consists of fixed-rate, fully amortizing, full documentation loans and over 90% of the Corporation's securities portfolio is invested in U.S. Government and Agency debentures and U.S. government-sponsored agency fixed-rate mortgage-backed securities ("MBS") (mainly FNMA and FHLMC fixed-rate securities). In connection with the placement of FNMA and FHLMC into conservatorship by the U.S. Treasury in September 2008, the Treasury entered into agreements to invest up to approximately $100 billion in each agency to, among other things, protect debt and mortgage-backed securities of the agencies. As of December 31, 2008 the Corporation had $4.0 billion and $0.9 billion in FNMA and FHLMC mortgage-backed securities and debt securities, respectively, representing approximately 87% of the total investment portfolio. The Corporation's investment in equity securities is minimal, and it does not own any equity or debt securities of U.S. financial institutions that recently failed. Also, as part of its credit risk management, the Corporation maintains strict and conservative underwriting guidelines, diversifies the counterparties used and monitors the concentration of risk to limit its counterparty exposure. For more information on current exposure with respect to the Corporation's derivative instruments and outstanding repurchase agreements by counterparty, management of liquidity risk and current liquidity levels, see the "Risk Management" discussion below and Notes 13, 29 and 30 to the Corporation's audited financial statements for the year ended December 31, 2008 included in Item 8 of this Form 10-K.
The Corporation's principal market is Puerto Rico. Although affected by the economic situation in the United States, Puerto Rico's economy has been in a recession since early 2006 due to several local conditions including Puerto Rico government budget shortfalls and diminished consumer buying power. Nevertheless, the election of new governments in Puerto Rico and in the United States and the expectations of new measures to positively impact the economy may renew the confidence of consumers and businesses in Puerto Rico. The Corporation has seen stress in the credit quality of, and worsening trends affecting its construction loan portfolio, in particular condo conversion loans in the U.S. mainland (mainly in the state of Florida) affected by the continuing deterioration in the health of the economy, an oversupply of new homes and declining housing prices in the United States. The Corporation also increased its reserves for the residential mortgage, commercial and construction loan portfolio from the 2007 level to account for the increased credit risk tied to recessionary conditions in Puerto Rico's economy. Nevertheless, the Puerto Rico housing market has not seen the dramatic decline in housing prices that is affecting the U.S. mainland but there is a lower demand due to the diminished consumer's acquisition power and confidence. Since 2005 the Corporation has taken actions and implemented initiatives designed to strengthen the Corporation's credit policies as well as loss mitigation initiatives that have begun to have the desired effects as reflected by a decrease in consumer loans charge-offs and a relative stability in non-performing residential mortgage loans (as a percentage of total residential mortgage loans) . The degree of the impact of economic conditions on the Corporation's financial results is dependent upon the duration and severity of the aforementioned conditions. For example, the credit risk is affected by a deteriorating economy to the extent that the borrowers' spending capacity is decreased and, as a result, may not be able to make scheduled payments when due. A deteriorating economy could also lead to a decline in real estate values and therefore the reduction of the borrowers' capacity to refinance loans and increase the Corporation's exposure to losses upon default. For more information on credit quality, see the "Risk Management -Allowance for Loan and Lease Losses and Non-performing Assets" discussion below.

OVERVIEW OF RESULTS OF OPERATIONS
First BanCorp's results of operations depend primarily upon its net interest income, which is the difference between the interest income earned on its interest-earning assets, including investment securities and loans, and the interest expense incurred on its interest-bearing liabilities, including deposits and borrowings. Net interest income is affected by various factors, including: the interest rate scenario; the volumes, mix and composition of interest-earning assets and interest-bearing liabilities; and the re-pricing characteristics of these assets and liabilities. The Corporation's results of operations also depend on the provision for loan and lease losses, non-interest expenses (such as personnel, occupancy and other costs), non-interest income (mainly service charges and fees on loans and deposits and insurance income), the results of its hedging activities, gains (losses) on investments, gains (losses) on sale of loans, and income taxes.
Net income for the year ended December 31, 2008 amounted to $109.9 million or $0.75 per diluted common share, compared to $68.1 million or $0.32 per diluted common share for 2007 and $84.6 million or $0.53 per diluted common share for 2006.
The Corporation's financial performance for 2008, as compared to 2007, was principally impacted by: (i) an increase of $76.9 million in net interest income, as the Corporation benefited from lower short-term interest rates on its interest-bearing liabilities as compared to rate levels during 2007 that more than offset lower loan yields on its commercial and construction loan portfolio,
(ii) an income tax benefit of $31.7 million for 2008 compared to an income tax expense of $21.6 million for 2007, a fluctuation mainly related to lower taxable income, the reversal of $10.6 million of Unrecognized Tax Benefits ("UTBs"), and an income tax benefit of $5.4 million in connection with an agreement entered into with the Puerto Rico taxing authority, as discussed below, and (iii) a net gain on investments of $21.2 million in 2008 compared to a net loss of $2.7 million in 2007, impacted by a gain of $9.3 million on the mandatory redemption of a portion of the Corporation's investment in VISA, Inc. ("VISA") as part of VISA's Initial Public Offering ("IPO") in March 2008 and realized gains of $17.9 million on the sale of fixed-rate MBS. These factors were partially offset by: (i) an increase of $70.3 million in the provision for loan and lease losses due to the increase in delinquency levels and increases in specific reserves for impaired commercial and construction loans adversely impacted by deteriorating economic conditions, and (ii) an increase of $19.0 million in losses on real estate owned operations ("REO") driven by a higher volume of repossessed properties and declining real estate prices, mainly in the U.S. mainland, that have caused write-downs in the value of repossessed properties.

