March 27 - Eastern Virginia Bankshares Inc., Tappahannock, Va., (NASDAQ: EVBS) has entered into securities purchase agreements with affiliates of Castle Creek Capital Partners and GCP Capital Partners and certain other institutional investors pursuant to which it expects to raise aggregate gross proceeds of $45 million through private placements of approximately 4.6 million shares of common stock and 5.2 million shares of a new series of non-voting mandatorily convertible non-cumulative preferred stock, each at $4.55 per share. The closing of the private placements is subject to shareholder approval and other conditions.
The company also announced plans to conduct a $5 million rights offering to allow existing shareholders to purchase common stock at the same purchase price per share as the investors in the private placements. The closing of the rights offering will be conditioned on the closing of the private placements. The company intends to use the gross proceeds from these capital raises for general corporate purposes, including strengthening its balance sheet and pursuing certain strategic initiatives discussed below.
Joe A. Shearin, president and CEO, commented, "We are excited about the capital raise and our partnership with Castle Creek and GCP Capital. This capital raise significantly strengthens our balance sheet and will allow for the resolution of our most significant remaining problem assets and better position the Bank and the company to expeditiously exit the written agreement, which currently restricts us from paying dividends to our shareholders, and TARP. Additionally, we are excited about the financial and strategic flexibility this capital will provide us."
Continuing, Shearin said, "I am very pleased that representatives of Castle Creek and GCP Capital will be joining our board of directors, and believe that their expertise and guidance will help contribute to the future success of the company."
The company plans to use the gross proceeds from the private placements and the rights offering for general corporate purposes, including strengthening its balance sheet, the accelerated resolution and disposition of assets adversely classified by the Company and the optimization of its balance sheet through the restructuring of FHLB advances, with ultimate goals of repurchasing its preferred stock and warrants issued to the U.S. Treasury through the Troubled Asset Relief Program and exiting from the previously disclosed written agreement with the Federal Reserve Bank of Richmond and the Virginia Bureau of Financial Institutions.
The company intends to remove risk from its balance sheet by accelerating the disposition of a portion of the assets adversely classified by the company, including approximately $13 million in classified loans through a combination of asset sales and "A/B note" structures and approximately $3 million in other real estate owned. Management has also identified approximately $7.5 million in additional adversely classified assets that it expects the company to retain on the balance sheet and work out over the next 12 months. The ultimate effect of disposing and working out the $23.5 million of adversely classified assets on the company's after-tax earnings will depend on ongoing market conditions and other factors.
Given currently favorable market conditions, the company also intends to optimize its balance sheet by restructuring the $117.5 million in FHLB advances on its balance sheet as of Dec. 31, 2012. The company currently anticipates pre-paying approximately $94 million in FHLB advances, funded in part by the sale of assets in the Company's securities portfolio, which pre-payment would result in an estimated pre-tax penalty fee of approximately $14 million. With respect to the balance of the FHLB advances, the company intends to either pay off the remaining advances at scheduled maturities or to lower existing interest rates through "blend and extend" transactions. Under current market and interest rate conditions, the company estimates that the restructuring could increase the net interest margin by approximately 60 basis points and annual pre-tax net interest income by approximately $2.9 million.
No investor will own more than 9.9 percent of the Company's voting securities (or securities that convert into voting securities in the hands of such investor) or 33.3 percent of the company's total equity outstanding, each as calculated under the applicable regulations of the Board of Governors of the Federal Reserve System. The investments are subject to shareholder approval and satisfaction of certain other conditions, which the company presently expects to be satisfied in the second quarter of 2013.
Pro forma for these private placements, excluding the impact of the rights offering, Castle Creek and GCP Capital will each beneficially own approximately 9.9 percent of the company's voting common stock and 32 percent and 14.1 percent of the company's total equity, respectively. One other investor will beneficially own approximately 9 percent of the company's voting common stock and 6.1 percent of the company's total equity. The remainder of the investors will each beneficially own varying ownership interests, in all cases below 4.9 percent of the company's voting common stock and total equity.
The common stock and preferred stock will be issued pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended. The company has agreed to promptly file a registration statement with respect to the shares of common stock and preferred stock being issued in the private placement and the shares of common stock issuable upon conversion of the shares of preferred stock being issued. The shares of preferred stock to be issued will convert into shares of common stock in the hands of a transferee immediately upon the consummation of certain permitted transfers and under certain other circumstances, each as detailed in the terms of the preferred stock.
On closing of the private placements, each of Castle Creek and GCP Capital are entitled to have one representative appointed to both the company's and bank's board of directors, subject to applicable regulatory approvals and corporate governance requirements. In the event one or both of these investors exercise such rights and the requisite approvals are received, these representatives will serve alongside the 13 current directors.
The company also announced plans to conduct a $5 million rights offering to allow existing shareholders to purchase common stock at the same purchase price per share as the investors in the capital raise described above. The rights will be non-transferable and will have customary oversubscription privileges, provided that purchases through the rights offering will not be permitted to cause an individual shareholder's aggregate ownership of the company's common stock to exceed 4.9 percent of the company's common stock if the shareholder's ownership did not previously exceed 4.9 percent. If the rights offering is oversubscribed, subscriptions will be reduced proportionally based on the pro rata ownership of the common stock. The investors in the private placements are not providing a "back stop" to the rights offering in the event it is undersubscribed. The closing of the rights offering will be conditioned on the closing of the transactions contemplated by the securities purchase agreements.
Shearin noted, "Our legacy shareholders have stood by our side during the prolonged economic downturn. This rights offering provides these shareholders the opportunity to purchase additional company shares at the same price as the investment made by Castle Creek, GCP Capital and the other institutional investors and continue to support the company."