• Net income of $28.6 million, or $0.13 per diluted share, for the third quarter of 2020, compared to $21.3 million, or $0.09 per diluted share, for the second quarter of 2020. First BanCorp. (the “Corporation”) completed the acquisition of Banco Santander Puerto Rico (“BSPR”) effective September 1, 2020. The Corporation’s financial statements reflect $5.6 billion in total assets, $2.6 billion in gross loans, and $4.2 billion in total deposits acquired in the BSPR acquisition. The net income for the third and second quarters of 2020 included the following items of note:

- Provision for credit losses on loans, finance leases and debt securities of $46.9 million for the third quarter of 2020, compared to a provision of $39.0 million for the second quarter of 2020. Approximately $38.9 million ($25.9 million after-tax, or $(0.12) per diluted share) of the provision for the third quarter was a result of the Day 1 reserves required by the current expected credit losses (“CECL”) methodology for non-purchased credit deteriorated (“non-PCD”) loans acquired in the acquisition of BSPR.

- Merger and restructuring costs of $10.4 million ($6.5 million after-tax, or $(0.03) per diluted share) for the third quarter of 2020 associated with the acquisition of BSPR, compared to $2.9 million ($1.8 million after-tax, or $(0.01) per diluted share) for the second quarter of 2020.

- Income tax benefit of $8.0 million, or $0.04 per diluted share, resulting from a partial reversal of the deferred tax asset valuation allowance.

- Tax-exempt gains of $5.3 million in the third quarter of 2020, or $0.02 per diluted share, consisting of a $5.1 million gain on sales of $116.6 million of U.S. agencies mortgage-backed securities (“MBS”) and a $0.2 million gain on sales of $803.3 million of U.S. Treasury Notes. The U.S. Treasury Notes sold were part of the investment securities portfolio acquired from BSPR.

- For the second quarter of 2020, a benefit from business interruption insurance recovery of $5.0 million ($3.1 million after-tax, or $0.01 per diluted share) related to lost profits caused by Hurricanes Irma and Maria in 2017.

• Income before income taxes of $24.2 million for the third quarter of 2020, compared to $27.3 million for the second quarter of 2020.

• On a non-GAAP basis, adjusted pre-tax, pre-provision income of $77.1 million for the third quarter of 2020, compared to $67.3 million for the second quarter of 2020.

• Net interest income increased by $13.5 million to $148.7 million for the third quarter of 2020, compared to $135.2 million for the second quarter of 2020. Approximately $14.0 million of the increase was related to the acquisition of BSPR which at closing added $2.5 billion of loans and $1.2 billion of investment securities, partially offset by lower average loan and investment yields.

• Net interest margin was 3.93% for the third quarter of 2020, compared to 4.22% for the second quarter of 2020, reflecting, among other things, the effects of a lower interest rate environment on variable-rate commercial loans and MBS prepayment rates, and a higher proportion of low-yielding assets to total interest-earning assets, partially offset by a lower cost of deposits and higher loan accretion income. The acquisition of BSPR had a one basis point dilutive impact on the net interest margin in the third quarter of 2020, as the adverse impact of low yields on acquired investment securities and interest-bearing cash balances was offset by loan accretion income.

• Non-interest income increased by $9.0 million to $29.9 million for the third quarter of 2020, compared to $20.9 million for the second quarter of 2020, primarily due to the $5.3 million gain on sales of investment securities and a $3.4 million increase in revenues from mortgage banking activities, driven by a higher volume of loan originations and sales. Approximately $2.0 million of the total increase in non-interest income is attributable to the contribution of the BSPR acquisition, primarily reflected in service charges on deposits, and transactional interchange and merchant fee income.

• Non-interest expenses increased by $17.7 million to $107.5 million for the third quarter of 2020, compared to $89.8 million for the second quarter of 2020. Non-interest expenses for the third quarter of 2020 included $10.4 million of merger and restructuring costs, compared to $2.9 million for the second quarter of 2020, and $1.0 million of COVID-19 pandemic-related expenses, compared to $3.0 million, for the second quarter of 2020. Approximately $10.7 million of the total increase in non-interest expenses is related to expenses of the acquired operations as well as the amortization of intangible assets acquired.

• Income tax benefit of $4.4 million for the third quarter of 2020, compared to income tax expense of $6.0 million for the second quarter of 2020. The variance was primarily related to an $8.0 million tax benefit related to the partial reversal of the deferred tax asset valuation allowance.

• Credit quality variances:

- Non-performing assets decreased by $10.5 million to $293.3 million as of September 30, 2020, compared to $303.8 million as of June 30, 2020. The decrease was primarily related to a $7.3 million decrease in the other real estate owned (“OREO”) portfolio balance, driven by sales of residential properties, and a $3.2 million decrease in nonaccrual consumer loans, primarily reflected in the auto loan portfolio. The Corporation did not acquire any of BSPR’s non-performing assets as established in the stock purchase agreement.

- An annualized net charge-offs to average loans ratio of 0.45% for the third quarter of 2020, compared to 0.43% for the second quarter of 2020.

• Total deposits, excluding brokered deposits and government deposits, increased by $3.7 billion to $12.5 billion as of September 30, 2020, which reflects $3.4 billion of deposits (net of brokered and government deposits) resulting from the acquisition of BSPR. Organic deposit growth was $216.4 million during the third quarter, primarily demand deposits, which grew by 6%, or $250.4 million.

• Brokered certificates of deposits (“CDs”) decreased by $87.2 million during the third quarter to $276.2 million as of September 30, 2020. Meanwhile, non-maturity brokered deposits increased in the quarter by $31.2 million to $278.4 million as of September 30, 2020 primarily reflecting $56.1 million of non-maturity brokered deposits resulting from the acquisition of BSPR.

• Government deposits increased in the quarter by $899.3 million and totaled $2.1 billion as of September 30, 2020, reflecting increases of $782.9 million, $115.7 million, and $0.7 million in the Puerto Rico, Virgin Islands, and Florida regions, respectively. The increase in the Puerto Rico region during the third quarter reflects primarily $670.5 million of government deposits resulting from the acquisition of BSPR. The remaining $228.8 million of organic growth reflects an increase in balances of transactional accounts of certain municipalities in Puerto Rico, primarily related to the collection of municipal license taxes, and higher balances on transactional accounts of the central government in the U.S. Virgin Islands driven by collection of income taxes.

• Total loans increased in the quarter by $2.5 billion to $11.9 billion as of September 30, 2020. The increase reflects primarily $2.6 billion in loans resulting from the acquisition of BSPR, consisting of $1.5 billion in commercial and construction loans, $821.9 million in residential mortgage loans and $210.9 million in consumer loans. As of September 30, 2020, loans held for investment include a net purchase accounting discount of $66.9 million related to the acquisition of BSPR. The decrease in the legacy loan portfolio of $60.5 million during the third quarter consisted of a $65.8 million decrease in residential mortgage loans, and a $60.7 million decrease in commercial and construction loans, partially offset by a $66.0 million increase in consumer loans, primarily auto loans.