The following table summarizes the effect of the aforementioned factors and other factors that significantly impacted financial results in previous years on net income attributable to common stockholders and earnings per common share for the last three years:

                                                                   Year Ended December 31,
                                         2008                                2007                                2006
                              Dollars          Per Share          Dollars          Per Share          Dollars          Per Share
                                                     (In thousands, except for per common share amounts)
Net income attributable
to common stockholders
for prior year               $  27,860        $      0.32        $  44,358        $      0.53        $  74,328        $      0.90
Increase
(decrease) from changes
in:
Net interest income             76,865               0.88            7,322               0.09           11,375               0.14
Provision for loan and
lease losses                   (70,338 )            (0.81 )        (45,619 )            (0.55 )        (24,347 )            (0.29 )
Net gain (loss) on
investments and
impairments                     23,919               0.28            5,468               0.06          (20,533 )            (0.25 )
Gain (loss) on partial
extinguishment and
recharacterization of
secured commercial
loans to local
financial institutions          (2,497 )            (0.03 )         13,137               0.16          (10,640 )            (0.13 )
Gain on sale of credit
card portfolio                  (2,819 )            (0.03 )          2,319               0.03              500               0.01
Insurance reimbursement
and other agreements
related to a
contingency settlement         (15,075 )            (0.17 )         15,075               0.18                -                  -
Other non-interest
income                           3,959               0.05             (179 )                -           (1,068 )            (0.01 )
Employees' compensation
and benefits                    (1,490 )            (0.02 )        (12,840 )            (0.15 )        (25,445 )            (0.31 )
Professional fees                4,942               0.06           11,344               0.13          (18,708 )            (0.23 )
Deposit insurance
premium                         (3,424 )            (0.04 )         (5,073 )            (0.06 )           (366 )                -
Provision for
contingencies (SEC &
Class Action suit
settlements)                         -                  -                -                  -           82,750               1.00
Net loss on REO
operations                     (18,973 )            (0.22 )         (2,382 )            (0.03 )            325                  -
All other operating
expenses                        (6,583 )            (0.08 )        (10,929 )            (0.13 )        (11,387 )            (0.14 )
Income tax provision            53,315               0.61            5,859               0.07          (12,426 )            (0.15 )

Net income after
preferred stock
dividends and change in
average common shares           69,661               0.80           27,860               0.33           44,358               0.54
Change in average
common shares (1)                    -              (0.05 )              -              (0.01 )              -              (0.01 )

Net income attributable
to common stockholders       $  69,661        $      0.75        $  27,860        $      0.32        $  44,358        $      0.53

(1) For 2008, mainly attributed to the sale of 9.250 million common shares to the Bank of Nova Scotia
("Scotiabank") in the second half of 2007.

• Net income for the year ended December 31, 2008 was $109.9 million compared to $68.1 million and $84.6 million for the years ended December 31, 2007 and 2006, respectively.

• Diluted earnings per common share for the year ended December 31, 2008 amounted to $0.75 compared to $0.32 and $0.53 for the years ended December 31, 2007 and 2006, respectively.

