Like many banks that were established in the late 1990s, Falls Bank in Stow, Ohio, had hit a wall.
Its earnings were essentially flat last year, and the steady deterioration of its efficiency ratio shows that the $83.6 million-asset bank was having a harder time making a buck.
So instead of slugging it out in a fiercely competitive market, this week the bank announced that it would sell itself to Sky Financial Group Inc. in Bowling Green, Ohio, for $12.8 million.
Many banks that opened for business in the late 1990s seem to be following that path. In nine of the 23 bank deals announced since May 1, the selling bank was founded between 1997 and 1999, according to Highline Banking Data Services.
Observers say that they expect this trend to accelerate in the coming quarters. They say many of the more than 300 banks founded from 1997 through 1999 have had only minimal success and may be looking for merger partners to provide more value to shareholders.
Moreover, because most of those banks are in attractive markets, buyers have shown a willingness to pay a premium.
"It's hard work to get a new bank growing, but in the right market this work can really pay off when you sell," said John Gorman, a partner at the Washington law firm Luse Gorman Pomerenk & Schick PC.
Though M&A action in general has slowed down, it has surged among these banks. Others may be standing pat until bank stocks stabilize and interest rates rise, but many of these younger banks cannot afford to wait.
Mr. Gorman said that when a bank hits about $150 million of assets, which usually comes after six or seven years, it needs to invest in infrastructure to fuel more growth - or it can look for a buyer.
The $151 million-asset Keystone Community Bank in Kalamazoo, Mich., chose the latter course. The 8-year-old bank announced in mid-May that it was selling itself to the $814 million-asset Firstbank Corp. of Alma, Mich.; it is to retain its name and operate as a unit of Firstbank. Keystone said in a news release that the added resources would help it strengthen its offerings of products and services and accelerate its growth in southwest Michigan.
Andrew M. Senchak, a vice chairman and the head of corporate finance at Keefe, Bruyette & Woods Inc. in New York, said many new banks are founded by bankers whose jobs were merged out of existence but who still had deep roots in their communities.
Now some of those bankers who brought in lots of loans at the outset are struggling to attract new business and are opting to sell out rather than hire lenders to drum up more, he said.
"They hit a developmental wall and decide to pull the trigger," Mr. Senchak said. "When your business plan is to exploit relationships you've had for 20 or 30 years, once you are done with that, it's much easier to just sell off for a premium."
Chris Hargrove, the president of Professional Bank Services Inc. in Louisville, said that though many of these banks could probably go it alone if willing to invest in technology and staff, some sell because they have to.
To grow fast, banks sometimes overpay for branches and deposits and start making loans that no other bank wants, Mr. Hargrove said. Though they may be profitable at first, he said, often many loans go bad just when deposits start leaving the branch.
"The problem with de novos that have asset-quality problems is that there is not enough core business to turn the bank around," he said. "They have no other options" but to sell.
This may have been the case at the 6-year-old Albemarle First Bank in Charlottesville, Va.
The $121 million-asset bank has struggled with asset-quality problems and charged off millions of dollars in loans in its short life. In 2003 it was rocked by the discovery of a customer's check-kiting scheme that cost it $2.4 million.
This month the bank announced an agreement to sell itself to the $404 million-asset Millennium Bankshares Corp. of Reston, Va. Despite these problems, Albemarle fetched $27 million, or 2.47 times its book value.
In fact, the average price-to-book ratio for the nine young banks that have announced deals in the last two months is 2.21%, compared with 2.10% for all deals announced this year.
Observers say the new banks are fetching higher premiums not because they are performing better but because many of them are in desirable markets, such as northern Virginia, central Florida, and southern California.
William Griffith is the president and chief executive officer at United Financial Inc. of Graham, N.C. He said the 7-year-old, $150 million-asset banking company has regularly received offers from bigger ones but never considered any of them - until earlier this year.
It was then, he said, that he realized how much prices had increased, and how much more shareholders would benefit from a sale than if United just grew.
In mid-May the $864 million-asset FNB Corp. of Asheboro, N.C., announced that it would acquire United for $24.3 million, or 2.2 times book value.
"Honestly, if the pricing had not been where it was, this probably would have never happened," Mr. Griffith said.
