Net interest margin
The Company reported a tax equivalent net interest margin of 3.98% for the third quarter of 2012, as compared to 4.06% for the second quarter of 2012, and 4.12% for the third quarter of 2011. The decrease in net interest margin in the current quarter over the prior quarter resulted primarily from the decline in non-covered loan yields, the decline in investment yields, the decrease in average investment balances and the decrease in average covered loan balances, partially offset by an increase in average loans held for sale, the increase in average non-covered loans outstanding, an increase in loan disposal gains from the covered loan portfolio and the decrease in the cost of interest bearing deposits. The decrease in net interest margin in the current quarter over the same period of the prior year resulted from the same items as noted above, partially offset by the decrease in interest bearing liabilities.
Loan disposal activities within the covered loan portfolio, either through loans being paid off in full or transferred to OREO, result in gains within covered loan interest income to the extent assets received in satisfaction of debt (such as cash or the net realizable value of OREO received) exceed the allocated carrying value of the loan disposed of from the pool. Loan disposal activities contributed $5.9 million of interest income in the third quarter of 2012, as compared to $2.9 million in the second quarter of 2012 and $4.8 million in the third quarter of 2011. While dispositions of covered loans positively impact net interest margin, we recognize a corresponding decrease to the change in FDIC indemnification asset at the incremental loss-sharing rate within other non-interest income. Excluding the impact of covered loan disposal gains, consolidated net interest margin would have been 3.75% for the current quarter, 3.94% for the prior quarter, and 3.94% in the same quarter of the prior year.