An Iowa bank’s mandate for selling itself: Simplify

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ATBancorp in Dubuque, Iowa, must shed certain assets before it can complete its sale to MidWestOne Bancorp in Iowa City.

MidWestOne agreed in August to buy the $1.4 billion-asset ATBancorp for $170 million.

ATBancorp must sell a plane and a number of fee-generating businesses before the deal closes, according to a regulatory filing associated with the proposed merger. The businesses include a retirement planning division, registered investment advisor, insurance agency and a trust office in California.

MidWestOne determined that the retirement planning business needed “scale and investment” and was inconsistent with its own strategy, Greg Turner, the $3.3 billion-asset company’s senior vice president of wealth management and corporate communications, said in an interview.

“We have a great deal of respect for that group,” Turner said, noting that MidWestOne uses ATBancorp’s retirement planning services to handle its own company plan. MidWestOne will retain a trust business with about $1 billion in assets under management.

ATBancorp is expected to sell the retirement planning business, with more than $1.6 billion in assets under management, to the division’s principals, Turner said. ATBancorp’s insurance business, which will also be sold, is closely linked to its retirement planning operations.

The move shows how a business that is important to one bank may not be vital to another.

ATBancorp began to consider its long-term options in mid-2017, citing a need of many investors for increased liquidity, among other things. Members of the Schrup family, including Chairman and President Nicholas Schrup, own more than a third of the company’s stock, the filing notes.

Investment banks that met with ATBancorp suggested that it sell its 83% stake in United American Bank in San Mateo, Calif., based on a belief that there are very few buyers interested in a footprint that included Iowa, Wisconsin and California.

With the support of ATBancorp, United American agreed in January to sell itself to Heritage Commerce in San Jose, Calif., for $44.2 million. ATBancorp received $9.1 million in cash and Heritage Commerce stock that it sold in mid-May for $37.9 million, the filing said.

ATBancorp hired an investment bank in February to help it consider several options, including selling, listing on an exchange and divestitures. The board quickly concluded that selling was the best option.

The investment bank contacted 15 potential buyers in early April. Nine companies, including MidWestOne, signed confidentiality agreements to gain access to more information. By mid-May, all of the other potential buyers decided not to make bids.

MidWestOne, however, remained interested. In May, it offered to buy ATBancorp for $185 million, with an even split of cash and stock. The offer also allowed ATBancorp to pay its shareholders a $20 million special dividend to address the funds it received from the sale of United American.

After ATBancorp pressed for more money, MidWestOne on June 6 raised its offer by 9%, to $201.7 million, with 75% of the consideration in stock. A few days later, at ATBancorp’s insistence, MidWestOne increased the size of the allowable special dividend to $21.8 million.

MidWestOne took a deeper dive into ATBancorp’s businesses, hiring a consultant to parse over the seller’s trust business, including its retirement planning operations. Around that time, ATBancorp hired a consultant to review MidWestOne’s loan book.

MidWestOne informed ATBancorp on July 23 that it would not buy certain assets, including the retirement planning business.

The filing provides no reason why MidWestOne made the decision, and it is unclear exactly how much those businesses contribute to ATBancorp’s bottom line.

The financial management group has more than $2.6 billion in assets under management, according to the company’s website. Income from fiduciary services totaled $7.8 million in the first half of 2018, comprising 14% of total revenue, according to a regulatory filing.

MidWestOne in early August lowered its offer by 17%, to $168.1 million, though it increased the allowable special dividend to $31.8 million. (The filing notes that ATBancorp paid the special dividend on Sept. 24.)

ATBancorp may also pay a special dividend to investors based on the net proceeds it receives from selling the retirement planning and insurance businesses, the filing said.

ATBancorp’s board unanimously approved the deal on Aug. 20, and it was announced two days later. The deal, which is expected to close in the first quarter, priced ATBancorp at 155% of its tangible book value.

United American, in comparison, sold for 206% of its tangible book value.

The acquisition represents MidWestOne’s entry into Des Moines and Dubuque. MidWestOne said it expects the deal to be more than 15% accretive to its earnings per share in 2019 and 2020, excluding $20 million in merger-related expenses. It should take MidWestOne less than three years to earn back any dilution to its tangible book value.

MidWestOne also plans to cut about $14.7 million of ATBancorp’s annual noninterest expenses.

ATBancorp “is a great fit for us,” Turner said. “We all grew up as community bankers in Iowa. We think they will be a great fit culturally and we’ll be in some great markets in Iowa like Dubuque.”

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