• Total loan originations, including refinancings, renewals and draws from existing commitments (other than credit card utilization activity), amounted to $971.1 million in the third quarter of 2020, compared to $902.9 million in the second quarter of 2020. Total loan originations in the third quarter included $15.1 million of Small Business Administration Paycheck Protection Program (“SBA PPP”) loans, compared to $375.2 million originated in the second quarter of 2020. Excluding SBA PPP loans, total loan originations of $956.0 million in the third quarter of 2020, up $428.3 million from $527.7 million in the second quarter of 2020.

• Liquidity levels have remained high with the cash and liquid securities to total assets ratio exceeding 19.2% as of September 30, 2020, compared to 21.0% as of June 30, 2020.

• Core deposits and other intangible assets of $39.2 million and goodwill of $6.3 million recorded in connection with the acquisition of BSPR.

• Capital ratios remained strong compared to regulatory levels for well capitalized banks. Preliminary estimated Total capital, Common equity Tier 1 capital (“CET1”), Tier 1 capital, and Leverage ratios of 20.32%, 17.22%, 17.53%, and 13.04%, respectively, as of September 30, 2020. The tangible common equity ratio was 11.36% as of September 30, 2020.

SAN JUAN, Puerto Rico--(BUSINESS WIRE)-- First BanCorp. (the “Corporation”) (NYSE: FBP), the bank holding company for FirstBank Puerto Rico (“FirstBank” or “the Bank”), today reported net income of $28.6 million, or $0.13 per diluted share, for the third quarter of 2020, compared to $21.3 million, or $0.09 per diluted share, for the second quarter of 2020, and $46.3 million, or $0.21 per diluted share, for the third quarter of 2019. Financial results for the third quarter of 2020 reflected a current period provision for credit losses of $46.9 million, of which $38.9 million ($25.9 million after-tax, or $(0.12) per diluted share) was a result of the initial establishment of the Day 1 reserves required by CECL in connection with non-PCD loans acquired in the BSPR acquisition. Additionally, in the third quarter of 2020, the Corporation incurred merger and restructuring related costs of $10.4 million ($6.5 million after-tax, or $(0.03) per diluted share) in connection with the closing of the BSPR acquisition, recognized an $8.0 million tax benefit related to a partial reversal of the deferred tax asset valuation allowance, or $0.04 per diluted share, and recorded a tax-exempt gain from sales of investment securities of $5.3 million, or $0.02 per diluted share.

The Corporation completed the acquisition of BSPR effective September 1, 2020. The Corporation’s financial statements for the third quarter include 30 days of BSPR operations, post-acquisition, which have an effect on the comparability of the current quarter’s results to prior periods. The Corporation’s statement of financial condition as of September 30, 2020 reflects $5.6 billion in total assets, $2.6 billion in gross loans, and $4.2 billion in total deposits acquired in the BSPR acquisition. BSPR operated 27 banking branches in Puerto Rico.

The following table summarizes the composition of the earnings reported for the third quarter of 2020:

Aurelio Alemán, President and Chief Executive Officer of First BanCorp., commented: “We are very pleased with the closing of the strategic acquisition of Banco Santander Puerto Rico solidifying our position on the island and strengthening our competitiveness in commercial, retail and residential lending. The acquisition brings us greater reach and market share gains across the island, as well as new levers to improve our efficiency metrics. This acquisition contributed $4.2 billion in deposits and $2.6 billion in loans, the acquired loan portfolio complements our loan book nicely, and the deposit book significantly improves our funding. Our loan to deposit ratio now stands at 78% and our expanded customer base should drive future growth. We welcome the former Banco Santander employees and customers to our family and look forward to exceeding their expectations with an expanded branch network, service channels and enhanced technological offerings. Our existing customers will also benefit from this expansion.

There is still over $60 billion of remaining estimated hurricane and pandemic relief funding in Puerto Rico which will contribute to the economic recovery already underway in our main market. Employment figures continue to trend positive now at 92% of August 2019 levels and lending activity continues to improve in most products. We are optimistic for the prospects of growth for the island and are well prepared to support increased economic activity. We remain vigilant to potential economic hurdles related to future COVID-19 restrictions. We have worked hard to build a fortress balance sheet and even following the completed acquisition our liquidity levels, reserve coverage, and capital position are among the highest in the banking sector and have positioned us well to take advantage of growth opportunities.

We generated net income of $28.6 million during the quarter, including only one month of earnings contribution from the acquired operations; on a non-GAAP basis, pre-tax pre-provision income for the quarter was over $77 million, an increase of 14.6% over the prior quarter. The enhanced funding profile of our combined institution and greater customer reach should help to drive additional loan growth and net interest income, which will improve further our outsized capital position. Capital deployment opportunities remain a priority as our economic environment stabilizes.

The integration efforts are well underway, I am very proud of what the combined team has been able to accomplish thus far and we are excited for the future growth prospects of our institution.”

NON-GAAP DISCLOSURES

This press release includes certain non-GAAP financial measures, including adjusted net income, adjusted pre-tax, pre-provision income, adjusted net interest income and margin, adjusted non-interest expenses, tangible common equity, tangible book value per common share, certain capital ratios, and certain other financial measures that exclude the effect of items that management believes are not reflective of core operating performance, are not expected to reoccur with any regularity or may reoccur at uncertain times and in uncertain amounts (the “Special Items”), and should be read in conjunction with the discussion below in Basis of Presentation – Use of Non-GAAP Financial Measures and the accompanying tables (Exhibit A), which are an integral part of this press release.

BSPR ACQUISITION

Effective September 1, 2020, the Corporation completed the acquisition of BSPR pursuant to a stock purchase agreement dated as of October 21, 2019. The transaction was structured as an all-cash acquisition of all of the issued and outstanding common stock of Santander Bancorp, the sole shareholder of BSPR, a corporation incorporated under the laws of the Commonwealth of Puerto Rico and sole shareholder of Santander Insurance Agency, Inc. (collectively referred to as “BSPR”). In consideration for the acquisition, the Corporation paid cash in an amount of approximately (i) $394.8 million for 117.5% of BSPR’s core tangible common equity, comprised of a $58.8 million premium on $336 million of core tangible common equity, plus (ii) $882.8 million for BSPR’s excess capital (paid at par), which represents the estimated closing payment pursuant to the terms of the stock purchase agreement.

The following table summarizes the estimated fair value of assets acquired and liabilities assumed of BSPR as of September 1, 2020 under the acquisition method of accounting:

As of September 30, 2020, the purchase price remains subject to final adjustments and fair value measurements remain preliminary due to the timing of the acquisition. The Corporation continues to review information relating to events or circumstances existing at the acquisition date and expects to finalize its analysis of the acquired assets and assumed liabilities over the next few months, but not later than one year after the acquisition.

SPECIAL ITEMS

The financial results for the third and second quarters of 2020 and the third quarter of 2019 included the following significant Special Items:

Quarter ended September 30, 2020

• Merger and restructuring costs of $10.4 million ($6.5 million after-tax) in connection with the acquisition of BSPR and related restructuring initiatives. Merger and restructuring costs in the third quarter of 2020 primarily included consulting, legal, system conversions and other integration related efforts.
• An $8.0 million tax benefit related to a partial reversal of the deferred tax asset valuation allowance.
• A $5.3 million aggregate gain on sales of approximately $116.6 million of U.S. agencies MBS and $803.3 million of U.S. Treasury Notes executed in the latter part of September. The gain on tax-exempt securities or realized at the tax-exempt international banking entity subsidiary level had no effect in the income tax expense recorded in the third quarter of 2020.
• Costs of $1.0 million ($0.6 million after-tax) related to the COVID-19 pandemic response efforts, primarily costs related to additional cleaning, safety materials, and security matters.