• Net interest income for the year ended December 31, 2008 was $527.9 million compared to $451.0 million and $443.7 million for the years ended December 31, 2007 and 2006, respectively. Net interest spread and margin on an adjusted tax equivalent basis (for definition and reconciliation of this non-GAAP measure, refer to the "Net Interest Income"discussion below) were 2.83% and 3.20%, respectively, up 54 and 37 basis points from 2007. The increase for 2008 compared to 2007 was mainly associated with a decrease in the average cost of funds resulting from lower short-term interest rates and to a lesser extent to a higher volume of interest earning assets. The decrease in funding costs more than offset lower loan yields resulting from the repricing of variable-rate construction and commercial loans tied to short-term indexes and from a higher volume of non-accrual loans.

Approximately $14.2 million of the total net interest income increase is related to positive fluctuations in the fair value of derivative instruments and financial liabilities elected to be measured at fair value under Statement of Financial Accounting Standards No. ("SFAS") 159, "The Fair Value Option for Financial Assets and Financial Liabilities". Most of the Corporation's derivative instruments are interest rate swaps used to economically hedge callable brokered CDs and medium-term notes.
Average earning assets for 2008 increased by $1.3 billion, as compared to 2007, driven by commercial and residential real estate loan originations, and to a lesser extent, purchases of loans during 2008 that contributed to a wider spread. In addition, the Corporation purchased approximately $3.2 billion in U.S. government agency fixed-rate MBS having an average yield of 5.44% during 2008, which is higher than the cost of the borrowing required to finance the purchase of such assets; thus contributing to a higher net interest income as compared to 2007. Refer to the "Net Interest Income"discussion below for additional information.

The increase in net interest income for 2007, compared to 2006, was principally due to the effect in the financial results of 2006 of unrealized losses related to changes in the fair value of derivative instruments prior to the implementation of the long-haul method of accounting on April 3, 2006. Prior to the second quarter of 2006, the Corporation recorded changes in the fair value of derivative instruments as non-hedging instruments through operations as part of interest expense. The adoption of fair value hedge accounting in the second quarter of 2006 and the adoption of SFAS 159 in 2007 reduced the accounting volatility that previously resulted from the accounting asymmetry created by accounting for the financial liabilities at amortized cost and the derivatives at fair value. The mark-to-market valuation changes for the year ended December 31, 2007 amounted to a net non-cash loss of $9.1 million, compared to net non-cash losses of $58.2 million for 2006.
Net interest income on an adjusted tax equivalent basis decreased 10% for 2007, as compared to 2006, (from $529.9 million in 2006 to $475.4 million in 2007). Adjusted tax equivalent net interest income excludes the effect of mark-to-market valuation changes on derivative instruments and financial liabilities measured at fair value and includes an adjustment that increases interest income on tax-exempt securities and loans by an amount which makes tax-exempt income comparable, on a pre-tax basis, to the Corporation's taxable income. The decrease in adjusted tax equivalent net interest income in 2007, as compared to 2006, was mainly driven by the continued pressure of the flattening of the yield curve during most of 2007 and the decrease in the average volume of interest earning assets primarily attributable to the repayment of approximately $2.4 billion received from a local financial institution reducing the balance of its secured commercial loan with the Corporation during the latter part of the second quarter of 2006.
• The provision for loan and lease losses for 2008 was $190.9 million compared to $120.6 million and $75.0 million for 2007 and 2006, respectively. The increase for 2008, as compared to 2007, is mainly attributable to the significant increase in delinquency levels and increases in specific reserves for impaired commercial and construction loans. During 2008, the Corporation experienced continued stress in the credit quality of and worsening trends on its construction loan portfolio, in particular, condo-conversion loans affected by the continuing deterioration in the health of the economy, an oversupply of new homes and declining housing prices in the United States and on its commercial loan portfolio adversely impacted by deteriorating economic conditions in Puerto Rico. Also, higher reserves for residential mortgage loans in Puerto Rico and in the United States were necessary to account for the credit risk tied to recessionary conditions in the economy. The current economic recession in Puerto Rico is expected to continue at least through the remainder of 2009.

