RP FINANCIAL, LC.
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Financial Services Industry Consultants
July 5, 2001
Board of Directors
Essex Bancorp, Inc.
Interstate Corporate Center
Building 9, Suite 200
Norfolk, Virginia 23502
Members of the Board:
You have requested RP Financial, LC. ("RP Financial") to provide you
with its opinion as to the fairness from a financial point of view of the
consideration to be paid to the current unaffiliated common holders of the
common stock ("Common Stock") of Essex Bancorp, Inc., Norfolk, Virginia ("Essex"
or the "Company"), the holding company for Essex Savings Bank, F.S.B. (the
"Bank"), in connection with the merger transaction described below.
Description of Merger
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In this regard, Essex has entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Essex Acquisition Corp. ("Essex Acquisition"), a
newly-formed wholly-owned subsidiary of the Company, whereby Essex Acquisition
will exchange all of the outstanding shares of the Company's Common Stock for
cash concurrent with the merger of the Company into Essex Acquisition (the
"Merger"). The Bank will become a subsidiary of Essex Acquisition. This letter
incorporates by reference the proxy statement for the Merger and the Merger
Agreement. Following the Merger, the holders of the Common Stock will no longer
have an interest in the Company and the holders of the two series of preferred
stock ("Preferred Stock"), Series B and Series C, and outstanding warrants to
purchase Common Stock ("Warrants") will own all of the equity interests in Essex
Acquisition, which will be the surviving company in the Merger. The Common Stock
ownership of Essex Acquisition will be based on the redemption value and
accumulated dividends of the both series of Preferred Stock and the value of the
Warrants determined as of February 1, 2001. The holders of the Series B and C
Preferred Stock will be issued new shares of Common Stock of Essex Acquisition
and the Warrants will be exchanged for new shares of Common Stock of Essex
Acquisition. Accordingly, the Merger will eliminate the public ownership of the
Company's Common Stock and will result in a "going private" transaction whereby
the common stock ownership of Essex Acquisition will be closely held by the
current holders of the Series B and C Preferred Stock and Warrants. As a result,
the Common Stock will no longer be traded on the American Stock Exchange, price
quotations with respect to sales of shares in the public market will no longer
be available and the Common Stock will no longer be registered under the
Securities Exchange Act of 1934, as amended. Following the Merger, Essex
Acquisition will be renamed Essex Bancorp,
Inc. The effective time of the Merger (the "Effective Time") is
expected to occur as soon as practicable after the meeting of shareholders
approving the Merger and satisfaction and waiver of terms and conditions of the
Merger Agreement, following which the holders of the Common Stock will receive a
cash payment, as described below.
Essex Acquisition intends to finance the Merger through a loan of up to
$2 million, representing the anticipated aggregate consideration to be paid to
the holders of the Company's Common Stock plus related fees and expenses,
according to the executed Loan Agreement between Essex Acquisition and Centura
Bank, dated May 31, 2001 ("Loan Agreement").
Summary Description of Merger Consideration
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At the Effective Time, all of the outstanding shares of Essex Common
Stock will be converted into the right to receive cash in an amount equal to
$1.45 per share ("Cash Consideration"). As of the date of this letter, Essex had
a total of 1,060,642 common shares outstanding.
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The Company's granted employee and director stock options will be
exchanged for cash equal to the amount by which the Cash Consideration exceeds
the exercise price of such options, if any. Out of the money employee and
director stock options will not be eligible to receive any Cash Consideration.
Payment received, if any, will constitute consideration for the termination and
cancellation of all options and related stock appreciation rights. As of the
date of this letter, there were: 166,500 employee stock options with a weighted
average exercise price of approximately $1.40, of which 132,000 were in the
money with a weighted average exercise price of approximately $1.30, and 7,300
director stock options with a weighted average exercise price of $1.99, of which
2,350 were in the money with a weighted average exercise price of approximately
$1.22.
The Company has 7,949,000 Warrants outstanding, all of which are
exercisable into Essex Common Stock at a price of $0.9375 per share, and all of
the Warrants are owned by the holders of the Preferred Stock. Given tax
considerations and the limited equity available to the Company to pay the Cash
Consideration, any significant exercise of the Warrants prior to the Effective
Time may cause the Company to determine that it cannot consummate the Merger and
thus terminate the Merger Agreement. Further, because of the large number of
Warrants outstanding, any significant exercise of the Warrants prior to the
Effective Time may adversely impact the level of the Cash Consideration per
share.
