>
December 31,
JUNE 30, 1996 1995 1994
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
Passbook savings $73,602,930 $ 73,471,042 $ 44,392,993
----------- ------------ ------------

NOW accounts 22,633,889 21,233,410 16,600,752
Super NOW accounts 56,172,235 52,405,683 46,740,513
Regular checking accounts (non-interest bearing) 17,077,942 19,073,123 3,147,900
Commercial checking accounts (non-interest bearing) 34,892,985 33,925,790 32,408,079
------------ ------------ ------------
126,638,006 98,897,244 130,777,051
------------ ------------ ------------
Certificates of deposit:
Under $100,000 211,781,812 194,657,528 127,598,479
$100,000 and over 145,581,288 122,144,426 108,094,229
------------ ------------ ------------
357,363,100 316,801,954 235,692,708
------------ ------------ ------------
561,743,081 516,911,002 378,982,945

Accrued interest payable 1,404,284 1,275,561 1,165,469
------------ ------------ ------------
$563,147,365 $518,186,563 $380,148,414
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

F-74

<PAGE>

At June 30, 1996 the weighted average stated interest rate on all deposits was
5.02%. The weighted average stated interest rate on all deposits at December
31, 1995 and 1994 was 5.03% and 4.85%, respectively.

Scheduled maturities of certificates of deposits at December 31, 1995 are as
follows:

Year ending
DECEMBER 31,
--------------
1996 $238,040,541
1997 19,607,763
1998 14,707,209
1999 25,520,045
2000 14,298,373
Thereafter 4,628,023
------------
Total $316,801,954
------------
------------

Deposit accounts at June 30, 1996 and December 31, 1995, include approximately
$16,447,000 and $13,948,000, respectively (1994 - $10,039,000), of escrow funds
of mortgage loans serviced by R&G.

At December 31, 1995, the Bank has pledged approximately $1,542,000 in
securities with a market value of approximately $1,493,000 to collateralize
public funds totalling approximately $1,450,000.

Interest expense on deposits is comprised of the following:

<TABLE>
<CAPTION>
Six month
period ended
JUNE 30, Year ended December 31,
1996 1995 1995 1994 1993
----------- ---------- ----------- ----------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Passbook $ 1,378,964 $ 828,853 $ 2,201,299 $ 1,629,618 $1,290,034
NOW and Super
NOW accounts 1,460,960 1,126,341 2,497,973 2,513,848 1,756,754
Certificates of deposit 10,194,327 7,929,207 17,363,594 10,252,760 6,930,539
----------- ---------- ----------- ----------- ----------
$13,034,251 $9,884,401 $22,062,866 $14,396,226 $9,977,327
----------- ---------- ----------- ----------- ----------
----------- ---------- ----------- ----------- ----------
</TABLE>

F-75

<PAGE>

NOTE 11 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:

At June 30, 1996 securities sold under agreements to repurchase totalled
$10,200,000 with accrued interest payable of $40,205.

Securities sold under agreements to repurchase as of December 31, 1995 amount to
$10,525,000 (1994 - $11,566,000) bearing interest at 5.11% (1994 - 4.90 to
4.92%) and with accrued interest payable amounting to $47,807 (1994 - $73,326).
These agreements mature within thirty days.

Information on securities sold under agreements to repurchase follows:

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Maximum aggregate balance outstanding
at any month end $14,673,000 $22,272,000
----------- -----------
----------- -----------
Average aggregate balance outstanding $ 7,737,583 $ 9,723,833
----------- -----------
----------- -----------

Weighted average interest rate:
For the year 5.16% 3.98%
At December 31 5.11% 4.91%
Carrying value of securities sold under agreements
to repurchase $10,719,629 $12,911,682
----------- -----------
----------- -----------
Approximate market value of securities sold under
agreements to repurchase $10,872,213 $11,830,079
----------- -----------
----------- -----------
</TABLE>

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

The Bank has no unsecured lines of credit available as of June 30, 1996 and
December 31, 1995.

F-76

<PAGE>

NOTE 12 - NOTES PAYABLE:

Notes payable outstanding consist of the following:

December 31,
----------------------
June 30, 1996 1995 1994
-------------- ---- ----
(Unaudited)
<S> <C> <C> <C>
Promissory notes maturing in 1997 paying
semiannual interest at a fixed annual rate
of 4.67%. $ 50,000,000 $ - $ -

Promissory notes maturing in 1999 paying
semiannual interests at fixed annual rates
ranging from 6.20% to 7.15% 23,600,000 23,600,000 23,600,000

Promissory notes maturing in 2000 paying
semiannual interests at fixed annual rates
ranging from 5.55% to 5.67% 15,000,000 15,000,000 -

Promissory note maturing in 2000 paying
quarterly interest at a floating rate of 84%
of the three month LIBOR rate less .125% 10,000,000 10,000,000 -

Promissory note maturing in 2003 paying
semiannual interest at a fixed annual rate
of 5.50% 2,400,000 2,400,000 -
------------- ----------- -----------
$101,000,000 $51,000,000 $23,600,000
------------- ----------- -----------
------------- ----------- -----------
</TABLE>

Certain promissory notes include pledge agreements in which the Bank has pledged
certain negotiable securities as a guarantee for payment of some of the notes
totalling $41,000,000. The pledge agreements provide that the value of the
pledged securities must not fall below 105% of the principal balance of the
promissory note plus accrued interest on such amount. In the event that the
securities' value fall below the stated percentage, the Bank must deliver
additional negotiable securities. As June 30, 1996 securities pledged in
compliance with this requirement consist of mortgage backed securities with a
carying value of approximately $45,602,000 and approximate market value of
$45,047,000. At December 31, 1995 securities pledged in compliance with this
requirement consist of mortgage backed securities with a carrying value of
approximately $44,866,000 and approximate market value of $44,339,000. At
December 31, 1995 floating rate notes of $10,000,000 are guaranteed by letters
of credit issued by the FHLB -NY.

F-77
<PAGE>

NOTE 13 - ADVANCES FROM THE FEDERAL HOME LOAN BANK OF NEW YORK (FHLB-NY):

Advances from the FHLB-NY are as follows:

December 31,
Interest June 30, ------------
Maturity rate 1996 1995 1994
-------- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
September 28, 1995 4.68 $ - $ - $ 2,500,000
September 30, 1995 4.70 - - 3,500,000
November 25, 1995 6.79 - - 1,500,000
April 23, 1996 7.21 - 1,000,000 1,000,000
August 15, 1996 6.65 5,000,000 5,000,000 5,000,000
August 28, 1996 5.67 6,000,000 - -
Market value adjustment - 7,135 67,834
----------- ---------- -----------
$11,000,000 $6,007,135 $13,567,834
----------- ---------- -----------
----------- ---------- -----------

Weighted average stated interest rate 6.12% 6.74% 5.84%
----- ----- -----
----- ----- -----
</TABLE>

Advances are received from the FHLB - NY under an Advances, Collateral Pledge
and Security Agreement (the "Agreement"). Under the Agreement, the Bank is
required to maintain a minimum amount of qualifying collateral with a market
value of at least equal to 110% of the outstanding advances. In addition, the
Bank maintains standby letters of credit with the FHLB - NY amounting to
approximately $73,822,000 and $17,492,000 at June 30, 1996 and December 31,
1996, respectively.

At June 30, 1996 and December 31, 1995, specified collateral (in form of first
mortgages notes and cash deposits) amounting to approximately $113,547,000 and
$62,263,000, respectively, were pledged to the FHLB - NY as part of the
Agreement and to secure standby letters of credit. At June 30, 1996 and
December 31, 1995 the market value of the collateral indicated above was
sufficient to comply with the provisions of the Agreement. The market value
adjustment to the face value of the Advances from the FHLB - NY represents an
allocation of a portion of the excess price paid to acquire Caribbean Federal
(See Note 2).

F-78
<PAGE>

The aggregate maturities of FHLB - NY advances are as follows:

Year
----
December 31,
-------------
June 30, 1996 1995 1994
------------- ---- ----
(Unaudited)

1995 $ - $ - $ 7,500,000
1996 11,000,000 6,000,000 6,000,000
----------- ---------- -----------
$11,000,000 $6,000,000 $13,500,000
----------- ---------- -----------
----------- ---------- -----------

NOTE 14 - SUBORDINATED NOTES:

On June 14, 1991 the Bank issued $3,250,000 in subordinated capital notes
bearing interest at 8% payable quarterly. These notes are guaranteed by an
irrevocable transferable letter of credit issued by a commercial bank, by R&G,
and by the personal guaranty of the sole stockholder of R&G. The Bank shall
deposit in seven equal annual installments beginning in September 1992 with a
trustee for credit to an established sinking fund account cash or a permitted
investment in an amount sufficient to retire one-seventh (1/7) or $464,286, of
the aggregate principal amount. Likewise, the letter of credit is reduced in
equal proportion to the deposits in such sinking fund.

Investments deposited in the Trust as of December 31, 1995 in compliance with
this requirement consist of FHLMC Participation Certificates with a carrying
value of approximately $1,232,000 (1994 - $1,057,000) and approximate market
value of $1,294,000 (1994 - $1,079,000) and $1,232,000 (1994 - $768,000) in
special deposit accounts.

NOTE 15 - INCOME TAXES:

Prior to the conversion to a Puerto Rico chartered commercial bank on November
30, 1994, the Bank as a corporation organized under the laws of the United
States, was subject to United States income tax with respect to all of its
income including income from sources within Puerto Rico. For United States
income tax purposes the Bank elected to be treated as a possessions corporation
pursuant to Section 936 of the Internal Revenue Code of 1986 (the "Code").
Section 936 of the Code allowed the Bank to claim a credit, (the "Section 936
Credit"), subject to qualification of the source and nature of the income and
certain other limitations, for the United States income tax on income derived
from sources outside of the United States that was attributable to the active
conduct of a trade or business in Puerto

F-79
<PAGE>
Rico ("Qualifying Income").

The credit granted under Section 936 was a full credit against the United States
income tax imposed on Qualifying Income. The Section 936 credit, as described,
has been claimed by the Bank for its taxable years beginning before November 30,
1994 therefore resulting in no United States income taxation on its Qualifying
Income.

For Puerto Rico income tax purposes prior to the conversion, the Bank was taxed
as a foreign corporation engaged in a trade or business in Puerto Rico. As
such, the Bank was subject to Puerto Rico income tax on all of its income from
sources within Puerto Rico and income from sources outside Puerto Rico that was
effectively connected with its Puerto Rico business.

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

Under the Puerto Rico tax law the Bank's tax liability will be the greater of
the tax computed under the regular tax system or the alternative minimum tax
(AMT) system. The AMT is imposed at 22% on regular taxable income after certain
adjustments for "preference items." An AMT credit may be claimed in future
years for tax paid on an AMT basis in excess of the regular tax basis.

A reconciliation of the provision for Puerto Rico income taxes computed by
applying the statutory tax rate to the tax expense as reported on financial
statements is as follows:

<TABLE>
<CAPTION>
Year ended December 31,
1995 1994 1993
---- ---- ----
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Computed income tax at statutory rate $4,108 42% $2,594 42% $4,171 42%
Effect on provision of:
Exempt interest income (1,391) (14) (1,183) (19) (402) (4)
Nondeductible expenses 293 3 1,070 17 253 2
Other reconciling items - net (69) (1) 36 1 35 1
----- -- ----- ----- ---- ---
$2,941 30% $2,517 41% $4,057 41%
------ --- ------ --- ------ ---
------ --- ------ --- ------ ---
</TABLE>

F-80
<PAGE>

Deferred tax (assets) liabilities are as follows:

December 31,
Temporary difference June 30, 1996 1995 1994
-------------------- ------------- ---- ----
(Unaudited)
<S> <C> <C> <C>
Deferred net loan origination fees $ 19,262 ($103,650) ($ 65,836)
Collateralized mortgage obligation residuals 921,937 1,310,350 958,501
Valuation allowance for loans held for sale - - (333,775)
Valuation allowance for securities available for sale (357,545) 608,815 630,509
Other foreclosed property reserve (29,435) (12,479) -
-------- ---------- ----------
Total deferred tax liability, net $554,219 $1,803,036 $1,189,399
-------- ---------- ----------
-------- ---------- ----------
</TABLE>

In October 1994, a Puerto Rico Tax Reform Act (the Reform) was approved to amend
existing tax laws into the "1994 Puerto Rico Internal Revenue Code." The
Reform, among other changes, incorporates tax rate reductions for corporations
effective for taxable years beginning after June 30, 1995. The normal tax rate
is reduced from 22% to 20% and the maximum combined tax rate (normal and surtax)
is reduced from 42% to 39%. In addition, the Reform incorporates new
accelerated methods of depreciation, repeals the reserve method for bad debts
deduction, and changes the rules for income tax withholdings at source for
certain payments. Management believes, based on presently available
information, that the Reform will not have an adverse effect on the Bank's
financial condition or results of operations.

NOTE 16 - STOCKHOLDERS' EQUITY:

On January 20, 1994, the Bank issued 100 shares of common stock for a total of
$1,309. Also, on March 10, 1994 the Bank declared a 20% stock dividend on its
then outstanding 1,597,280 shares of common stock and issued 319,456 additional
shares of common stock on June 15, 1994.

On November 29, 1994 the Bank issued 172,167 shares of common stock to R&G,
which generated $2,000,000 of new capital.

On June 28, 1993, the Bank issued 102,058 shares of common stock for an
aggregate price of approximately $1,251,000.

On April 30, 1995 and December 15, 1995, the Bank issued 200,000 shares of
preferred stock on each date to R&G for a total of $10,000,000. The preferred
shares are non-cumulative perpetual with liquidation preference of $25 per
share. The annual dividend rate of the preferred stock is 9.50%. On December
28, 1995, the Bank declared a cash dividend on its then outstanding preferred
stock totalling $348,333.

F-81
<PAGE>

NOTE 17 - REGULATORY MATTERS:

As a result of the conversion from a savings bank to a commercial bank, the Bank
is now subject to supervision, examination, and regulation by the Office of the
Commissioner of Financial Institutions of Puerto Rico and the Federal Deposit
Insurance Corporation (FDIC), which insures Bank deposits through the Savings
Association Insurance Fund (SAIF) up to applicable limits.

The FDIC capital standards for state chartered commercial banks require that
banks must maintain a minimum leverage ratio of Tier 1 (or core) capital to
total assets of at least 3% for the most highly - rated banks (i.e., those with
a composite CAMEL rating of 1 under the rating system established by the Federal
Financial Institutions Examination Council). The minimum leverage capital
requirement for all other state commercial banks shall be 3% plus an additional
cushion of at least 100 to 200 basis points and, therefore, shall consist of a
ratio of Tier 1 capital to total assets of not less than 4%. In addition to the
minimum leverage capital standards, state non-member banks generally are
required to maintain a minimum ratio of qualifying total capital to risk-
weighted assets of 8%, with at least one-half of that total capital amount
consisting of Tier 1 capital. The total amount of risk-weighted assets is
computed by applying risk weighing factors to the Bank's assets, which vary from
0% to 100% depending on the nature of the assets.

Pursuant to provisions in the Federal Deposit Insurance Company Improvement Act
of 1991 (FDICIA), each federal banking agency was required to revise its risk-
based capital standards to take adequate amount of interest rate risk,
concentration of credit risk and the risk of non-traditional activities. No
final rule incorporating these risks has being promulgated by the FDIC. An FDIC
insured state chartered commercial bank is well capitalized if: (i) has a total
leverage ratio of 5.0 percent or greater; (ii) has a total risk-based capital
ratio of 10.0% or greater; and (iii) has a Tier 1 risk-based capital ratio of
6.0% or greater. Tier 1 risk-based capital ratio means the ratio of Tier 1
capital to risk-weighted assets.

F-82
<PAGE>

At June 30, 1996, the Bank's regulatory capital position was as follows:

(Unaudited)
% to Total Risk % to Total Tier 1 % to Total
Core Adjusted Based Adjusted Risk Based Weighted
Capital Assets Capital Assets Capital Assets
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>

Actual $45,107 6.09 $49,490 11.02 $45,107 10.04

Regulatory requirement 44,405 5.00 44,918 10.00 26,951 6.00
-------- ----- ------- ----- ------- -----

Excess $ 702 1.09 $ 4,572 1.02 $18,156 4.04
-------- ----- ------- ----- ------- -----
-------- ----- ------- ----- ------- -----

At December 31, 1995, the Bank's regulatory capital position was as follows:

(Unaudited)
% to Total Risk % to Total Tier 1 % to Total
Leverage Adjusted Based Adjusted Risk Based Weighted
Capital Assets Capital Assets Capital Assets
------- ----- ------- ------ ------- ------
Actual $39,835 6.25 $44,113 11.66 $39,835 10.53

Regulatory requirement 31,848 5.00 37,825 10.00 22,694 6.00
-------- ----- ------- ----- ------- -----

Excess $ 7,987 1.25 $ 6,288 1.66 $17,141 4.53
-------- ----- ------- ----- ------- -----
-------- ----- ------- ----- ------- -----

</TABLE>

On September 1995, the United States Congress Banking Committee proposed a
legislation to recapitalize the FDIC administered SAIF. The proposed Bill would
require a one-time charge to SAIF-insured institutions of approximately $6.6
billion, or approximately $.85 to $.90 per $100.00 of assessable deposits as of
March 31, 1995. As of February 2, 1996 the proposed legislation has not been
approved. If the proposed assessment is approved based on deposits as of March
31, 1995 as proposed, management estimates that the Bank's share of the one
time assessment will approximate $3,100,000 (approximately $1.9 million net of
tax) and accordingly, management believes the proposed assessment, if approved,
will not have a material adverse effect on the Bank financial condition or
regulatory capital position, although it may adversely affect results of
operations in the year of the assessment.

