The covered loan portfolio is comprised of loans acquired from the FDIC-assisted acquisitions of United Commercial Bank (UCB) and Washington First International Bank (WFIB) which are covered under loss share agreements with the FDIC. During the third quarter, we recorded a net decrease in the FDIC indemnification asset and receivable included in noninterest income (loss) of $(43.5) million which resulted largely from the improved performance of the UCB loan portfolio as compared to our original estimate.
Deposits and Borrowings
During the third quarter, total deposits grew $172.9 million from June 30, 2011 to a record $17.3 billion at September 30, 2011. In the third quarter, we continued our focus on growing commercial and low-cost core deposits and reducing our reliance on time deposits. Core deposits increased to a record $9.8 billion at September 30, 2011, or an increase of $469.7 million or 5% from June 30, 2011 while time deposits decreased to $7.5 billion at September 30, 2011, or a decrease of $296.7 million or 4% from June 30, 2011. Demand deposits grew to a record $3.4 billion, an increase of $225.9 million or 7% quarter to date.
As of September 30, 2011, FHLB advances totaled $457.1 million, a decrease of 14% or $75.9 million from June 30, 2011 due to both scheduled payments and prepayments during the third quarter. During the third quarter, we prepaid $48.8 million of FHLB advances with an effective interest rate of 2.4%, incurring a prepayment penalty of $3.3 million, which is included in noninterest expense. Additionally, during the third quarter, we called $10.8 million of 10.9% junior subordinated debt securities at a premium of $526 thousand, which is also recorded in noninterest expense. These actions were taken to reduce borrowing costs and improve the net interest margin in the coming quarters.Third Quarter 2011 Operating Results Net Interest Income The core net interest margin, excluding the net impact to interest income of $39.3 million resulting from covered loan activity and amortization of the FDIC indemnification asset, remained strong at 3.98% for the third quarter of 2011, as compared to 4.03% for the second quarter of 2011 and 3.98% for the third quarter of 2010. 1 For the third quarter, the yield on noncovered loans was 4.87% compared to 5.10% in the prior quarter and the yield on covered loans, excluding the net impact to interest income from covered loan activity and amortization of the FDIC indemnification asset, was 7.89%, compared to 7.92% in the prior quarter. 1 Additionally, the yield on investment securities improved 9 basis points to 2.99% for the quarter ended September 30, 2011. East West continues to focus on commercial and low-cost core deposits and successfully grew core deposits $469.7 million during the quarter and lowered the cost of deposits by five basis points to 0.65% for the quarter. In addition, the cost of funds was also down quarter to date, decreasing seven basis points to 0.93%.
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