Quarter ended June 30, 2020

• A $5.0 million ($3.1 million after-tax) benefit resulting from the final settlement of the Corporation’s business interruption insurance claim related to lost profits caused by Hurricanes Irma and Maria in 2017.
• Merger and restructuring costs of $2.9 million ($1.8 million after-tax) in connection with the acquisition of BSPR and related restructuring initiatives. Merger and restructuring costs in the second quarter of 2020 primarily included consulting, legal, and other pre-conversion related efforts.
• Costs of $3.0 million ($1.9 million after-tax) related to the COVID-19 pandemic response efforts, including approximately $1.7 million in bonuses paid to branch personnel and other essential employees for working during the pandemic, as well as other employee-related expenses, including expenses for the administration of COVID-19 tests and purchases of personal protective equipment.
• A $0.2 million loss realized on sales of U.S. agencies MBS. The loss, realized at the tax-exempt international banking entity subsidiary, had no effect on the income tax expense recorded in the second quarter of 2020.

Quarter ended September 30, 2019

• A $3.0 million ($1.8 million after-tax) positive effect in earnings related to the acceleration of the discount accretion from the payoff of an acquired commercial mortgage loan.
• A $0.4 million ($0.2 million after-tax) benefit resulting from hurricane-related insurance recoveries related to repairs and maintenance costs incurred on facilities in the U.S. Virgin Islands.

NET INCOME AND RECONCILIATION TO ADJUSTED NET INCOME (NON-GAAP)

Net income was $28.6 million for the third quarter of 2020, compared to $21.3 million for the second quarter of 2020. Adjusted net income was $22.4 million, or $0.10 per diluted share, for the third quarter of 2020, compared to $22.0 million, or $0.10 per diluted share, for the second quarter of 2020. The following table reconciles for the third and second quarters of 2020 and the third quarter of 2019 the net income to adjusted net income and adjusted earnings per share, which are non-GAAP financial measures that exclude the significant Special Items identified above, as well as a non-significant gain realized on the repurchase and cancellation of trust preferred securities in the third quarter of 2020.

INCOME (LOSS) BEFORE INCOME TAXES AND RECONCILIATION TO ADJUSTED PRE-TAX, PRE-PROVISION INCOME (NON-GAAP)

Income before income taxes was $24.2 million for the third quarter of 2020, compared to $27.3 million for the second quarter of 2020. Adjusted pre-tax, pre-provision income was $77.1 million for the third quarter of 2020, up $9.8 million from the second quarter of 2020. The following table reconciles income (loss) before income taxes to adjusted pre-tax, pre-provision income for the last five quarters:

Adjusted pre-tax, pre-provision income for the third quarter of 2020 included $5.1 million related to the operations of BSPR from the acquisition date to the end of the third quarter.

NET INTEREST INCOME

The following table sets forth information concerning net interest income during the periods indicated:

Net interest income amounted to $148.7 million for the third quarter of 2020, an increase of $13.5 million, compared to net interest income of $135.2 million for the second quarter of 2020. The increase in net interest income was mainly due to:

• A $5.1 million increase in interest income on commercial and construction loans, primarily due to a $539.9 million increase in the average commercial and construction loan balance. The BSPR acquisition added $1.5 billion of commercial and construction loans, contributing to an increase of $498.1 million in the average balance and $7.8 million in interest income during the third quarter. Total discount accretion related to commercial and construction loans acquired from BSPR amounted to $1.8 million in the third quarter of 2020. In addition, there was a $0.6 million increase in interest income on commercial and construction loans related to the effect of one additional day in the third quarter. These variances were partially offset by the downward repricing of the legacy variable-rate commercial and construction loans portfolio, which resulted in a decrease in interest income of approximately $1.3 million.
  
  The interest rate on approximately 38% of the Corporation’s commercial and construction loans, excluding SBA PPP loans, is based upon LIBOR indexes and 16% is based upon the Prime rate index. For the third quarter of 2020, the average one-month LIBOR declined 20 basis points, and the average three-month LIBOR declined 36 basis points, compared to the average rates for such indexes during the second quarter of 2020.
• A $3.8 million increase in interest income on residential mortgage loans, primarily due to a $269.9 million increase in the average balance of this portfolio. The BSPR acquisition added $821.9 million of residential mortgage loans, contributing to an increase of $265.2 million in the average balance and $4.1 million in interest income during the third quarter. Total discount accretion related to residential mortgage loans acquired from BSPR amounted to $0.2 million in the third quarter of 2020.
• A $3.5 million increase in interest income on consumer loans, primarily due to a $106.1 million increase in the average balance of this portfolio. The BSPR acquisition added $210.9 million of consumer loans, contributing to an increase of $69.9 million in the average balance and $2.5 million in interest income during the third quarter. Total discount accretion related to consumer loans acquired from BSPR amounted to $0.1 million in the third quarter of 2020. The remaining increase was primarily related to both an increase of $36.2 million in the average balance of the legacy consumer loan portfolio, predominantly auto loans, which resulted in an increase in interest income of approximately $0.8 million, and a $0.6 million increase in interest income related to the effect of one additional day in the third quarter.
• A $1.7 million decrease in interest expense, including a reduction of $0.7 million related to the downward repricing of junior subordinated debentures and variable-rate repurchase agreements tied to the decrease in the three-month LIBOR index, and a $0.9 million decrease in interest expense on interest-bearing deposits. The decrease in interest expense on interest-bearing deposits reflects a reduction of approximately $2.3 million attributable to the lower average rates paid on legacy interest-bearing checking, savings, and non-brokered time deposits, partially offset by an increase of approximately $1.3 million related to an increase of $1.3 billion in the average balance of interest-bearing deposits. The BSPR acquisition added $2.9 billion of interest-bearing deposits, contributing to an increase of $977.2 million in the average balance and $0.8 million in interest expense during the third quarter (net of a $0.3 million premium accretion). The average cost of interest-bearing deposits assumed from BSPR was 0.34% during the month of September, which was below the average cost of 0.72% for the legacy non-brokered interest-bearing deposits for the third quarter of 2020.

Partially offset by:

• A $0.7 million decrease in interest income on investment securities, primarily due to a $2.7 million increase in U.S. agencies MBS premium amortization expense (including $0.7 million related to U.S, agencies MBS acquired in the BSPR transaction) affected by the low interest rate environment. This variance was partially offset by an $859.1 million increase in the average balance of total investment securities.
  
  Purchases of U.S. agencies MBS and callable debentures during the last two quarters contributed to an increase of approximately $520.1 million in the average balance of investment securities, which resulted in an increase in interest income of approximately $1.2 million. Purchases of U.S. agencies callable debentures and MBS during the third quarter amounting to $850.7 million carries an average yield of 0.90%, which is a lower yield compared to yields on securities that were called prior to maturity and MBS prepayments. This, together with the low yields on the investment securities portfolio acquired from BSPR had an adverse effect in the net interest margin for the third quarter.
  