F-83

<PAGE>

NOTE 18 - RELATED PARTY TRANSACTIONS:

The Bank entered into several agreements with R&G effective February 16, 1990.
Under these agreements R&G assists the Bank in the underwriting for mortgage
loans originations and provides servicing and securitization services while the
Bank provides R&G custodial services. Pursuant to these agreements, fees from
loans originated are allocated between the Bank and R&G. R&G subsequently
services the mortgage loans for the benefit of the Bank, and provides
securitization services to sell certain mortgage loans in the secondary market;
once the Bank has a commitment to sell loans, servicing rights of mortgage loans
originated by the Bank are sold to R&G. In addition, the Bank collects mortgage
payments on behalf of R&G for which it charges a fee.

In connection with these agreements, proceeds from the sale of servicing rights
and custodial fees amounted to approximately $366,000 and $162,000, respectively
(1994 - $884,000 and $161,000; 1993 - $1,792,000 and $175,000). Collection fees
charged to R&G in 1995 and 1994 amounted to $122,000 and $98,000, respectively.
Disbursements for servicing and securitization services amounted to
approximately $560,000 and $236,000, respectively (1994 - $499,000 and $139,000;
1993 - $390,000 and $309,000). Data processing services amounted to
approximately $149,000 and $308,000 in 1995.

In 1994, the Bank entered into a lease agreement with an affiliate for office
space. In connection with this lease, the Bank incurred rent expense of
approximately $312,000 for the year ended December 31, 1995 (1994 - $288,000).

Beginning in 1995, R&G also assists the Bank in the origination of certain
consumer loans and charges the Bank a 2% commission on consumer loans originated
on behalf of the Bank. Total commissions paid to R&G for consumer loan
originations totalled approximately $308,000 in 1995.

As discussed in Note 6 to the financial statements, in December 1995, the Bank
sold approximately $55 million mortgage loans to various commercial banks. As
part of the transaction, the Bank sold for approximately $292,000 the excess
servicing from the loans sold to R&G and R&G received an option to repurchase
loans sold in groups of no less than $1,000,000 after a one year period, at a 50
basis points premium of the outstanding balance of any loans repurchased. The
Bank does not have any recourse commitment as a result of the transaction.

F-84
<PAGE>

Loans to directors, officers and employees of the Bank were made in the ordinary
course of business. Interest rates on such loans were substantially the same as
those prevailing at the time for comparable transactions with unrelated parties
and did not involve more than a normal risk of collectibility. The aggregate
amount of loans outstanding to officers, directors and employees of the Bank as
of December 31, 1995 and 1994 and the aggregate activity for each of the years
then ended, were as follows:

Balance as of December 31, 1993 $1,352,539
Loan originations 155,013
Loan repayments (631,107)
---------
Balance as of December 31, 1994 876,445
Loan originations 609,638
Loan repayments (216,496)
---------
Balance as of December 31,1995 1,269,587
Loan originations (unaudited) 235,000
Loan repayments (unaudited) (792,855)
---------
Balance of June 30, 1996 (unaudited) $ 711,732
---------
---------

NOTE 19 - OTHER EXPENSES:

Other expenses consist of:

Six month period ended
June 30, Year ended December 31,
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Fees and expenses - directors and officers $ 30,500 $ 22,700 $ 47,395 $ 52,269 $ 43,400
Advertising and related 441,660 283,219 744,777 535,214 355,945
Loan servicing fees 324,776 318,699 820,527 655,289 698,698
Stationery and supplies 185,404 123,610 409,016 279,969 186,057
Telephone 308,348 151,336 417,389 376,159 199,612
Municipal license and other taxes 440,630 315,692 766,149 463,860 324,281
Bank account service charges 46,785 42,285 88,746 84,763 66,638
Check printing costs 203,642 169,015 409,445 240,358 223,608
Other 1,220,621 687,961 2,047,127 1,260,189 826,826
---------- ---------- ---------- ---------- ----------
Total $3,202,366 $2,114,517 $5,750,571 $3,948,070 $2,925,065
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>

F-85
<PAGE>

NOTE 20 - STOCK COMPENSATION PROGRAM:

On October 30, 1986, the Bank's Board of Directors adopted a Key Employee Stock
Compensation Program which was ratified by the majority of the stockholders on
April 23, 1987. The program covers a number of shares not to exceed 10% of the
number of shares issued in the conversion. At June 30, 1996 and December 31,
1995, there are no stock options which are exercisable.

NOTE 21 - PROFIT SHARING PLAN:

The Bank established in 1993 a profit sharing plan which covers substantially
all regular employees. Annual contributions to this plan are based on matching
percentages depending on the employee years of service and, at the option of the
Bank, on operational income. Contributions to this plan during 1995 amounted to
$23,544 (1994 - $54,467).

NOTE 22 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET
RISK AND CONCENTRATIONS OF CREDIT RISK:

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

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

F-86
<PAGE>

evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the counterparty.

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

The total amounts of financial instruments with off-balance sheet risk follows:

Financial instruments whose contract amounts
represent potential credit risk:

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

December 31,
1995 1994
---- ----
Commitments to originate loans $12,037,063 $ -

Unused lines of credit $ 5,991,183 $ 1,184,976

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

Interest rate swap contracts $35,000,000 $25,000,000
----------- -----------
----------- -----------
Interest rate caps $ - $ 3,440,000
----------- -----------
----------- -----------

A detail of interest rate swaps at December 31, 1995 follows:

Notional Pay Fixed Receive
Amount Maturity Rate Rate Floating
------ --------- ---- -------------

F-87
<PAGE>

The following table summarizes the changes in notional amounts of swaps
outstanding during 1995:

Beginning balance $25,000,000
New swaps 10,000,000
Maturities -
-----------

Ending balance $35,000,000
-----------
-----------

As of December 31, 1995, interest rate swap maturities are as follows:

1996 $15,000,000
1997 10,000,000
2000 10,000,000
-----------

$35,000,000
-----------
-----------

Net interest settlements on swap agreements are recorded as an adjustment to
interest expense on deposis. Net interest payments and receipts totalled
approximately $10,300 and $115,000, respectively, during the six month periods
ended June 30, 1996 and 1995, respectively. Net interest receipts amounted to
approximately $187,000 during 1995; net payments amounted to approximately
$65,000 and $387,000 during 1994 and 1993, respectively.

An interest cap is a guarantee given by one party to another party, in exchange
for a premium, to ensure that if interest rates rise above an agreed upon
protected rate (in the Bank's case, the LIBOR rate) the issuer of the cap will
pay to the purchaser the difference between the market rate and the protected
rate. As of December 31, 1994, the Bank had outstanding interest rate caps
having a total notional amount of $3,440,000 which matured in 1995.

The Bank's lending area is Puerto Rico. The Bank had no significant
concentration of credit risk in any specific industry in its loan portfolio as
of December 31, 1995 and 1994.

NOTE 23 - SUPPLEMENTAL DISCLOSURE ON THE STATEMENT OF CASH FLOWS:

During the year ended December 31, 1995, the Bank paid interest amounting to

F-88
<PAGE>

approximately $26,403,000 (1994 - $16,238,000; 1993 - $10,808,000) on deposits
and other borrowings. Income tax payments made during 1995 totalled
approximately $1,820,000 (1994 - $5,696,000; 1993 $1,837,000).

During 1995 the Bank retained for investment $17,630,721 of mortgage loans
securitized from its own loan portfolio (1994 - $51,492,000, 1993 - $0).

NOTE 24 - COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

The Bank conducts its operations in leased premises under noncancellable
operating leases. Rent expense for the six month period ended June 30, 1996 and
the years ended December 31, 1995, 1994 and 1993 was $495,101, $774,912,
$567,891 and $267,754, respectively.

Amortization of leased property (included within occupancy and equipment
expenses) in 1995, 1994 and 1993 was $211,424, $196,457 and $148,596,
respectively.

Future rental commitments under the terms of operating noncancellable leases are
summarized below:

At December 31,
At June 30, 1996 1995
---------------- ----
Year (Unaudited)
---

1996 $ 500,047 $1,027,011
1997 1,089,920 1,088,470
1998 1,066,749 1,065,299
1999 984,954 983,505
2000 897,200 895,750
Later years 3,926,733 3,820,108
---------- ----------

$8,465,603 $8,880,143
---------- ----------
---------- ----------

LITIGATION

The Bank is a defendant in legal proceedings arising from normal operating
activities. Based on advice from its legal counsel, it is management's opinion
that the outcome of these matters will not have a material adverse effect on the
financial condition of the Bank.

