Delmarva Bancshares (DLMV) – Merger Arbitrage – 8.5% Upside

Current Price: $8.21

Offer Price: $8.90

Upside: 8.5%

Expected Closing: Q4 2020

Press Release

 

A merger between two similarly sized nano-cap banks located in Maryland. Liquidity is limited (volume jumped up substantially after the merger announcement, but dried-up again in the last two days).

On the 18th of June, Delmarva Bancshares announced that it has signed a definitive agreement to be acquired by BV Financial (ticker BVFL) for $8.90/share in cash ($54m in total). DLMV shareholder’s approval is required and given the premium to pre-COVID trading levels, it seems that the vote will go through. Financing for the transaction will be provided via $30m debt issuance and cash generated from operations. BVFL appears to be in a rather strong balance sheet (overcapitalized) and should be able to borrow cheaply. Loan book profiles of both banks are homogenous (mostly retail and commercial mortgages – see sections below).

Over the last 1.5 years BVFL has already made two 2 similar acquisitions:

• This year in March it bought MB Bancorp ($115m in assets) for $31m in cash. It was priced also similarly at discount to BV (0.93x BV, while DMLV offer stands at 0.91x) and closed in 6 months.
• In February’19 it acquired Kopernik Bank ($133m assets) for stock consideration (valued at $41m). It also took 6 months to close the merger.

If these are good precedents, then this merger should also close successfully over the next half a year. The current spread is most likely the result of limited stock liquidity and overall uncertainty in the banking industry after COVID fall-out.

 

BV Financial

The company owns BayVanguard Bank and operates in 10 locations across Maryland.

BVFL is a partially converted thrift bank and there’s a potential for a second step conversion, which used to be a lucrative opportunity in the past. Currently, 87% of its shares are held by Mutually Held Corporation (MHC) that is controlled by bank’s depositors. The bank partially converted to stock in 2005 – part of shares was offered to the public, while the remaining 55% were left in the hands MHC. Subsequently, BVFL made two acquisitions in 2013 and 2019 (Vigilant and Kopernik) in which additional shares were issued to the MHC increaqsing it’s stake to 68.5% and 87% .

Loan book:

• 94% Real estate
  • 41% 1-4 family owner occ
  • 25% 1-4 family nonowner occ
  • 26% Multifamily and commercial
  • 1% Land
  • 3% Farm loans guaranteed by USDA
  • 5% Construction
• 1% Mobile homes
• 4% Marine (boats)
• 1% Consumer

Performance:

It is interesting that despite similar size and profitability BVFL trades significantly higher than its target. Most likely this is due to proven growth through acquisitions (at a discount to BV) strategy – e.g. merger with DLMV will double BVFL assets without diluting the shareholders. Potential for the second step thrift conversion likely adds to valuation as well.

 

DLMV

Delmarva Bancshares is a parent of 1880 Bank and has 6 locations in Maryland.

Loan book:

• 92% Real estate
  
  • 46% Residential
  • 52% Commercial
  • 2% Development
• 7% Commercial
  • 98% Secured
  • 2% Unsecured
• 1% Consumer
  • 98% Secured
  • 2% Unsecured

So the majority of the portfolio is secured and collateralized by real estate.

Performance: