Denver's Growth Compels Small Bank to Sell Itself

A half-dozen cranes dot Bob Malone's view of Denver, showing a burgeoning city and giving the veteran banker a reason to sell his bank.

"The needs of Denver borrowers are bigger; this is becoming a big city," says Malone, chief executive of Steele Street Bank & Trust. "At our size, we're really only able to serve a narrow segment of the market, so we decided to align ourselves with an organization that could reach a wider segment."

The $525 million-asset Steele Street agreed late last month to sell itself to the $9.5 billion-asset MidFirst Bank in Oklahoma City for an undisclosed sum. Though succession and shareholder liquidity played a role in the decision, the 69-year-old Malone repeatedly emphasizes that his bank needed to be bigger to compete in a bigger city.

Malone's desire for leverage is shared by community bankers in cities across the country, says C.K. Lee, a managing partner at Commerce Street Capital, a Dallas investment bank. Banks in larger cities, particularly growing ones, have a harder time rationalizing independence since their lending limits are small and the rent is high.

"Most of the economic growth happening in the metropolitan areas, and as the middle-market space comes back, these community banks are finding that they don't have the size they need to compete," Lee says. "They are losing credits to regionals."

Malone echoes Lee's views. "Our size would work in a market like Pueblo," he says, referring to a city two hours south of Denver with a population of 107,000.

About a year ago, Malone says he approached St. Charles Capital, now KPMG Corporate Finance, about finding a buyer. Steele Street wanted to merge with a solid operator and had a strong desire for an out-of-market buyer.

"We had a preference for those who didn't have a lot going on in the Denver market," he says.

There are a few larger community banks in Denver that are hungry for acquisitions, but Malone says he wanted a buyer that wouldn't strip out the culture his nearly 11-year-old bank has crafted.
"I just think your opportunity to continue to serve the market the way you've been serving it is better in an [out-of-market buyer] situation," Malone says.

The deal is set to close in the first quarter of next year; Malone is set to serve as market chairman. Brad Wilkinson, Steele Street's president, will become MidFirst's market president for Colorado.

MidFirst did not respond to calls for comment. Jeff Records, MidFirst's chairman and chief executive, said in a press release announcing the deal that Malone and his executives are "one of Colorado's most respected and valuable banking teams."

Steele Street's financial metrics make it a standout among Colorado community banks. Its first-quarter return on assets was 1.7%, 66 basis points higher than the state average. The bank had a 54.34% efficiency ratio and 0.13% of its assets were nonperforming, considerably lower than Colorado and nationwide averages. Its loans increased 5% from Dec. 31, to $385 million.

Records also said in MidFirst's release that the deal allows his company, which has branches in Oklahoma and Arizona, to enter "one of the most dynamic markets in the country."

The Colorado economy generated 3% year-over-year job growth in 2013, its strongest growth rate since 2000, according to the Colorado Department of Labor and Employment. The Denver area had job growth of 3.6% last year.

Investment bankers say out-of-market buyers are eyeing cities like Denver because of their economic growth. Entering a growing market is easier than poaching customers in an existing area.

"Wherever you have small-business growth you're going to have new lending," says Dan Bass, a managing director at Performance Trust Capital Partners in Houston. "I hear that all over Texas, and Denver has some of the same positive attributes."