F-89
<PAGE>

NOTE 25 - FAIR VALUE OF FINANCIAL INSTRUMENTS:

SFAS No. 107, "Disclosures about fair values of Financial Instruments" requires
entities to disclose information about the estimated fair values of their
financial instruments. Most of the Bank's assets, liabilities and off-balance
sheet products are considered financial instruments as defined by SFAS No. 107.
The estimated fair values of the Bank's financial instruments as of December 31,
1995 and 1994 are as follows:

1995 1994
------------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(In thousands) (In thousands)
FINANCIAL ASSETS
<S> <C> <C> <C> <C>
Cash and due from banks $ 18,097 $ 18,097 $ 11,810 $ 11,810
Securities purchased under agreements
to resell 21,695 21,695 10,232 10,232
Time deposits 44,930 44,930 14,131 14,131
Federal Funds purchased 5,011 5,011
Accrued interest receivable 4,052 4,052 2,870 2,870
Investment securities 47,056 46,061 88,182 82,831
Investment securities available for sale 59,447 61,008 11,684 13,300
Mortgage-backed securities held for trading 1,917 1,847 2,133 1,919
Loans 420,755 304,501
LESS: Allowance for loan losses (3,510) (2,887)
-------- -------- -------- --------

Loans, net of allowance 417,245 434,696 301,614 294,303
Loans held for sale 9,330 9,531 14,286 17,140
-------- -------- -------- --------

Total financial assets $628,780 $646,928 $456,942 $448,536
-------- -------- -------- --------
-------- -------- -------- --------

FINANCIAL LIABILITIES

Accrued interest payable $ 1,275 $ 1,275 $ 1,165 $ 1,165
Deposits:
Non interest bearing demand 52,998 52,998 35,556 35,556
Savings and NOW accounts 147,111 147,111 107,734 107,734
Certificates of deposit 316,802 321,609 235,693 233,686
Securities sold under agreements
to repurchase 10,573 10,528 11,639 11,563
Advances from FHLB-NY 6,007 6,051 13,568 13,681
Notes payable 51,000 54,108 23,600 23,338
Subordinated notes 3,250 3,741 3,250 3,331
-------- -------- -------- --------

Total financial liabilities $589,016 $597,421 $432,205 $430,054
-------- -------- -------- --------
-------- -------- -------- --------

Unrecognized financial instruments:
Interest rate swap agreements -
in a net receivable position* $14 $1,215 $10 $471

</TABLE>
- ------------------------
* The amount shown under "carrying amount" represents net accrual arising from
those unrecognized financial instruments.

F-90
<PAGE>

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

SHORT-TERM FINANCIAL INSTRUMENTS

Short-term financial instruments, which include cash and due from banks,
securities purchased under agreements to resell, time deposits, accrued interest
receivable and accrued interest payable, have been valued at their carrying
amounts reflected in the Statement of Financial Condition as these are
reasonable estimates of fair value given the relatively short period of time
between origination of the instruments and their expected realization.

INVESTMENT SECURITIES

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

LOANS

The fair value for all loans has been estimated by discounting loans with
similar financial characteristics. Loans were classified by type such as
commercial, commercial real estate, residential mortgage, and consumer. These
asset categories were further segmented into various maturity groups and by
accruing and non-accruing groups. The fair value of accruing loans was
calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. Recent prepayment experience, which is based on
industry, was assumed to continue for mortgage loans. Other loans assume little
or no prepayment.

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

DEPOSITS

Under SFAS 107, the fair value of deposits with no stated maturity, such as non-
interest bearing demand deposits, savings and NOW accounts, and money market and
checking accounts, is equal to the amount payable on demand. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.

F-91
<PAGE>

ADVANCES FROM FHLB-NY, SUBORDINATED NOTES, SECURITIES SOLD UNDER
AGREEMENT TO REPURCHASE AND NOTES PAYABLE

The fair value of the advances from FHLB-NY, subordinated notes, securities sold
under agreement to repurchase and notes payable was determined using discounted
cash flow analysis over the remaining term of the obligations using market rates
for similar instruments.

INTEREST RATE SWAP AGREEMENTS

The fair value of interest rate swap agreements was determined taking into
account the current interest rates at December 31, 1995. This value represents
the estimated amount the Bank would pay to terminate the contract or agreement
taking into account current interest rates and, when appropriate, the current
credit worthiness of the counterparties.

LIMITATIONS

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

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

F-92
<PAGE>

introduces a greater degree of subjectivity to these derived or estimated fair
values. Therefore, while disclosure of estimated fair values of financial
instruments is required, readers are cautioned in using this data for purposes
of evaluating the financial condition of the Bank.

F-93
<PAGE>

NOTE 26 - SUBSEQUENT EVENT (UNAUDITED):

F-94

<PAGE>

Annex I

(See Exhibit 2.0)

<PAGE>

Annex II

(See Exhibit 99.2)

<PAGE>

Annex III

<PAGE>

SECTION 15(d) OF THE PUERTO RICO BANKING LAW

(d) If any stockholder not voting in favor of said merger or consolidation
agreement records his opposition to such merger or consolidation at the time
of the meeting, or within twenty days thereafter, and demands payment of his
shares, and if such merger or consolidation is carried out, in such case said
stockholder may, within sixty days after the merger or consolidation, upon
written ten-day notice on said corporation, petition the Superior Court to
appoint three appraisers to estimate and determine the value of his shares,
and the court shall make such appointment. It shall also designate the date
and place where the appraisers shall first meet and shall give them such
instructions as to such procedure to be followed as the court may deem
pertinent. The court shall also specify the date and manner in which the
value of said shares shall be paid to the aforesaid stockholder. The
appraisers shall meet on the date and at the place designated, and after
taking oath, shall proceed to perform the duties imposed on them by the court
and to estimate and determine the value of the aforesaid shares. They shall
deliver a copy of their report to the corporation and another to the
stockholder, if he demands it. All expenses incurred in determining the value
of said shares shall be for account of the corporation. When the corporation
has paid the value of the aforesaid shares, as the same may have been fixed by
the appraisers, said shares shall be cancelled and the stockholder shall
cease to be a stockholder of the corporation or to have any interest
therein, and the corporation may dispose of such shares of stock for its own
benefit. In case of emergency, when necessary for a better protection of the
interests of the depositors and of the bank, if the merger or consolidation
is approved by the votes of the stockholders of three-fourths of the shares,
such merger or consolidation agreement having been submitted to the
consideration of the Secretary of the Treasury and thereby approved, the
stockholders who may not have agreed to said merger shall in all respects be
subject to, and be bound by, such merger or consolidation. The Secretary of
the Treasury shall, in these cases, certify that the merger was made on
account of an emergency, and that, in his opinion, the same will be
beneficial to the public interest. Should the Secretary of the Treasury
disapprove the merger or consolidation agreement made by reasons of emergency,
he shall, within the term of ninety days, serve notice of his determination by
registered mail on the banks interested in the agreement. The finding of the
Secretary disapproving a merger or consolidation agreement made for reasons
of emergency shall be conclusive and not reviewable.

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Article VI of the Registrant's Bylaws provide as follows:

6.1 INDEMNIFICATION.

(a) The Corporation shall indemnify, to the fullest extent authorized
by the General Corporation Law of the Commonwealth of Puerto Rico, any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the Corporation) by reason of the fact that he is or was a director, officer,
employee, or agent of the Corporation, or is or was serving at the written
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a matter he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, provided that the
Corporation shall not be liable for any amounts which may be due to any
person in connection with a settlement of any action, suit or proceeding
effected without its prior written consent or any action, suit or proceeding
initiated by any person seeking indemnification hereunder without its prior
written consent. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which he reasonably believed to be
in or not opposed to the best interests of the Corporation and, with respect
to any criminal action or proceeding, that such person had reasonable cause
to believe that his conduct was unlawful.

(b) The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer,
employee, or agent of the Corporation, or is or was serving at the written
request of the Corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation unless and only
to the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expense which such court shall deem
proper.

(c) To the extent that a director, officer, employee, or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 6.1(a) or Section 6.1(b) of
this Article VI, or in defense of any claim, issue or matter therein, he
shall be

II-1
<PAGE>

indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.

(d) Any indemnification under Section 6.1(a) or Section 6.1(b) of this
Article VI (unless ordered by a court) shall be made by the Corporation only
as authorized in the specific case upon a determination that indemnification
of the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth therein.
Such determination shall be made (a) by the Board of Directors by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, or (b) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (c) by the stockholders.

