In a move aimed at reducing its cost of funds, Eastern Virginia Bankshares (EVBS) in Tappahannock is retiring debt owed to the Federal Home Loan Bank System.

The $1.1 billion-asset company announced Friday that it has prepaid $107.5 million in long-term FHLB advances and plans to retire an additional $10 million in early September. The loans carry an average interest rate of 4.14% and have average remaining maturities of 3.5 years, the company said.

The bank will record an $11.5 million prepayment penalty in its third-quarter earnings, it said. It expects the prepayment to reduce annual interest costs by $4.5 million and improve its net interest margin by approximately 65 basis points. Its net interest margin was 3.35% as of June 30, and the company earned $297,000 in the second quarter, it announced last month.

"In this low interest rate environment, these high-cost long-term borrowings have created a sizeable amount of negative pressure on our balance sheet," said Joe Shearin, the company's president and chief executive, in a news release. "Prepayment of these advances has allowed us to utilize excess liquidity, modestly shrink the balance sheet, improve our net interest margin and reduce our reliance on noncore funding while maintaining a prudent interest rate risk profile."

The Federal Reserve Board terminated a 2011 written agreement with Eastern Virginia earlier this month. The bank raised a total of $50 million through a private placement that closed in March and a rights offering that closed in June.

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