  The BSPR acquisition added $308 million of U.S. agencies MBS, $803 million of U.S. Treasury Notes, and $56 million of Puerto Rico municipal bonds at acquisition date. This accounted for $339.2 million of the total increase in the average balance of investment securities and contributed $0.4 million in interest income, net of a $1.4 million amortization of the premium resulting from the new amortized cost basis of securities acquired from BSPR. As a result of the purchase accounting requirements, the acquired U.S. Treasury Notes were booked at a yield of 0.15%, therefore, in the latter part of the third quarter, the Corporation sold all the U.S. Treasury Notes acquired from BSPR and reinvested the proceeds in U.S. agency securities at an approximate average yield of 0.94%. The average yield of the U.S. agencies MBS acquired from BSPR was 0.42% for the month of September.

Net interest margin was 3.93%, compared to 4.22% for the second quarter of 2020. The decrease was primarily attributable to the effect of the low interest rate environment in the repricing of variable rate commercial loans and the acceleration of the U.S. agencies MBS premium amortization, as well as a higher proportion of low-yielding assets, such as U.S. agencies MBS, callable debentures and interest-bearing cash balances, to total interest-earning assets, partially offset by the lower cost of deposits and higher loan accretion income.

The acquisition of BSPR had a one basis point dilutive impact on the net interest margin in the third quarter of 2020, primarily due to the above-mentioned low yields on acquired investment securities and interest-bearing cash balances that more than offset the benefit of higher yields on acquired loans and lower average cost of assumed deposits as compared to the legacy portfolios. The results for the third quarter include the effect of acquisition marks and related accretion for the BSPR acquisition. Net interest income benefited from $0.7 million of net loan and investment securities accretion income and $0.3 million of deposits premium accretion, which added two basis points of net interest margin on a combined basis.

The third quarter results also include the effect of SBA PPP loans. Interest income includes $2.2 million on average SBA PPP loan balances of $399.9 million, which had a 5 basis points dilutive impact on net interest margin.

NON-INTEREST INCOME

The following table sets forth information concerning non-interest income during the periods indicated:

Non-interest income amounted to $29.9 million for the third quarter of 2020, compared to $20.9 million for the second quarter of 2020. The $9.0 million increase in non-interest income was primarily due to:

• The $5.3 million gain on sales of approximately $116.6 million of available-for-sale U.S. agencies MBS and $803.3 million of available-for-sale U.S. Treasury Notes. The Corporation realized a $5.1 million gain on the U.S. agencies MBS sold, which carried an increased prepayment risk given the low market interest rate environment, and a $0.2 million gain on the sale of the U.S. Treasury Notes that were acquired in the BSPR transaction.
• A $3.4 million increase in revenues from mortgage banking activities, driven by a $4.5 million increase in realized gains on sales of residential mortgage loans in the secondary market, driven by both a higher volume of conforming loan originations and sales and higher gain margins, and a $0.6 million increase in servicing fee income, partially offset by a $0.7 million decrease related to the net change in mark-to-market gains and losses from both interest rate lock commitments and To-Be-Announced (“TBA”) MBS forward contracts, and a $0.7 million increase in the servicing assets amortization expense. Total loans sold in the secondary market to U.S. government-sponsored agencies during the third quarter of 2020 amounted to $161.8 million, with a related net gain of $5.9 million (net of realized losses of $0.4 million on TBA hedges), compared to total loans sold in the secondary market during the second quarter of 2020 of $63.8 million, with a related net gain of $1.4 million (net of realized losses of $1.1 million on TBA hedges). Revenues from mortgage banking activities from BSPR included in the third quarter financial results amounted to approximately $0.1 million. The BSPR acquisition added $1.0 billion to the residential mortgage loan servicing portfolio.
• A $2.8 million increase in transactional fee income from credit and debit cards, automated teller machines (ATMs), and Point-of-Sale (POS) and merchant-related activity, primarily reflecting higher sales volume associated with the gradual reopening of businesses and resumption of economic activity. Approximately $0.3 million of the increase is related to transactional fee income generated by the BSPR operations from the date of acquisition to the end of the third quarter of 2020. These amounts are included as part of “Other operating income” in the table above.
• A $1.4 million increase in service charges on deposits, including an increase of $1.1 million related to deposit accounts acquired from BSPR of which $0.6 million relates to cash management fee income. The remaining increase was primarily related to a higher number of cash management fee transactions in the legacy portfolio as a result of increased customer activity since the gradual reopening of business activities after the COVID-19 related lockdowns and quarantines.
• A $0.4 million increase in fees and commissions from other banking services, such as mail and cable transmission, official checks, safe deposits and insurance referrals, among others, reflecting increased customer activity. These fees are included as part of “Other operating income” in the table above.
• A $0.2 million gain on the sale of a land lot during the third quarter of 2020, included as part of “Other operating income” in the table above.

Partially offset by:

• The $5.0 million benefit recorded in the second quarter of 2020 resulting from the final settlement of the Corporation’s business interruption insurance claim related to lost profits caused by Hurricanes Irma and Maria in 2017, included as part of “Other operating income” in the table above.

NON-INTEREST EXPENSES

The following table sets forth information concerning non-interest expenses during the periods indicated:

Non-interest expenses amounted to $107.5 million in the third quarter of 2020, an increase of $17.7 million from $89.8 million in the second quarter of 2020. Included in non-interest expenses are the following Special Items:

• Merger and restructuring costs associated with the acquisition of BSPR of $10.4 million for the third quarter of 2020, compared to $2.9 million for the second quarter of 2020. The increase was primarily related to higher legal and financial consultant fees as well as expenses incurred in integration efforts during the third quarter.
• COVID-19 pandemic-related expenses of $1.0 million for the third quarter of 2020, compared to $3.0 million for the second quarter of 2020. COVID-19 pandemic-related expenses for the third quarter of 2020, primarily consist of $0.8 million of expenses associated with cleaning and security protocols, included as part of “Occupancy and equipment” in the table above, compared to $0.9 million in the second quarter of 2020. For the second quarter of 2020, COVID-19 pandemic-related expenses also include $1.7 million incurred in employee-related expenses primarily related to bonuses paid to branch personnel and other essential employees for working during the pandemic, as well as expenses for the administration of COVID-19 tests and purchases of personal protective equipment, both recorded as part of “Employees’ compensation and benefits” in the table above.