(e) The Corporation shall not be liable for any amounts which may be
due to any person in connection with a settlement of any action, suit or
proceeding initiated by any person seeking indemnification under this Article
VI without its prior written consent.

6.2 ADVANCEMENT OF EXPENSES. Reasonable expenses (including attorneys'
fees) incurred in defending a civil or criminal action, suit or proceeding
described in Section 6.1 may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding as authorized by the
Board of Directors in the specific case upon receipt of an undertaking by or
on behalf of the director or officer to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
Corporation as authorized in this Article VI.

6.3 OTHER RIGHTS AND REMEDIES. The indemnification and advancement of
expenses provided by, or granted pursuant to, this Article VI shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any statute, by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both
as to actions in their official capacity and as to actions in another
capacity while holding such office, and shall continue as to a person who has
ceased to be a director, officer, employee, or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.

6.4 INSURANCE. By action of its Board of Directors, notwithstanding
any interest of the directors in the action, the Corporation may purchase and
maintain insurance, in such amounts as the Board of Directors deems
appropriate, on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the written
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the
Corporation would have the power or would be required to indemnify him
against such liability under the provisions of this Article VI or of the
General Corporation Law of the Commonwealth of Puerto Rico, or of the laws of
any other State or political dependency of the United States or foreign
country as may be applicable.

6.5 MODIFICATION. The duties of the Corporation to indemnify and to
advance expenses to a director, officer, employee or agent provided in this
Article VI shall be in the nature of a contract between the Corporation and
each such person, and no amendment or repeal of any provision of this Article
VI shall alter, to the detriment of such person, the right of such person to
the advance of expenses or indemnification related to a claim based on an act
or failure to act which took place prior to such amendment or repeal.

II-2
<PAGE>

An unofficial english translation of Article 4.08 of the General
Corporation Law of 1996 of the Commonwealth of Puerto Rico provides:

A. A corporation may indemnify any person who is or was a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that said person was or is a director, officer employee, or agent of the
corporation, or was or is serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise. The indemnification may include
expenses reasonably incurred, including attorneys' fees, awards or judgments,
fines and amounts paid in settlement of such action, suit or proceeding, if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any legal action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person
did not act in good faith or in a manner which he reasonably believed to be
in or not opposed to the best interests of the corporation and, with respect
to any criminal action or proceeding, that the person did not have reasonable
cause to believe that his conduct was unlawful.

B. A corporation may indemnify any person who is or was a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to protect the interests of the
corporation to procure a judgment in its favor by reason of the fact that he
is or was a director, officer, employee, or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust
or other enterprise. The indemnification may include expenses reasonably
incurred, including attorneys' fees, in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in, and not opposed to, the best interests of
the corporation. No indemnification shall be made in respect of any claim,
matter or issue as to which such person shall have been adjudged to be liable
to the corporation unless, upon application therefor, the court in which such
action or suit was brought shall determine that, despite the adjudication of
liability and in view of all the circumstances of the case, such person is
fairly and reasonably entitled to be indemnified for such expenses which such
court shall deem proper, and only to the extent to which said court shall
determine.

C. To the extent that a director, officer, employee, or agent of the
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections A and B or in defense
of any claim, matter or issue related thereto, he shall be indemnified
against expenses reasonably incurred by him (including attorneys' fees) by
reason of such action, suit or proceeding.

D. Any indemnification under subsections A and B (except that ordered
by a court) shall be made by the corporation, only as authorized in the
specific case, upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met
the applicable standard of conduct set forth in subsections A and B of this
article. Such determination shall be made:

1. by the board of directors by a majority vote of a quorum consisting
of directors who were not parties to such action, suit or proceeding, even if
said directors constitute less than a quorum; or

II-3
<PAGE>

2. if there shall not be any such directors, or if such directors shall
so determine by an independent legal counsel in a written opinion to such
effect; or

3. by the stockholders.

E. Prior to the final disposition of such action, suit or proceeding,
the corporation may pay in advance expenses incurred by an officer or
director defending a civil or criminal action, suit or proceeding. Upon
receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that he is not
entitled to such indemnification by the corporation, as authorized in this
Article. Such expenses incurred by other employees and agents may be so paid
upon such terms and conditions, if any, as the board of directors deems
convenient.

F. The indemnification and advancement of expenses provided by this
Article shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement (of expenses) may be entitled under
any by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to actions in their official capacity and as to actions in
another capacity while holding such office.

G. Every corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against him or incurred by him in any such capacity,
or arising out of his status as such, whether or not the corporation would
have the power to indemnify him against such liability under the provisions
of this Article.

H. For purposes of this Article, "the corporation" shall be deemed to
include, in addition to the resulting corporations, any corporation which is
a party to any consolidation or merger that is absorbed in a consolidation or
merger which, if its separate legal existence had continued, would have had
the power and authority to indemnify its directors, officers, and employees
or agents. So that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer or employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Article with
respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate legal existence had
continued.

I. For purposes of this Article, the term "other enterprises" shall
include employee benefit plans. The term "fines" shall include any taxes
assessed on a person with respect to any benefit or employee plan. The term
"serving at the request of the corporation" shall include any service as a
director, officer, employee, or agent of the corporation which imposes duties
on, or involves services by, such director, officer, employee, or agent with
respect to an employee pension plan, its participants, or beneficiaries. A
person who acted in good faith and in a manner he reasonably believed to be
in the interest of the participants and beneficiaries of an employee pension
plan shall further be deemed to have acted in a manner "not opposed to the
best interests of the corporation" as referred to in this Article.

II-4
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:

(a) List of Exhibits:

Exhibit No. Exhibit Location
- ----------- ------- --------
2.0 Amended and Restated Agreement and Plan of Merger by and
between R&G Financial Corporation, R-G Premier Bank of
Puerto Rico (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 (1)

3.2 Certificate of Amendment to Certificate of Incorporation
of R&G Financial Corporation (1)

3.3 Bylaws of R&G Financial Corporation (1)

4.0 Form of Stock Certificate of R&G Financial Corporation (1)

5.0 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re:
legality E-1

8.0* Ruling or opinion regarding certain Puerto Rico income
tax consequences

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 (1)

10.2 Master Custodian Agreement between R&G Mortgage and the
Bank dated February 16, 1990 and as further revised by
the Ancillary Agreements Committee on December 14, 1990
and approved by the Board of Directors of the Bank on
December 21, 1990 (1)

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 (1)

10.4 Data Processing Computer Service Agreement between R&G
Mortgage and R-G Premier Bank dated December 1, 1994 (1)

10.5 Securitization Agreement by and between R&G Mortgage and
the Bank, dated as of July 1, 1995 (1)

10.6 R&G Financial Corporation Stock Option Plan (1)

23.1 Consent of Elias, Matz, Tiernan & Herrick L.L.P.
(included in Exhibit 5.0)

23.2 Consent of Price Waterhouse E-2

23.3 Consent of Friedman, Billings, Ramsey & Co., Inc. E-3

24.0 Power of Attorney (included in Signature Page of this
Registration Statement)

27.0 Financial Data Schedule (1)

99.1 Valuation Report on Minority Interest of Bank
Stockholders, prepared by Friedman, Billings, Ramsey &
Co., Inc., dated June 13, 1996. (1)

99.2 Update to Valuation on Minority Interest of Bank
Stockholders, prepared by Friedman, Billings, Ramsey &
Co., Inc., dated September 27, 199 E-4

- ------------------------
(1) Incorporated by reference to the Form S-1 Registration Statement (Reg. No.
333-06245), filed by R&G Financial Corporation with the Commission on June
18, 1996, as amended.
* To be filed by amendment.
II-5
<PAGE>

(b) FINANCIAL STATEMENT SCHEDULES

No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.

ITEM 22. UNDERTAKINGS

(a) The undersigned Registrant hereby undertakes as follows:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and

(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;

PROVIDED, HOWEVER, that paragraphs (a) (1) (i) and (a) (1) (ii)
do not apply if the registration statement is on Form S-3 or Form S-8,
and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in
the registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.

II-6
<PAGE>

(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of
such issue.

(b) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b) 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.

(c) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.

II-7
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Juan, Commonwealth of
Puerto Rico, on the 30th day of September 1996.

R&G FINANCIAL CORPORATION

By: /s/ Victor J. Galan
-----------------------------------
Victor J. Galan
Chairman of the Board and Chief
Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each of the directors and/or officers
of R&G Financial Corporation whose signature appears below hereby appoints
Victor J. Galan, as his attorney-in-fact to sign in his name and behalf, in
any and all capacities stated below and to file with the Securities and
Exchange Commission any and all amendments, including post-effective
amendments, to this Registration Statement on Form S-4, making such changes
in the Registration Statement as appropriate, and generally to do all such
things in their behalf in their capacities as directors and/or officers to
enable R&G Financial Corporation to comply with the provisions of the
Securities Act of 1933, and all requirements of the Securities and Exchange
Commission.

Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Victor J. Galan Chairman of the Board and September 30, 1996
- --------------------------- Chief Executive Officer
Victor J. Galan (principal executive officer)

/s/ Ana M. Armendariz Director, Controller and Treasurer September 30, 1996
- --------------------------- (principal accounting officer)
Ana M. Armendariz

/s/ Ramon Prats Executive Vice President and Director September 30, 1996
- ---------------------------
Ramon Prats

II-8
<PAGE>

/s/ Enrique Umpierre-Suarez Director and Secretary September 30, 1996
- ---------------------------
Enrique Umpierre-Suarez

/s/ Victor L. Galan Fundora Director September 30, 1996
- ---------------------------
Victor L. Galan Fundora

/s/ Juan J. Diaz Director September 30, 1996
- ---------------------------
Juan J. Diaz

/s/ Pedro Ramirez Director September 30, 1996
- ---------------------------
Pedro Ramirez

/s/ Laureno Carus Abarca Director September 30, 1996
- ---------------------------
Laureno Carus Abarca

/s/ Eduardo McCormack Director September 30, 1996
- ---------------------------
Eduardo McCormack

/s/ Gilberto Rivera-Arreaga Director September 30, 1996
- ---------------------------
Gilberto Rivera-Arreaga

/s/ Benigno R. Fernandez Director September 30, 1996
- ---------------------------
Benigno R. Fernandez
</TABLE>

II-9
<PAGE>

EXHIBIT INDEX

3.1 Certificate of Incorporation of R&G Financial Corporation (1)

3.2 Certificate of Amendment to Certificate of Incorporation
of R&G Financial Corporation (1)

3.3 Bylaws of R&G Financial Corporation (1)

4.0 Form of Stock Certificate of R&G Financial Corporation (1)

5.0 Opinion of Elias, Matz, Tiernan & Herrick L.L.P. re:
legality E-1

8.0* Ruling or opinion regarding certain Puerto Rico income
tax consequences

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 (1)

10.4 Data Processing Computer Service Agreement between R&G
Mortgage and R-G Premier Bank dated December 1, 1994 (1)

10.5 Securitization Agreement by and between R&G Mortgage and
the Bank, dated as of July 1, 1995 (1)

10.6 R&G Financial Corporation Stock Option Plan (1)

23.1 Consent of Elias, Matz, Tiernan & Herrick L.L.P.
(included in Exhibit 5.0)

23.2 Consent of Price Waterhouse E-2

23.3 Consent of Friedman, Billings, Ramsey & Co., Inc. E-3

24.0 Power of Attorney (included in Signature Page of this
Registration Statement)

27.0 Financial Data Schedule (1)

99.1 Valuation Report on Minority Interest of Bank
Stockholders, prepared by Friedman, Billings, Ramsey &
Co., Inc., dated June 13, 1996. (1)

99.2 Update to Valuation on Minority Interest of Bank
Stockholders, prepared by Friedman, Billings, Ramsey &
Co., Inc., dated September 27, 1996 E-4

II-10

<PAGE>

AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER

AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of September
27, 1996, amending and restating the Agreement and Plan of Merger dated as of
April 16, 1996 as amended and restated as of June 13, 1996 (as herein amended
and restated, this "AGREEMENT"), by and between R&G FINANCIAL CORPORATION, a
corporation organized under the laws of the Commonwealth of Puerto Rico
("FINANCIAL"), R-G PREMIER BANK OF PUERTO RICO, a commercial bank chartered
under the Puerto Rico Banking Law of 1933, as amended (the "BANKING LAW") (the
"BANK"), and R-G INTERIM PREMIER BANK ("INTERIM"), a Puerto Rico chartered
commercial bank organized for the sole purpose of consummating the transactions
provided for herein.

WITNESSETH:

WHEREAS, the Bank is organized under the Banking Law and has its principal
place of business at 280 Jesus T. Pinero Avenue, Hato Rey, Puerto Rico, with an
authorized capital of 10,000,000 shares of common stock, par value $1.00 per
share (the "BANK COMMON SHARES"), of which 2,089,653 are issued and outstanding,
and 2,000,000 shares of preferred stock, of which 600,000 are issued and
outstanding (the "BANK PREFERRED SHARES");

WHEREAS, Financial is authorized to issue 10,000,000 shares of its Class A
Common Stock, par value $0.01 per share (the "CLASS A SHARES"), of which
5,122,377 are issued and outstanding, and 15,000,000 shares of its Class B
Common Stock, par value $0.01 per share (the "CLASS B SHARES", and with the
Class A Shares, the "FINANCIAL COMMON SHARES"), of which 2,435,000 are issued
and outstanding;

<PAGE>

-2-

WHEREAS, on July 19, 1996, Financial became the holding company of the Bank
(the "Reorganization"), pursuant to the approval of the Board of Governors of
the Federal Reserve Board (the "FRB") and the Office of the Commissioner of
Financial Institutions of the Commonwealth of Puerto Rico;

WHEREAS, in connection with the Reorganization, on July 19, 1996,
Mr. Victor J. Galan contributed to Financial (a) his 100% ownership of the
outstanding common stock of R&G Mortgage Corp. and (b) all of his 1,840,982 Bank
Common Shares (the "GALAN BANK SHARES") in exchange for 5,189,044 Class A
Shares, and Financial desires to acquire, in addition to the Galan Bank Shares,
all of the remaining outstanding Bank Common Shares not owned by it (the
"REMAINING BANK SHARES") in exchange for a number of Class B Shares (the
"FINANCIAL EXCHANGE SHARES");

WHEREAS, on June 18, 1996, Financial filed a Registration Statement (the
"REGISTRATION STATEMENT") with the Securities and Exchange Commission (the
"SEC") with respect to the proposed issuance and sale (a) by Financial of Class
B Shares in a firm commitment initial public offering following the approval of
its bank holding company application and the consummation of the Reorganization,
(b) by Victor J. Galan of Class B Shares received in exchange for certain or his
Class A Shares in the same public offering (collectively, the issuance and sale
of Class B Shares is referred to as the "Public Offering"), and (c) the exchange
by Financial of Class B Shares for the Remaining Bank Shares (the "EXCHANGE
TRANSACTION") (with the actual number of Class B Shares to be so issued pursuant
to the Exchange Transaction being determined in connection with the underwritten
public offering of Class B Shares);

WHEREAS, due to an unanticipated position of the SEC expressed during its
review of the Registration Statement, it became necessary to separate the
Exchange Transaction from the Public Offering; the Registration Statement
declared effective by

<PAGE>

-3-

the SEC (including an additional Registration Statement
filed on August 22, 1996 to register additional Class B Shares) solely related
the Class B Shares to be issued in the Public Offering (the "REGISTERED CLASS B
SHARES"), and the Public Offering was consummated on August 27, 1996, with the
issuance and sale to the public of the 2,415,000 Class B Shares;

WHEREAS, the parties have determined that it is in the best interest of
their respective shareholders that the Exchange Transaction be effected as
promptly as practicable, and to that end Financial intends to file a new
Registration Statement (the "EXCHANGE REGISTRATION STATEMENT") with respect to
Class B Shares to be issued in the Exchange Transaction;

WHEREAS, Financial caused Interim to be organized solely to facilitate the
Exchange Transaction, with its principal office at the same address as that of
the Bank, with all of the shares of capital stock of Interim to be issued prior
to the Merger to be held by Financial (except for any shares that may be
required to be held by the directors of Interim as Qualifying Shares prior to
the merger described herein); and

WHEREAS, upon the receipt of all applicable regulatory approvals, Interim
shall be merged with and into the Bank ("MERGER"), and the Exchange Transaction
shall be consummated;

NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, Financial, the Bank and Interim hereby agree that,
subject to the conditions hereinafter set forth, Interim shall be merged with
and into the Bank with the Bank as the Resulting Bank. The terms and conditions
of the Merger shall be as follows:

<PAGE>

-4-

1. REGULATORY APPROVALS.

(a) The Merger shall not become effective until receipt of all
requisite approvals of the Federal Deposit Insurance Corporation ("FDIC") and
the OCFI with respect to the Merger, and the expiration of all applicable
waiting periods.

(b) Financial, the Bank and Interim shall have obtained all other
consents, permissions and approvals and taken all actions required by law or
agreement, or deemed necessary by such parties prior to the consummation of the
Agreement.

2. CONDITIONS TO EFFECTIVENESS OF MERGER.

The Merger shall not become effective until the SEC and any applicable
state securities commission shall have declared effective the Exchange
Registration Statement with respect to the Financial Exchange Shares which are
the subject of the Exchange Transaction.

3. IDENTITY AND NAME OF RESULTING BANK.

The Bank shall be the Resulting Bank in the Merger, which shall
continue to operate under its present name.