RP Financial Background and Experience
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RP Financial, as part of its financial institution valuation,
consulting and merger advisory practice, is regularly engaged in the valuation
of financial institution securities in connection with mergers and acquisitions
of commercial banks and thrift institutions, initial and secondary offerings by
commercial banks and thrift institutions, mutual-to-stock conversions of thrift
institutions, and business valuations for other corporate purposes for financial
institutions including the valuation of equity and debt securities, stock-based
benefit plans and going private transactions. As specialists in the securities
of financial institutions, RP Financial has experience in, and knowledge of, the
Virginia and Mid-Atlantic markets for thrift and bank securities and financial
institutions operating in Virginia.
In the past, RP Financial has provided consulting and planning services
to Essex and has received customary fees for such services. Neither RP Financial
nor its members have any past or present ownership in any debt or equity
securities of Essex or any future ownership in any debt or equity securities of
Essex Acquisition. RP Financial will receive a fee from Essex for rendering this
opinion, a substantial portion of which is contingent upon the consummation of
the Merger. RP Financial will also receive a fee for the valuation of the
Warrants to assist the Special Committee in setting the conversion ratio of the
Warrants of the Company for Common Stock in Essex Acquisition. In addition,
Essex has agreed to indemnify RP Financial for certain liabilities arising out
of this financial advisory engagement. RP Financial has not been engaged by
Essex Acquisition. RP Financial is not a broker/dealer and thus does not engage
in the trading of securities for any company, including Essex, for its own
account or for others.
RP Financial's opinion does not address Essex's underlying business
decision to effect the Merger. At the direction of the Special Committee, RP
Financial has not been asked to, nor does RP Financial offer, any opinion as to
the material terms of the Merger Agreement or the form of the Merger. RP
Financial was not engaged to solicit third party indications of interest in the
possible acquisition of Essex in part or in whole.
Materials Reviewed and Considered
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In rendering this fairness opinion, RP Financial reviewed the following
material:
(1) the various documents pertaining to the Merger, including -
(a) the Merger Agreement,
(b) the term letter from Centura Bank, dated February 20, 2001,
and the Loan Agreement, dated May 31, 2001 pertaining to the
financing of the Merger,
(c) the shareholder proxy materials,
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(d) the tax memorandum prepared by PricewaterhouseCoopers, dated
January 31, 2001;
(2) financial and other information of Essex, all with regard to
balance and off-balance sheet composition, profitability, interest
rates, volumes, maturities, trends, credit risk, interest rate
risk, liquidity risk and operations -
(a) audited financial statements for five fiscal years ended
December 31, 2000 and unaudited financial statements for the
first five months of 2001,
(b) stockholder, regulatory and internal financial reports and
for the last five fiscal years and the quarter ended March
31, 2001, including quarterly and annual reports, filings
with the Securities and Exchange Commission, including Form
10-K and Form 10-Q, and press releases,
(c) the annual proxy statements for the last five years,
(d) various other internal documents, including, but not limited
to, minutes of the Board of Directors for the Company and the
Bank, regulatory reports, the employee and directors stock
options schedule and the preferred dividends schedule
assuming the dividends continue to accumulate and earn
interest over the next five years.
(3) Comments by the Essex Board, Special Committee and management
regarding past and current business, operations, financial
condition, and future prospects;
(4) The Board approved business plan for Essex and subsidiaries for
fiscal year 2001, including financial projections, incorporating
the pro forma impact of the Merger;
(5) The net operating tax loss carryforward position of Essex and
the strategic implications historically,
currently and prospectively to realize the full benefit;
(6) The redemption value and accumulated dividends of Essex's Series B
and Series C preferred stock, and Essex's expectations that
earnings will continue to be inadequate to cover the annual
dividends for both series of Preferred Stock;
(7) The terms of the 7,949,000 Warrants outstanding, including the pro
forma impact and the resulting voting control of Essex's Common
Stock if the currently exercisable Warrants were to be partially
or fully exercised; and
(8) The Common Stock price history of Essex, including the closing
price and daily volume for Essex's stock on the American Stock
Exchange from 1999 up to the February 1, 2001 announcement of the
Merger and up to the date of this opinion.
RP Financial considered the absence of interest by third party
financial institutions and other financial intermediaries in pursuing a merger
with, or an acquisition of, Essex over the past five years, even with the
assistance provided by a third party financial advisor in 2000 who conducted a
targeted canvassing of financially capable in-market and out-of-market financial
institutions. RP Financial also considered the alternative strategies evaluated
and/or pursued by Essex over the last five years to provide returns to the
holders of the Preferred Stock and the Common Stock, including: (1) a secondary
offering of common stock to partially or fully refund the Preferred Stock; (2)
strategic affiliations with banking and non-banking entities whereby such third
parties would purchase the existing Preferred Stock or newly issued shares of
Common Stock; and (3) going private through a Merger whereby the holders of the
Common Stock would receive cash consideration and the holders of the Preferred
Stock and Warrants would become the holders of the Common Stock following the
Merger. RP Financial also considered the economic and demographic
characteristics in the local market area, the interest rate environment and the
potential impact of the regulatory, legislative and economic environments on
operations for Essex and the public perception of the savings institution
industry.