On a non-GAAP basis, adjusted non-interest expenses, excluding the effect of the Special Items mentioned above, amounted to $96.1 million for the third quarter of 2020, compared to $83.9 million for the second quarter of 2020. The $12.2 million increase in adjusted non-interest expenses reflects, among other things, the effect of both a $10.7 million increase resulting from the addition of operations, personnel and branches retained from the acquisition of BSPR and volume-related expense increases related to the reopening of business activities. The most significant variances were:

• A $5.2 million increase in adjusted employees’ compensation and benefits expenses, driven by a $3.0 million increase related to personnel retained from the acquisition of BSPR and a $1.6 million decrease in deferred loan origination costs primarily in connection with a lower amount of SBA PPP loans originated during the third quarter.
• A $2.8 million increase in adjusted occupancy and equipment costs, including approximately $2.7 million incremental expenses related to the acquired operations.
• A $1.0 million increase in adjusted business promotion expenses, driven by a $0.6 million increase in direct and digital marketing expenses and a $0.3 million increase in the cost of credit and debit card reward programs. Approximately $0.5 million of the total increase in business promotion expenses is related to incremental expenses of the acquired operations.
• A $0.9 million increase in adjusted taxes, other than income taxes, primarily related to a $0.5 million increase in business to business sales and use tax expenses due to the effect in the second quarter of legislation that provided for a temporary exemption of the 4% tax associated with business to business services up to June 30, 2020, and approximately $0.5 million incremental expenses related to the acquired operations, primarily municipal license taxes and personal property taxes.
• A $0.9 million increase in credit and debit card processing expenses related to higher transactions volume, including a $0.4 million incremental expense related to the acquired operations.
• A $0.7 million increase in “Other” in the table above including incremental expenses of approximately $1.1 million related to the acquired operations, partially offset by reductions of $0.3 million in printing expenses and $0.2 million in labor-related legal reserves. Incremental expenses include $0.8 million related to the amortization of core deposit and purchased credit card relationship intangible assets recorded in connection with the acquisition of BSPR.
• A $0.4 million increase in adjusted communications-related expenses, primarily due to higher telephone and mailing expenses. Approximately $0.2 million is related to incremental expenses of the acquired operations.

Partially offset by:

• A $0.4 million decrease in adjusted professional service fees, primarily due to a $0.7 million decrease in outsourced technology fees, driven by lower costs incurred in connection with the platform used for the origination of SBA PPP loans, partially offset by a $0.3 million increase in consulting fees. Incremental professional service fees related to acquired operations amounted to $1.8 million, representing temporary technology processing costs of the acquired operations while system conversions is completed.

The adjusted financial metrics presented above are non-GAAP financial measures. See Basis of Presentation for additional information and the reconciliation of total non-interest expenses and certain non-interest expenses components to adjusted total non-interest expenses and certain adjusted non-interest expense components.

INCOME TAXES

The Corporation recorded an income tax benefit of $4.4 million for the third quarter of 2020, compared to an income tax expense of $6.0 million for the second quarter of 2020. The variance was primarily related to the $8.0 million benefit resulting from the partial reversal of the deferred tax asset valuation allowance.

The Corporation’s estimated effective tax rate, excluding entities with pre-tax losses from which a tax benefit cannot be recognized and discrete items, decreased to 21.4%, compared to 25.2% as of the end of the second quarter of 2020, primarily due to a decrease of taxable income proportionate to pre-tax income. As of September 30, 2020, the Corporation had a deferred tax asset of $347.5 million (net of a valuation allowance of $99.6 million, including a valuation allowance of $62.1 million against the deferred tax assets of the Corporation’s banking subsidiary, FirstBank). The BSPR acquisition added $32.5 million of net deferred tax assets at the acquisition date.

CREDIT QUALITY

Non-Performing Assets

Variances in credit quality metrics:

• Total non-performing assets decreased by $10.5 million to $293.3 million as of September 30, 2020, compared to $303.8 million as of June 30, 2020. Total nonaccrual loans decreased by $2.7 million to $201.3 million as of September 30, 2020, compared to $204.0 million as of June 30, 2020.
  The decrease in non-performing assets consisted of:
  - A $7.3 million decrease in the OREO portfolio balance. The decrease was driven by sales of $6.9 million, primarily residential OREO properties in the Puerto Rico region, and approximately $1.5 million of fair value and other adjustments that reduced the OREO carrying value, partially offset by additions of $1.1 million.
  - A $3.2 million decrease in nonaccrual consumer loans, primarily auto loans and finance leases, driven by charge-offs and collections recorded in the third quarter, partially offset by inflows of $8.4 million.
  - A $0.5 million decrease in non-real estate repossessed assets, primarily repossessed automobiles.
  - A $0.1 million decrease in nonaccrual commercial and construction loans, primarily due to a $3.1 million charge-off taken on a nonaccrual commercial mortgage loan in the Puerto Rico region and collections recorded in the third quarter, partially offset by the inflow of a $3.5 million construction loan in the Puerto Rico region.
  - A $0.5 million increase in nonaccrual residential mortgage loans, reflecting inflows of $5.4 million primarily resulting from the failure of certain borrowers that were delinquent prior to the COVID-19 payment moratorium relief to resume monthly payments after the end of their payment moratorium period. The increase related to inflows was partially offset by collections, charge-offs, and loans brought current or with a sustained performance period and restored to accrual status during the third quarter.
• Inflows to nonaccrual loans held for investment were $18.4 million, a $7.7 million increase compared to inflows of $10.7 million in the second quarter of 2020. Inflows to nonaccrual residential mortgage loans were $5.4 million in the third quarter of 2020, an increase of $2.4 million compared to inflows of $3.0 million in the second quarter of 2020. Inflows to nonaccrual consumer loans were $8.4 million, an increase of $1.3 million compared to inflows of $7.1 million in the second quarter of 2020. Inflows to nonaccrual commercial and construction loans were $4.6 million in the third quarter of 2020, an increase of $3.9 million compared to inflows of $0.7 million in the second quarter of 2020, driven by the aforementioned inflow of a $3.5 million construction loan in the Puerto Rico region. See Early Delinquency, Payment Deferral Programs, and SBA PPP Loans below for additional information.
• Adversely classified commercial and construction loans increased by $39.8 million to $157.3 million as of September 30, 2020, primarily related to the downgrade of two commercial relationships in the Florida region engaged in the transportation industry totaling $38.8 million.
• Total Troubled Debt Restructured (“TDR”) loans held for investment were $488.6 million as of September 30, 2020, down $7.6 million from June 30, 2020. Approximately $399.7 million of total TDR loans held for investment were in accrual status as of September 30, 2020. These figures exclude $58.8 million of TDR residential mortgage loans guaranteed by the U.S. federal government (i.e., Federal Housing Administration and Veterans Administration loans).

Early Delinquency, Payment Deferral Programs, and SBA PPP Loans

Total loans in early delinquency (i.e., 30-89 days past due loans, as defined in regulatory report instructions) amounted to $110.4 million as of September 30, 2020, an increase of $18.8 million, compared to $91.6 million as of June 30, 2020. The statement of financial condition as of September 30, 2020 reflects $14.1 million of 30-89 days past due loans resulting from the BSPR acquisition. The variances by major portfolio categories were as follow:

• Residential mortgage loans in early delinquency increased by $4.7 million to $44.5 million as of September 30, 2020, and consumer loans in early delinquency increased by $0.1 million to $35.7 million as of September 30, 2020. The early delinquency residential mortgage loans as of September 30, 2020 reflect $4.0 million and $2.9 million of 30-89 past due residential mortgage and consumer loans, respectively, resulting from the BSPR acquisition.
• Commercial and construction loans in early delinquency increased in the third quarter by $13.9 million to $30.1 million as of September 30, 2020, including as a result of the migration of a commercial mortgage loan that is delinquent for over 30 days with respect to a $5.0 million final balloon payment but with respect to which the Corporation continues to receive from the borrower interest and principal payments. In addition, there was an increase of $7.2 million related to loans acquired in the BSPR transaction, primarily a $6.1 million matured commercial and industrial loan.