4. OFFICES OF RESULTING BANK.

The home office of the Resulting Bank shall be the Bank's main office
located at 280 Jesus T. Pinero Avenue, Hato Rey, San Juan, Puerto Rico.

<PAGE>

-5-

5. THE RESULTING BANK'S ARTICLES OF INCORPORATION AND BYLAWS.

The Articles of Incorporation and Bylaws of the Bank as in effect
immediately prior to the effectiveness of the Merger shall be the Articles of
Incorporation and Bylaws of the Resulting Bank, with no amendment being made as
part of the Merger.

6. EFFECTIVE DATE.

The effective date of the Merger ("Effective Date") shall be the date
as soon as practicable after the issuance by the FDIC and OCFI of all requisite
approvals, certificates and documents as may be required in order to cause the
Merger to become effective, the expiration of all applicable waiting periods and
the receipt of all requisite Bank stockholder approval required by Section 7
hereof. The Merger shall become effective at the time this Agreement is
properly perfected and filed in accordance with the Banking Law.

7. BANK STOCKHOLDER APPROVAL.

The affirmative vote of the holders of more than three-fourths of the
aggregate issued and outstanding Bank Common Shares and Bank Preferred Shares
shall be required to approve this Agreement. The Bank will take any action
necessary in accordance with applicable law and its Certificate of Incorporation
and Bylaws to convene a meeting of stockholders, or to take such other action as
is permitted by law, as promptly or practicable after the date hereof to
consider and vote upon the approval of this Agreement. Notice shall be given to
Bank stockholders of such meeting, of the transaction contemplated by this
Agreement, and of the intention of Financial to vote (a) all of the Galan Bank
Shares which it acquired in connection with the

<PAGE>

-6-

Reorganization, which represent a controlling interest in the Bank's
capital stock, in favor of the transaction, and (b) all of the Bank
Preferred Shares, in favor of the transaction.

8. INTERIM STOCKHOLDER APPROVAL.

The approval of Financial, as the sole stockholder of Interim, shall
be required to approve this Agreement.

9. CONVERSION OF OUTSTANDING BANK COMMON STOCK.

(a) Upon the Effective Date:

(i) (A) Each Bank Common Share outstanding immediately prior to
the Effective Date shall, without any further action on the part of
the Bank or any other person, shall be treated in the following
manner:

(I) the Galan Bank Shares heretofore acquired by Financial in
exchange for Class A Shares shall be unaffected by the Merger and
shall constitute and continue to be one share of common stock of
the Resulting Bank; and

(II) in the case of the Remaining Bank Shares, an obligation of
the Resulting Bank (an "OBLIGATION") to cause Financial to
deliver to the holder thereof the corresponding number of
Financial Exchange Shares for each Bank Common Share so
converted, as determined pursuant to subparagraph C below.

<PAGE>

-7-

(B) Such conversion and allocation of the Remaining Bank
Shares shall not in any way preclude or prevent any such holder from
exercising his statutory right to dissent from the Merger, to demand
appraisal for such holder's Remaining Bank Shares, and to receive from
the Resulting Bank payment of the value of his Remaining Bank Shares
and such other rights and benefits as are provided by law.

(C) Immediately after the treatment provided in
subparagraph (A) above, Financial shall, on behalf of the Resulting
Bank and as consideration for the benefits received by Financial
hereunder, issue to each recordholder of Obligations of the Resulting
Bank a number of Financial Exchange Shares which represents (i) the
number of particular Obligations allocated to such recordholder,
multiplied by (ii) 1.23 (the "Exchange Ratio"), and the Obligations
shall thereupon be cancelled.

(D) Each holder of a certificate that, immediately prior to
the Effective Date, represented Remaining Bank Shares that were
converted pursuant to this Section (a "Bank Stock Certificate") may,
at any time after the Effective Date, deliver to Financial (or to its
transfer agent, which may be the Resulting Bank) such Bank Stock
Certificate and the letter of transmittal which shall be provided by
Financial, in exchange for a certificate or certificates (as the
holder requests) representing the appropriate number of Financial
Exchange Shares, and the payment of cash in lieu of fractions,
dividends, and other distributions on said stock may be withheld until
the Bank Stock Certificate is surrendered for exchange to the transfer
agent for Financial Common Shares; and when such new certificates are
issued, the holders thereof shall be entitled to be paid the amount
(without any interest thereon) of all such withheld cash in

<PAGE>

-8-

lieu of fractions, dividends, or other distributions which have
theretofore become payable with respect to such Financial Common
Shares.

(E) After the Effective Date there will be no transfers on
the stock record books of the Resulting Bank of the Remaining Bank
Shares which were converted pursuant to this Section. If, after the
Effective Date, Bank Stock Certificates are presented to the Resulting
Bank, they shall be cancelled and exchanged for Financial Exchange
Shares as provided in this Section.

(F) As of the Effective Date, the holders of Remaining Bank
Shares shall cease to have any rights with respect to Remaining Bank
Shares and their sole rights on and following the Effective Date shall
be with respect to the Obligations and the Financial Exchange Shares
for which their Remaining Bank Shares shall have been exchanged as a
result of the Merger.

(ii) The Resulting Bank shall issue 248,671 shares of its common
stock to Financial (constituting all Bank Common Shares not owned by
Financial), and shall issue any directors' Qualifying Shares that may
be required by, and in accordance with, the Banking Law.

(b) Each Bank Preferred Share outstanding immediately prior to the
Effective Date shall be unaffected by the Merger and shall constitute and
continue to be an outstanding Bank Preferred Share of the Resulting Bank.

<PAGE>

-9-

(c) Each Bank Common Share held by Financial immediately prior to the
effective Date shall be unaffected by the Merger and shall constitute and
continue to be one share of common stock of the Resulting Bank.

(d) Notwithstanding any provision of this Agreement to the contrary,
if holders of the Remaining Bank Shares are entitled to demand appraisal
for their Remaining Bank Shares under the Banking Law, the following shall
apply:

(i) Any Remaining Bank Shares held by a holder who has demanded
appraisal of his Remaining Bank Shares and as of the Effective Date
has neither effectively withdrawn nor lost his right to such appraisal
(the "DISSENTING SHARES") shall not be converted in the manner set
forth in subsection (a) of this Section, but the holder thereof shall
only be entitled to such rights as are granted by the Banking Law.

(ii) Notwithstanding the provisions of paragraph (e)(i) above, if
any holder of Dissenting Shares shall effectively withdraw or lose
(through failure to perfect or otherwise) his right to appraisal, then
as of the Effective Date or the occurrence of such event, whichever
later occurs, such Dissenting Shares shall automatically be converted
as provided in paragraph (a)(i) of this Section.

10. STOCK OF INTERIM.

The issued and outstanding shares of common stock of Interim owned by
Financial on the Effective Date shall be converted into the right to receive an
amount in cash equal to the par value thereof, and shall thereupon be cancelled
upon consummation of the Merger.

<PAGE>

-10-
11. EFFECTS OF MERGER.

(a) All deposit accounts of the Bank shall be and will become
deposits in the Resulting Bank without change in their respective terms,
interest rates, maturities, minimum required balances or withdrawal values.
After the Effective Date, the Resulting Bank will continue to issue deposit
accounts on the same basis as immediately prior to the Effective Date.

(b) Upon the Effective Date, all assets and property (real, personal
and mixed, tangible and intangible, choses in action, rights and credits) then
owned by the Bank or Interim or which would inure to either of them, shall
immediately by operation of law and without any conveyance, transfer or further
action, become the property of the Resulting Bank, which shall have, hold and
enjoy them in its own right as fully and to the same extent as they were
possessed, held and enjoyed by the Bank and Interim immediately prior to the
Effective Date of the Merger. The Resulting Bank shall be deemed to be a
continuation of the entity of both the Bank and Interim and all of the rights
and obligations of the Bank and Interim shall remain unimpaired; and the
Resulting Bank, upon the Effective Date of the Merger, shall succeed to all
those rights and obligations and the duties and liabilities connected therewith.

(c) Upon the Effective Date, the Resulting Bank shall have
outstanding 2,089,653 shares of its common stock, and the 600,000 Bank Preferred
Shares.

12. DIRECTORS.

The Board of Directors of the Resulting Bank shall be comprised of
all of the current twelve (12) members of the Board of Directors of the
Bank, whose names and addresses are listed in Appendix I attached
hereto, immediately prior to the

<PAGE>

-11-

Effective Date, and each director shall serve for the term such director
is currently serving as director of the Bank or until a successor director is
elected.

13. OFFICERS.

The officers of the Bank shall be and will become the officers of the
Resulting Bank.

