Carroll Bancorp (CROL) – Merger Arbitrage – 13% Upside

Current Price: $19.1

Offer Price: $21.63

Upside: 13%

Expected Closing Date: Q3 2020

Press Release


This is a tiny ($25m) all cash bank merger. Liquidity is limited, but a decent position may be acquired with patience.

Carroll Bancorp is being acquired by Farmers and Merchants for $21.63/share subject to certain adjustments (more below). Approval of target company shareholders is required (not clear if the minority vote will by required). Management owns 28.4% of shares.

Overall it seems that CROL shareholders should be fine with the offer and it is also quite likely that the consideration won’t be adjusted at all (the margin of safety is wide enough anyways). The transaction also makes sense from geographical (both banks are operate in Maryland) and operational (cost efficiency) perspective.

Downside to pre-announcement price is 21% (including the $1m termination fee from the buyer side).


Final consideration

Biggest risk seems to be related to the eventual payout amount as it is “subject to adjustment under certain circumstances provided for in the agreement”. The transaction is quite fresh (announced on the 6th of March) and  proxy statement is not out yet, so the information is limited (adjustment is not properly explained in the press release). A bit more details are provided in the annual report of FMFG, however the strange thing is that different numbers are given in two different places. Page 15:

Carroll’s stockholders will receive aggregate cash merger consideration of $25 million, subject to adjustment if and to the extent that Carroll’s tangible book value prior to the Closing does not equal or exceed $17,775,000. Therefore, the value of the aggregate consideration to be received by Carroll’s stockholders in the Merger will depend on the extent of any adjustment. The impact of this adjustment on the actual cash merger consideration will depend on a variety of factors, including general market and economic conditions, changes in the business, operations and prospects of Carroll and regulatory considerations. Many of these factors are beyond our or Carroll’s control.

Page 4:

outstanding shares of Carroll’s common stock will be converted into the right to receive cash in the aggregate amount of $25 million, subject to a dollar-for-dollar reduction if and to the extent Carroll’s tangible book value prior to the closing does not equal or exceed $18,200,000.

Most likely this is a some kind of a typing mistake and the correct number should be $18.2m as it is also the most recent TBV (stakeholders equity) of Carroll (as of Dec’19). For the last two years the tangible book value of CROL has been consistently growing by about 1%-2% per quarter.


With this stable growth is the possibility of the eventual price adjustment seems rather low.

The second quote states that the adjustment would be done on a dollar-for-dollar basis, so that means in order to completely erase the upside, TBV of the target company would have to drop to $16.5m (2016 level). Therefore it seems that the margin of safety is quite sufficient here.


Other thoughts


FMFG has total assets in excess of $440m and operates 6 branches in Maryland. Despite the size it annually brings about 10% return on average equity and trades at 12% premium to its tangible book value.


CROL, on the other hand has $180m of total assets and operates 5 branches in Maryland. It performs significantly weaker and less consistently than the acquirer and is also used to consistently trade at a 10-15% discount to its TBV.



Shareholder approval

So the offer comes at significant premium to usual Carroll Bancorp TBV. On one hand it is still materially lower than the average West bank acquisition multiple (1.68x). On the other hand, CROL operates inefficiently and struggles with profitability, that is considerably lower than the median of an average target (11.8%) in similar mergers.


Bank M&A statistics. Mercer Capital Data

All in all, it seems that shareholders should vote in favour of the acquisition.


Buyers perspective

As indicated by the profitability ratios above (ROE), CROL operates considerably less efficiently than FMFG. Cost efficiency ratio currently stands at 0.68 (CROL) vs 0.54 (FMFG). Nonetheless, the combination should more or less eliminate the difference and increase the efficiency of the target bank to the acquirer levels. According to the calculations, this efficiency improvement would increase net income of CROL by about $1.2m therefore significantly improving the profitability of the company.


So despite the premium that Farmers and Merchants is paying, the price is actually not so high in the light of the potential synergies. Therefore the chances of FMFG dropping this transaction is rather low.



5 thoughts on “Carroll Bancorp (CROL) – Merger Arbitrage – 13% Upside”

  1. From Apri 27 earnings release: “We are confident that our well-capitalized bank will thrive in this current crisis. In addition, we look forward to the completion of our acquisition of Carroll Community Bank. The acquisition process continues to proceed at the expected pace.”

  2. Shareholders approved the merger on June 22nd. Still awaiting approval from the FDIC and the Maryland Commissioner (application was submitted on April 13th).

    Based on the proxy, shareholder equity was $18,306,000 reflecting exclusions as of March 31st. So, the risk of an offer reduction seems less likely at this point.

    An additional risk not mentioned is the ability to secure funding for the deal. FMFG plans to fund the deal “through a combination of a third-party loan to the Company in an amount up to $16 million (the “Holding Company Loan”) and a $9 million cash dividend to be paid by F&M Bank.” The ability to secure funding was still listed as a risk in FMFGs 10Q May 13.

    The deal spread is still ~5.5%


    The Merger Agreement requires that the transactions be approved by Carroll’s stockholders, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Maryland Commissioner of Financial Regulation. The Company is pleased to announce that the last of these approvals was obtained on August 31, 2020. The Company and Carroll are now working toward a closing date of September 30, 2020, with an effective date of October 1, 2020.

  4. The remaining spread now stands at <1%. Therefore, the idea is closed with 12% profit in 6 months.


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