In working with borrowers affected by the COVID-19 pandemic, the Corporation has agreed to let consumer borrowers (i.e., borrowers under residential mortgages, personal loans, auto loans, finance leases and small loans) that were current in their payments or no more than 2 payments in arrears (not having exceeded 89 days past due as of March 16, 2020) to defer payments on their loans in some cases for up to six months but not beyond September 30, 2020, with few exceptions. In the case of credit cards and individual lines of credit, the borrowers were required to be current or less than 29 days past due in their payments as of March 16, 2020 to qualify for the payment deferral program providing for payment deferrals in some cases up to August 31, 2020. For both consumer and residential mortgage loans subject to the deferral programs, each borrower is required to begin making their regularly scheduled loan payment at the end of the deferral period and the deferred amounts were moved to the end of the loan. The payment deferral programs were applied prospectively beginning, in some instances, with the scheduled contractual payment due in March. For commercial loans, any request for payment deferral is analyzed on a case by case basis. Most of these deferred repayment arrangements have been done under the provisions of the Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act of 2020”) or the Revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. In Puerto Rico, the moratoriums for consumer and residential mortgage products were mandated by local law.

As of September 30, 2020, the Corporation had under deferred repayment arrangements 25,173 loans, totaling $1.2 billion, or 10% of its total loan portfolio held for investment, as shown in the following table:

As of October 21, 2020, approximately $83.7 million, or 1%, of the total loan portfolio held for investment balance continue to be under deferment programs, primarily commercial and construction loans. The $83.7 million of loans under deferred payment agreements as of October 21, 2020 consisted of 69 residential mortgage loans, totaling $18.4 million, 52 commercial and construction loans, totaling $62.9 million, and 160 consumer loans, totaling $2.3 million.

As a certified SBA lender, the Corporation is participating in the SBA Paycheck Protection Program (PPP) to help provide loans to the Corporation’s small business customers to provide them with additional working capital. During the third quarter of 2020, the Corporation originated 636 loans under this program, totaling $15.1 million. Together with originations closed in the second quarter, the Corporation has executed over 6,000 loans for approximately $390.3 million in the two rounds of the program. The acquisition of BSPR added $77.6 million of SBA PPP loans as of September 30, 2020. As of September 30, 2020, the total amount of SBA PPP loans carried on books amounted to $453.4 million (outstanding balance - $462.3 million).

Allowance for Credit Losses

Effective January 1, 2020, the Corporation adopted the CECL impairment model required by the Accounting Standards Codification Topic 326 (“ASC 326”). The adoption of this standard replaced the incurred loss methodology with a methodology, which is referred to as CECL, to estimate the allowance for credit losses (“ACL”) for the remaining estimated life of a financial asset carried at amortized cost and certain off-balance sheet credit exposures considering, among other things, expected future changes in macroeconomic conditions. ASC 326 does not require restatement of comparative period financial statements; as such, results for the first nine months of 2020 reflect the adoption of ASC 326, while prior periods reflect results under the previously required incurred loss methodology.

The following table summarizes the activity of the ACL for on-balance sheet and off-balance sheet exposures during the third quarter and nine-month period ended September 30, 2020:

The main variances of the total ACL by main categories follow:

Allowance for Credit Losses for Loans and Finance Leases

The following table sets forth information concerning the allowance for credit losses for loans and finance leases during the periods indicated:

• As of September 30, 2020, the ACL for loans and finance leases was $384.7 million, up $65.4 million from June 30, 2020. The increase was primarily due to the initial ACL required with respect to loans from the acquisition of BSPR. The CECL accounting standard requires the Corporation to provide for an ACL for non-PCD loans at the time of acquisition through a direct charge to earnings, in addition to any fair value adjustments on these loans. Accordingly, the Corporation recorded approximately $37.5 million in provision for credit losses for non-PCD loans acquired in the BSPR acquisition. In addition, for purchased credit deteriorated (“PCD”) loans totaling $785 million, the Corporation established a $28.7 million ACL representing the fair value credit marks on these loans. The initial ACL for PCD loans is not established through a charge to the provision for credit losses, but, rather, through an initial adjustment to the loan’s amortized cost.
• The provision for credit losses on loans and finance leases was $48.1 million for the third quarter of 2020, up $11.7 million from $36.4 million in the second quarter of 2020. The increase reflects the effect of the aforementioned charge of $37.5 million recorded in the third quarter with respect to non-PCD loans acquired in the BSPR transaction, partially offset by lower reserve builds for the legacy loan portfolio in the third quarter. The following table shows the breakdown of the provision for credit losses by portfolio for the third and second quarters of 2020:

- Provision for credit losses for the legacy commercial and construction loans portfolio of $11.1 million, compared to $18.0 million in the second quarter of 2020, reflecting lower reserve builds compared to the more significant increase in reserves in the second quarter. Notwithstanding, a reserve build of $5.8 million for the legacy commercial and construction loan portfolio was recorded in the third quarter of 2020 primarily reflecting adverse changes in the economic forecast used in the Corporation’s CECL model affecting the retail real estate industry.

- Release of credit losses for the legacy residential mortgage loans portfolio of $3.7 million, compared to a provision of $6.2 million in the second quarter of 2020. The reserve release for the legacy portfolio in the third quarter reflects the effect of favorable changes in the economic forecast used in the Corporation’s CECL model, primarily in the regional home price index, and the overall decrease in size of the legacy portfolio.

- Provision for credit losses for the legacy consumer loans and finance leases portfolio of $3.2 million, compared to $12.2 million in the second quarter of 2020. The decrease primarily reflects the effect of lower reserve builds for the legacy auto loan portfolio in the third quarter compared to the more significant increase in the reserve in the second quarter, and a decrease in charge-offs taken on small personal loans. In addition, there were reserve releases recorded for the legacy credit card and personal loan portfolios, primarily related to the decrease in the overall size of these components of the consumer loan portfolio and changes in economic forecast employed in the Corporation’s CECL model.

• The ratio of the ACL for loans and finance leases to total loans held for investment was 3.25% as of September 30, 2020, compared to 3.41% as of June 30, 2020. No ACL was allocated to SBA PPP loans as they are fully guaranteed. On a non-GAAP basis, excluding SBA PPP loans, the ratio of the ACL for loans and finance leases to adjusted total loans held for investment was 3.38% as of September 30, 2020 compared to 3.55% as of June 30, 2020. The ratio of the total allowance for credit losses for loans and finance leases to nonaccrual loans held for investment was 191.15% as of September 30, 2020, compared to 156.54% as of June 30, 2020. The total ACL established for loans acquired in the BSPR acquisition was $66.2 million, or 2.68% of the total loans held for investment acquired from BSPR (excluding SBA PPP loans), as of September 30, 2020.

The following table sets forth information concerning the composition of the Corporation’s ACL for loans and finance leases as of September 30, 2020 and June 30, 2020 by loan category:

Net Charge-Offs

The following table presents ratios of annualized net charge-offs to average loans held-in-portfolio:

The ratios above are based on annualized net charge-offs and are not necessarily indicative of the results expected in subsequent periods.