14. INCOME TAX MATTERS.

Prior to the Effective Date, the parties hereto shall have received an
opinion of counsel or tax ruling, satisfactory to them in form and substance,
with respect to the Puerto Rico income tax consequences of the Merger.

15. AMENDMENT OR TERMINATION OF THE AGREEMENT.

This Agreement may be modified at any time or terminated by mutual
written agreement of the Boards of Directors of Financial, the Bank or Interim.

Any of the terms or conditions of this Agreement which may be legally
waived may be waived at any time by any party hereto which is entitled to the
benefit thereof, by actions taken or authorized by the Board of Directors of
such party.

16. GOVERNING LAW.

This Agreement is made pursuant to, and shall be construed and be
governed by, the laws of the Commonwealth of Puerto Rico.

<PAGE>

-12-

17. ALL TERMS INCLUDED.

This Agreement sets forth all terms, conditions, agreements and
understandings of the parties hereto with respect to the Merger.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on its behalf by its officers thereunto duly authorized, all as of
the date first above written.

R&G FINANCIAL CORP.

By: /S/ VICTOR J. GALAN
_____________________________
Victor J. Galan
President
Chief Executive Officer
and Chairman of the Board

R-G PREMIER BANK OF PUERTO RICO

By: /S/ VICTOR J. GALAN
_____________________________
Victor J. Galan
President
Chief Executive Officer
and Chairman of the Board

R-G PREMIER INTERIM BANK

By: /S/ VICTOR J. GALAN
_____________________________
Victor J. Galan
President

<PAGE>

APPENDIX I

Ana M. Armendariz Eduardo McCormack
Condominio Hato Rey Plaza One Street, Block 3 No. 3
Apartment 4-E Alturas de Torrimar
Hato Rey, PR 00918 Guaynabo, PR 00969

Victor L. Galan-Fundora Ramon Prats
Condominio The Falls Paseo Alto No. 41
Apartment J-7 Box 422 Los Paseos
Guaynabo, PR 00969 Rio Piedras, PR 00926

Pedro Ramirez-Soltero Enrique Umpierre-Suarez
Romany Park A-6 9 Gabrielle Street
Rio Piedras, PR 00926 Monte Alvernia
Rio Piedras, PR 00927

Juan J. Diaz Gilberto Rivera-Arreaga
A-22 Alborada Street C-24 Nardos Street
Highland Gardens Enramada
Guaynabo, PR 00969 Bayamon, PR 00961

Laureano Carus-Abarca Benigno R. Fernandez
9-A Pino de Rio Street EE-14 Poppy Street
Garden Hills Borinquen Gardens
Guaynabo, PR 00969 Rio Piedras, PR 00926

Victor J. Galan
M-2 Clavel Street
Parque de Santa Maria
Rio Piedras, PR 00927

Jeanne Ubinas
Condominio Laguna
548 O'Hare Street and
Baldorioty de Castro Avenue
Miramar
San Juan, PR 00907

<PAGE>

[LETTERHEAD]

October 1, 1996

Board of Directors
R&G Financial Corporation
280 Jesus T. Pinero Avenue
San Juan, Puerto Rico 00918

Re: Registration Statement on Form S-4
300,962 Shares of Class B Common Stock

Ladies and Gentlemen:

We have acted as special counsel of R&G Financial Corporation (the
"Company") in connection with the preparation and filing with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, as amended,
of the registration statement on Form S-4 (the "Registration Statement")
relating to the issuance of up to 300,962 shares of the Company's Class B
common stock, $.01 par value per share (the "Shares"), in connection with the
proposed merger of R-G Premier Bank of Puerto Rico with and into R-G Interim
Premier Bank, a wholly-owned subsidiary of the Company, all as described in
the Registration Statement. As such counsel, we have made such legal and
factual examinations and inquiries as we deemed advisable for the purpose of
rendering this opinion.

Based upon the foregoing, it is our opinion that the Shares, when
issued, delivered and exchanged in the manner described in the Registration
Statement, will be legally issued, fully paid and nonassessable.

We hereby consent to the filing of this opinion as an exhibit to the
Company's Registration Statement, and we consent to the use of our name and
under the heading "Legal Opinion" in the Prospectus/Information Statement
constituting a part thereof.

ELIAS, MATZ, TIERNAN & HERRICK L.L.P.

By: /s/ Norman B. Antin
---------------------------
Norman B. Antin, a Partner

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of our report dated June 12, 1996,
except as to the stock exchange transaction described in Note 1 which is as
of July 19, 1996, relating to the consolidated financial statements of R&G
Financial Corporation, and of our report dated February 2, 1996, except as
to the stock exchange transaction described in Note 1 which is as of July
19, 1996, relating to the financial statements of R-G Premier Bank of Puerto
Rico, which appear in such Prospectus. We also consent to the reference to
us under the heading "Experts" in such Prospectus.

/s/ Price Waterhouse

PRICE WATERHOUSE
September 30, 1996

<PAGE>

Exhibit 23.3

September 30, 1996

We hereby consent to the use of our firm's name in the Registration Statement
on Form S-4 of R&G Financial Corporation and any amendments thereto. We also
consent to the inclusion of, summary of and references to our valuation
report of R-G Premier Bank of Puerto Rico in such Registration Statement,
including the Prospectus.

FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

<PAGE>

Exhibit 99.2

September 27, 1996

Members of the Board
R&G Financial Corporation
R-G Plaza Building
280 Jesus T. Pinero, Hyde Park
Hato Rey, PR 00918

Gentlemen and Ladies:

You have asked for our opinion as investment bankers as to determine the
fair value for the minority interest in R&G Premier Bank (the "Bank"), and
determine what percentage the minority interest will own of the new holding
company R&G Financial Corporation.

The background and experience of the principals of FBR are provided as an
exhibit to this report. We believe that, except for the fee we will
receive in connection with the public offering that we have underwritten,
we are independent of the Bank and the holding company.

In preparing this appraisal, we considered the following factors, among
others:

1. The nature of the business and the history of the Bank since its purchase
in February 1990.
2. The economic outlook in general and the condition and outlook of the
banking industry in particular.
3. The book value of the stock and the financial condition of the Bank.
4. The earning capacity of the Bank.
5. The dividend paying capacity of the Bank.
6. Asset generation capability of the Bank and the Mortgage Bank
7. Sales of the stock and the size of the block of stock to be valued.
8. The market price of stocks of thrifts, banks and mortgage banks engaged in
the same or similar lines of business having their stocks actively traded
in a free and open market, either on an exchange or over the counter.
9. The current trading value of R&G Financial Corporation.

<PAGE>

Among the various sources of information used to perform this appraisal
were the following:

1. Audited and unaudited financial statements for the Bank for the period
ending December 31, 1996, March 31, 1996 and June 30, 1996.

2. The Bank's Form S-1 that was prepared in connection with the public
offering of R&G Financial Corporation.

3. Discussions of the past and current operations, financial condition and
prospects of R-G Premier Bank and R&G Mortgage Corporation with the
management R-G Premier Bank and R&G Mortgage Corporation;

4. Review of R-G Premier Bank and R&G Mortgage Corporation business plans
and analysis of certain financial projections prepared by management;

5. Review the financial condition published in annual reports, 10-K's, and
10-Q's and the reported prices and trading activity for the common stock
of certain publicly traded companies which FBR deemed to be reasonably
comparable to R-G Premier Bank and R&G Mortgage Corporation and the
financial condition of R-G Premier Bank and R&G Mortgage Corporation;

6. Discussions with the Bank's independent auditors and special counsel.

7. Market area demographic and deposit information on the Commonwealth of
Puerto Rico.

8. Other analyses and review of such other information as FBR deemed
appropriate.

Our appraisal is based on R-G Premier Bank and R&G Mortgage Corporation's
representation that the financial and other information provided to us by
the Bank is truthful, accurate and complete. We have not independently
verified the financial statements and other information provided by the
Bank and its independent auditors, nor have we valued independently the
assets or liabilities of the Bank. Our valuation considers R&G Financial
Corporation only as a going concern and should not be considered as an
indication of the liquidation value of the Bank.

It is our opinion that as of September 27, 1996 the estimated value of R-G
Premier Bank's minority shares was $5.3 million or $21.48 per share. Given
R&G Financial Corporation's current trading value of $17.75 per share, the
appropriate exchange ratio for the minority shareholders is deemed to be
1.21 R&G Financial Corporation shares for each minority share of R-G
Premier Bank, or 300,962 shares in total of R&G Financial Corporation
representing 3.84% of the Company's shares on a pro forma basis.

<PAGE>

Our valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of
common stock. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject
to change from time to time, no assurance can be given that persons who
purchase shares of common stock will thereafter be able to sell such shares
at prices related to the foregoing valuation.

Very Truly Yours,

FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

By: /S/ KAREN K. EDWARDS
---------------------------------------
Karen K. Edwards, CFA
Managing Director