In evaluating the Merger, and specifically the Cash Consideration to be
paid to the current holders of the outstanding shares of the Company's Common
Stock, RP Financial also considered:
(1) Essex's financial and trading characteristics relative to
publicly-traded thrifts, including a peer group of regionally
based publicly-traded thrifts and a peer group of similarly sized
thrifts with an emphasis in mortgage banking and servicing of
loans for others;
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(2) the financial terms of completed and pending acquisitions of
comparable savings institutions both regionally and nationally
from 1998 to present, including the pricing ratios relative to
earnings per common share, book value per common share, assets per
share and the tangible book value premium relative to core
deposits;
(3) the trading price premium paid in the acquisitions of
publicly-traded savings institutions and commercial banks 1998 to
present;
(4) the trading price premium paid in going private transactions
involving publicly-traded banks and thrifts since the end of 1999;
(5) the trading price premium paid in going private transactions 2000
to date of non-financial institutions in which the
controlling/continuing shareholders owned 50% or more and 90% or
more of the voting stock or equity;
(6) the trading price premium paid in "Dutch auction" tender offers
conducted by banks and thrifts 1998 to present; and
(7) discounted cash flow analyses pertaining to Essex reflecting
future prospects, before consideration of the Merger, which are
expected to lead to further erosion of the negative book value per
common share despite anticipated balance sheet growth and
profitability.
In rendering its opinion, RP Financial relied, without independent
verification, on the accuracy and completeness of the information concerning
Essex furnished by management to RP Financial for review, as well as
publicly-available information regarding other financial institutions and
economic and demographic data. Essex did not restrict RP Financial as to the
material it was permitted to review. RP Financial further relied upon the
assurances of Essex's management that it is unaware of any facts that would make
the information provided to RP Financial incomplete or misleading in any
material respect. With respect to projected financial and operating data
provided by Essex, RP Financial has assumed that they were reasonably prepared
and reflect the best currently available estimates and judgment of the
management and staff of Essex relating to the future financial and operational
performance and business prospects of Essex and its subsidiaries. RP Financial
did not perform or obtain any independent appraisals or evaluations of the
assets and liabilities and potential and/or contingent liabilities of Essex. It
is the understanding of RP Financial from Essex that there have not been any
prior formal valuations of the Company's Common Stock during the past five
years.
RP Financial expresses no opinion on matters of a legal, regulatory,
tax or accounting nature or the ability of the Merger as currently structured.
In rendering this opinion, RP Financial assumed that, in the course of obtaining
the necessary regulatory and governmental approvals for the Merger, there will
be no restriction imposed on Essex or Essex Acquisition that will have a
material adverse effect on the ability of the Merger to be consummated as
currently structured and that the Merger will comply with applicable federal and
state laws. RP Financial has also assumed that the draft proxy materials and
Merger Agreement reviewed in connection with the preparation of this letter will
conform in all material respects to the final proxy materials and Merger
Agreement.
Opinion
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It is understood that this letter is directed to the Board of Directors
of Essex in its consideration of the Merger Agreement, and does not constitute a
recommendation to any current common stockholder of Essex as to any action that
such common stockholder should take in connection with the Merger Agreement, or
otherwise. Furthermore, this letter is not directed to the holders of the Series
B and C preferred stock and Warrants. RP Financial's opinion does not address
Essex's or Essex Acquisition's respective underlying business decisions to
effect the Merger. It is understood that RP Financial's opinion does not address
whether Essex Acquisition or any other party would be willing to pay
consideration in excess of the Cash Consideration for the outstanding shares of
Common Stock.
It is understood that this opinion is based on market conditions and
other circumstances existing on the date hereof.
It is understood that this opinion may be included in its entirety in
any communication by Essex or the Board of Directors to the holders of the
Common Stock of Essex. It is also understood that this opinion may be included
in its entirety in any regulatory filing by Essex and that RP Financial consents
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to the summary of the opinion in the proxy materials of Essex, and any
amendments thereto. Except as described above, this opinion may not be
summarized, excerpted from or otherwise publicly referred to without RP
Financial's prior written consent.
Based upon and subject to the foregoing, and other such matters
considered relevant, it is RP Financial's opinion that, as of the date hereof,
the Cash Consideration to be received by the current unaffiliated holders of the
outstanding shares of Essex's Common Stock in the Merger is fair to such
shareholders from a financial point of view.
Respectfully submitted,
RP FINANCIAL, LC.
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