Net charge-offs were $11.4 million for the third quarter of 2020, or an annualized 0.45% of average loans, compared to $9.9 million, or an annualized 0.43% of average loans, in the second quarter of 2020. The increase of $1.5 million in net charge-offs consisted of:

• A $3.2 million increase in commercial and construction loan net charge-offs, primarily due to the $3.1 million charge-off taken on a commercial mortgage loan in the Puerto Rico region.
• A $2.1 million decrease in consumer loan net charge-offs, primarily reflecting decreases in charge-offs taken on small personal loans and credit cards.
• A $0.4 million increase in residential mortgage loan net charge-offs, primarily related to charge-offs taken on delinquent loans repurchased from GNMA pools.

Allowance for Credit Losses for Unfunded Loan Commitments

The Corporation estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk as a result of a contractual obligation to extend credit, such as pursuant to unfunded loan commitments and standby letters of credit for commercial and construction loans, unless the obligation is unconditionally cancellable by the Corporation. The ACL for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. As of September 30, 2020, the ACL for off-balance sheet credit exposures was $6.3 million, down $0.8 million from $7.1 million as of June 30, 2020. The decrease consisted of a $2.1 million release recorded as a reduction of the provision for credit losses related to unfunded loan commitments of the legacy portfolio, mainly in connection with a construction loan facility, partially offset by a $1.3 million charge recorded in connection with unfunded loan commitments assumed in the BSPR acquisition.

Allowance for Credit Losses for Held-to-Maturity Debt Securities

As of September 30, 2020, the held-to-maturity securities portfolio consisted of Puerto Rico municipal bonds. As of September 30, 2020, the ACL for held-to-maturity debt securities was $10.2 million, up $0.9 million from $9.3 million as of June 30, 2020. The $0.9 million increase consisted of a $1.3 million initial ACL established for PCD debt securities acquired in the BSPR acquisition, partially offset by a $0.4 million release related to the repayment of certain bonds of the legacy debt securities portfolio during the third quarter. The initial ACL for PCD debt securities is not established through a charge to the provision for credit losses, but rather through an initial adjustment to the debt securities’ amortized cost.

Allowance for Credit Losses for Available-for-Sale Debt Securities

As of September 30, 2020, the ACL for available-for-sale debt securities was $1.4 million, down $0.2 million from $1.6 million as of June 30, 2020. The $0.2 million decrease was related to a charge-off taken against the previously-established reserve for private label MBS.

STATEMENT OF FINANCIAL CONDITION

Total assets were approximately $18.7 billion as of September 30, 2020, up $4.6 billion from June 30, 2020. The statement of financial condition as of September 30, 2020 includes $2.6 billion in loans and $354.8 million in investment securities related to the acquisition of BSPR. In addition, there was a $1.2 billion increase in cash and cash equivalents, reflecting both the effect of proceeds from the aforementioned sales of U.S. Treasury Notes acquired from BSPR amounting to $803.3 million and a $406.6 million increase related to the excess of the cash acquired in the BSPR acquisition over the cash consideration paid at closing.

The following variances within the main components of total assets are noted:

• A $2.5 billion increase in total loans. The increase reflects primarily $2.6 billion of loans (including $77.6 million of SBA PPP loans) resulting from the BSPR acquisition in the Puerto Rico region, partially offset by a $60.5 million decrease in the legacy portfolio. Loans held for investment include a net purchase accounting discount of $66.9 million as of September 30, 2020 related to the acquisition of BSPR. The decrease of $60.5 million in the legacy portfolio during the third quarter consisted of reductions of $60.3 million in the Puerto Rico region and $3.4 million in the Virgin Islands region, partially offset by a $3.2 million increase in the Florida region. On a portfolio basis, the decrease of the legacy portfolio consisted of reductions of $65.8 million in residential mortgage loans and $60.7 million in commercial and construction loans (net of a $16.2 million increase in SBA PPP loans), partially offset by a $66.0 million increase in consumer loans.
  
  The following table provides additional information about the decrease/increase on loans:

The decrease in the legacy loan portfolio related to the Puerto Rico region consisted of a decrease of $81.1 million in commercial and construction loans and a $48.6 million decrease in residential mortgage loans, partially offset by a $69.4 million increase in consumer loans, primarily auto loans. The decrease in the legacy commercial and construction loan portfolio reflects a $43.1 million reduction in exposure to three large commercial and industrial relationships, a $26.6 million decrease in the balance of floor plan lines of credit, and other reductions in revolving lines of credits, partially offset by a $14.6 million increase in SBA PPP loans. The decline in the legacy residential mortgage loan portfolio in the Puerto Rico region reflects the effect of collections and charge-offs, which more than offset the volume of non-conforming loan originations. Approximately 92% of the $136.3 million in residential mortgage loan originations in the Puerto Rico region during the third quarter of 2020 consisted of conforming loan originations and refinancings. The growth in consumer loans was driven by new loan originations, primarily auto loans and finance leases.

The decrease in total loans in the Virgin Islands region consisted of a $3.8 million decrease in residential mortgage loans, partially offset by a $0.4 million increase in the balance of commercial and construction loans. The increase in commercial and construction loans included an increase of $0.8 million in SBA PPP loans.

The increase in total loans in the Florida region consisted of a $20.0 million increase in the balance of commercial and construction loans, driven by the origination of two large commercial loans totaling $29.9 million, partially offset by reductions of $13.4 million in residential mortgage loans and $3.4 million in consumer loans.

Total loan originations, including refinancings, renewals and draws from existing commitments (excluding credit card utilization activity), amounted to $971.1 million in the third quarter of 2020, compared to $902.9 million in the second quarter of 2020. Total loan originations in the third quarter included $15.1 million of SBA PPP loan originations, compared to $375.2 million originated in the second quarter of 2020. Excluding SBA PPP loans, total loan originations of $956.0 million in the third quarter of 2020 increased by $428.3 million from $527.7 million in the second quarter of 2020 consisting of: (i) a $217.0 million increase in commercial and construction loan originations, driven by higher utilization of commercial lines of credit, an increased volume of loan renewals and refinancings, and a higher volume of new commercial loan originations in the Florida region; (ii) a $135.6 million increase in consumer loan originations as the auto and finance leases originations picked up after the reopening of the auto retail industry in the latter part of the second quarter; and (iii) a $75.8 million increase in residential mortgage loan originations, driven by a higher volume of refinancings and conforming loan originations due to the lower mortgage loan interest rate environment.

Total loan originations in the Puerto Rico region amounted to $760.0 million in the third quarter of 2020, compared to $618.6 million in the second quarter of 2020. Total loan originations in the Puerto Rico region during the third quarter of 2020 included $14.0 million of SBA PPP loan originations, compared to $252.0 million originated in the second quarter of 2020. Excluding SBA PPP loans, total loan originations of $746.0 million in the Puerto Rico region during the third quarter of 2020 increased by $379.4 million from $366.6 million in the second quarter of 2020, consisting of a $181.9 million increase in commercial and construction loan originations, driven by higher utilization of commercial lines of credit and an increased volume of loan renewals and refinancings, a $134.5 million increase in consumer loan originations, and a $63.0 million increase in residential mortgage loan originations. The increase in residential mortgage loans was driven by refinancings and conforming loan originations sold in the secondary market, while the increase in consumer loan originations primarily reflects the effect of the reopening of the auto retail industry in the latter part of the second quarter after disruptions caused by the COVID-19 pandemic-related lockdowns and quarantines.