The increase in the Corporation's provision for 2007, as compared to 2006, was due to a deterioration in the credit quality of the Corporation's loan portfolio which was associated with the weakening economic conditions in Puerto Rico and the slowdown in the United States housing sector. These conditions resulted in higher net charge-offs relating to Puerto Rico consumer loans as well as commercial and construction loans, representing an increase of $6.9 million and $8.7 million, respectively, as compared to 2006 and higher provisions allocated to the Corporation's construction loan portfolio originated by its Corporate Banking operations in Miami, Florida (USA). During the second half of 2007, the Corporation recorded a specific reserve of $8.1 million on four condo-conversion loans with an aggregate principal balance at the date of the evaluation of $60.5 million extended to a single borrower.
Refer to the "Provision for Loan and Lease Losses" and "Risk Management" discussions below for additional information with respect to this troubled relationship and further analysis of the allowance for loan and lease losses and non-performing assets and related ratios.
• Non-interest income for the year ended December 31, 2008 was $74.6 million compared to $67.2 million and $31.3 million for the years ended December 31, 2007 and 2006, respectively. The increase in non-interest income in 2008, compared to 2007, is related to a realized gain of $17.7 million on the sale of investment securities (mainly U.S. sponsored agency fixed-rate MBS) and to the gain of $9.3 million on the sale of part of the Corporation's investment in VISA in connection with VISA's IPO. A surge in MBS prices, mainly due to the recent announcement of the Federal Reserve ("FED") that it will invest up to $600 billion in obligations from U.S. government-sponsored agencies, including $500 billion in MBS, provided an opportunity to realize a gain on the sale of approximately $284 million fixed-rate U.S. agency MBS at a gain of $11.0 million. Early in 2008, a spike and subsequent contraction in yield spread for U.S. agency MBS also provided an opportunity for the sale of approximately $242 million and a realized gain of $6.9 million.

Higher point of sale (POS) and ATM interchange fee income and an increase in fee income from cash management services provided to corporate customers also contributed to the increase in non-interest income. The increase in non-interest income attributable to these activities was partially offset, when comparing 2008 to 2007, by isolated events such as the $15.1 million income recognition for reimbursement expenses related to the class action lawsuit settled in 2007 (see below), and a gain of $2.8 million on the sale of a credit card portfolio and $2.5 million on the partial extinguishment and recharacterization of a secured commercial loan to a local financial institution that were all recognized in 2007.
The increase in non-interest income in 2007, compared to 2006, was mainly attributable to the income recognition of approximately $15.1 million for reimbursement of expenses, mainly from insurance carriers, related to the settlement of the class action lawsuit brought against the Corporation, a decrease of $9.3 million in other-than-temporary impairment charges related to the Corporation's equity securities portfolio, the fluctuation resulting from gains and losses recorded on partial repayments of certain secured commercial loans extended to local financial institutions (a gain of $2.5 million recorded in 2007 compared to a loss of $10.6 million recorded in 2006), a higher gain on the sale of its credit card portfolio (a gain of $2.8 million recorded in 2007 compared to $0.5 million recorded in 2006) pursuant to a strategic alliance reached with a U.S. financial institution and higher income from service charges on loans (an increase of $0.9 million or 16% as compared to 2006) due to the increase in the loan portfolio volume driven by new originations. Refer to "Non-Interest Income"discussion below for additional information.
• Non-interest expenses for 2008 were $333.4 million compared to $307.8 million and $288.0 million for 2007 and 2006, respectively. The increase in non-interest expenses for 2008, as compared to 2007, is principally attributable to: (i) a higher net loss on REO operations that increased to $21.4 million for 2008 from $2.4 million for 2007, driven by a higher inventory of repossessed properties and declining real estate prices, mainly in the U.S. mainland, that have caused write-downs on the value of repossessed properties, and (ii) an increase of $3.4 million in deposit insurance premium expense, as the Corporation used available one-time credits to offset the premium increase in 2007 resulting from a new assessment system adopted by the Federal Deposit Insurance Corporation ("FDIC"), and (iii) higher occupancy and equipment expenses, an increase of $2.9 million tied to the growth of the Corporation's operations. The Corporation has been able to continue the growth of its operations without incurring in substantial additional operating expenses as reflected by a slight increase of 2% in operating expenses, excluding the increase in credit cost. Modest increases were observed in occupancy and equipment expenses, an increase of $2.9 million, and in employees' compensation and benefits, an increase of $1.5 million.

The increase in non-interest expenses for 2007, as compared to 2006, was mainly due to a $12.8 million increase in employees' compensation and benefits expense primarily due to increases in the average compensation and related fringe benefits paid to employees, coupled with the accrual of approximately $3.3 million for a voluntary separation program established by the Corporation as part of its cost saving strategies, a $5.1 million increase in the deposit insurance premium expense resulting from changes in the premium calculation by the FDIC, a $4.5 million increase in occupancy and equipment expenses mainly attributable to increases in costs associated with the expansion of the Corporation's branch network and loan origination offices and an increase of $6.4 million in other operating expenses primarily attributable to a $3.3 million increase related to costs associated with capital raising efforts in 2007 not qualifying for capitalization coupled with increased costs associated with foreclosure actions on the aforementioned troubled loan relationship in Miami, Florida. These factors were partially offset by an $11.3 million decrease in professional fees attributable to the conclusion . . .