Total loan originations in the Virgin Islands region amounted to $31.0 million in the third quarter of 2020, compared to $40.8 million in the second quarter of 2020. Total loan originations in the Virgin Islands region during the third quarter of 2020 included $0.7 million of SBA PPP loan originations, compared to $29.7 million originated in the second quarter of 2020. Excluding SBA PPP loans, total loan originations of $30.4 million in the Virgin Islands region during the third quarter of 2020 increased by $19.3 million from $11.1 million in the second quarter of 2020, consisting of a $19.3 million increase in commercial and construction loan originations, driven by the refinancing and renewal of certain government loans, and a $1.1 million increase in consumer loan originations, partially offset by a $1.1 million decrease in residential mortgage loan originations.

Total loan originations in the Florida region amounted to $180.0 million in the third quarter of 2020, compared to $243.4 million in the second quarter of 2020. Total loan originations in the Florida region during the third quarter of 2020 included $0.4 million of SBA PPP loan originations, compared to $93.5 million originated in the second quarter of 2020. Excluding SBA PPP loans, total loan originations of $179.6 million in the Florida region during the third quarter of 2020 increased by $29.7 million from $149.9 million in the second quarter of 2020, consisting of a $15.7 million increase in commercial and construction loan originations, driven by the aforementioned origination of two large commercial loans totaling $29.9 million, and a $14.0 million increase in residential mortgage loan originations.

• A $624.2 million increase in investment securities, mainly driven by purchases of $850.7 million of U.S. agencies MBS and callable debentures during the third quarter, and the acquisition of BSPR, which added $294.7 million of U.S. agencies residential pass-through MBS, $56.9 million of Puerto Rico municipal bonds accounted for as held-to-maturity investment securities, and $3.0 million of FHLB stock as of September 30, 2020. These variances were partially offset by approximately $205.9 million of U.S. agencies bonds that were called prior to maturity during the third quarter, prepayments of $179.9 million of U.S. agencies residential pass-through MBS, and the sales of $116.6 million of U.S. agencies MBS. The sales of $116.6 million have settlement dates in October; thus, as of September 30, 2020, the decrease in the investment securities portfolio was offset by a corresponding increase in accounts receivable on unsettled investment sales included as part of Other assets in the consolidated statement of financial condition.

• A $65.4 million increase in the ACL for loans and finance leases, reflecting a provision of $48.1 million and an initial ACL of $28.7 million with respect to PCD loans from the acquisition of BSPR. The provision was primarily a result of the BSPR acquisition and reserves build for the legacy commercial and construction loan portfolio.

• A $1.2 billion increase in cash and cash equivalents attributable, among other things, to proceeds from sales of U.S. Treasury Notes acquired from BSPR and the $406.6 million increase related to the excess of the cash acquired in the BSPR acquisition over the cash consideration paid at closing.

• Core deposits and other intangible assets of $38.5 million as of September 30, 2020 related to the acquisition of BSPR.

• A $41.4 million increase in net deferred tax assets, primarily related to the acquisition of BSPR.

Total liabilities were approximately $16.4 billion as of September 30, 2020, up $4.6 billion from June 30, 2020. The increase was mainly the result of the acquisition of BSPR, which added $4.2 billion in total deposits as of September 30, 2020.

The increase in total liabilities was mainly due to:

• A $3.7 billion increase in total deposits, excluding brokered deposits and government deposits, consisting of a growth of $3.7 billion in the Puerto Rico region, partially offset by decreases of $30.3 million and $14.5 million in the Florida and Virgin Islands regions, respectively. The increase in the Puerto Rico region reflects primarily $3.4 billion of deposits (net of brokered and government deposits) resulting from the BSPR acquisition. Organic deposit growth was $216.4 million during the third quarter, primarily demand deposits, which grew by 6%, or $250.4 million.

• An $899.3 million increase in government deposits, reflecting increases of $782.9 million, $115.8 million, and $0.7 million in the Puerto Rico, Virgin Islands, and Florida regions, respectively. The increase in the Puerto Rico region during the third quarter reflects primarily $670.5 million of government deposits resulting from the BSPR acquisition. The remaining $228.8 million of organic growth reflects an increase in balances of transactional accounts of certain municipalities in Puerto Rico, related to the collection of municipal license taxes, and higher balances on transactional accounts of the central government in the U.S. Virgin Islands driven by collection of income taxes.

Partially offset by:

• A $56.0 million decrease in brokered deposits, reflecting the effect of the maturity of approximately $87.3 million of brokered CDs, with an all-in cost of 2.15%, that were paid off during the third quarter, partially offset by an increase of $31.2 million in the balance of non-maturity brokered money market deposit accounts maintained by a deposit broker. The BSPR acquisition added $56.1 million in non-maturity brokered deposits as of September 30, 2020.

The following table provides additional information about the increase/decrease on deposits:

Total stockholders’ equity amounted to $2.2 billion as of September 30, 2020, an increase of $10.4 million from June 30, 2020. The increase was driven by earnings generated in the third quarter, partially offset by common and preferred stock dividends declared in the second quarter totaling $11.0 million.

The Corporation implemented the CECL model commencing January 1, 2020 and elected to phase in the full effect of CECL on regulatory capital over the five-year transition period. As of September 30, 2020, capital ratios remained strong compared to regulatory levels for well capitalized banks. The Corporation’s preliminary estimated common equity tier 1 capital, tier 1 capital, total capital and leverage ratios under the Basel III rules were 17.22%, 17.53%, 20.32% and 13.04%, respectively, as of September 30, 2020, compared to common equity tier 1 capital, tier 1 capital, total capital and leverage ratios of 21.52%, 21.90%, 25.08%, and 15.23%, respectively, as of June 30, 2020.

Meanwhile, the preliminary estimated common equity tier 1 capital, tier 1 capital, total capital and leverage ratios of our banking subsidiary, FirstBank Puerto Rico, were 15.94%, 18.60%, 19.86%, and 13.85%, respectively, as of September 30, 2020, compared to common equity tier 1 capital, tier 1 capital, total capital and leverage ratios of 20.02%, 23.32%, 24.59% and 16.23%, respectively, as of June 30, 2020.

The acquired assets and off-balance sheet items of BSPR have been fully included and risk weighted in the regulatory capital position determination of the Corporation and FirstBank Puerto Rico as of September 30, 2020. However, following regulatory capital requirements, the quarterly average asset calculation used for the leverage ratio includes the dollar amounts of the acquired assets from the acquisition date through the end of the third quarter, and the denominator for the number of days in the entire quarter, which resulted in a diluted quarterly average asset balance for the quarter ended September 30, 2020. The full effect in the leverage ratio of the assets acquired in the transaction will be reflected in the regulatory capital position determination as of December 31, 2020.

Tangible Common Equity

The Corporation’s tangible common equity ratio decreased to 11.36% as of September 30, 2020, compared to 15.25% as of June 30, 2020.

The following table presents a reconciliation of the Corporation’s tangible common equity and tangible assets over the last five quarters to the comparable GAAP items: