It's an article of faith in banking that start-ups need three years to reach profitability. But a new generation of de novo banks is shattering this time-honored rule.

More than half the banks launched in 1994 and the first half of 1995 broke even within 18 months. By contrast, fewer than one-third of banks started in the second half of 1993 matched that record, according to data from Sheshunoff Information Services.

Aided by higher capital levels, a growing economy, and a class of nimble managers willing to expand balance sheets quickly, some new banks have started making money in as little as three or four months, according to an American Banker study of the data.

"We had anticipated that our bank would be profitable fairly soon, (but) it was sooner than" expected, said Edward Jamison, chief executive officer of $95 million-asset Community Bank of Nevada, Las Vegas, which broke even just one month after opening in mid-1995.

The movement toward quicker profitability should prove heartening to those who launch start-ups. After falling steadily from 1987 to 1994, new bank formations began picking up again in 1995 and reached 144 in 1996.

Observers say this new generation of start-ups is hoping for successful performance, not just a quick sale as was often the case in the 1980s.

"A lot of these banks created in the past few years have been formed for the right reasons," said Byron Richardson, principal at Bank Resources Inc., a Marietta, Ga., consulting firm that works with start-ups.

Data showing how quickly banks formed before 1993 attained profitability were not available. But consultant Arnold Danielson, chairman of Danielson Associates, Rockville, Md., said that no more than one-quarter of those formed in the late 1980s and early 1990s were breaking into the black within 18 months.

"The good ones were usually starting to do it after their second year," Mr. Danielson said. "There weren't many who were doing it inside of 18 months."

And it appears that the newest banks-those formed in the past 18 months- are getting into the black faster.

Of the 47 banks chartered in the second half of 1995, 14 were profitable within a year, and nine earned money even sooner. And of 49 banks formed in the first half of 1996, nine were already profitable by Sept. 30, the latest period covered by the Sheshunoff data.

Community Bank of Nevada, for instance, was churning out a return on assets of 1.54% at March 31, 1996, just a few months after opening. Others, such as Minneapolis-based Minnesota Bankfirst, Farmers Bank, Clatonia, Neb., and People's Bank of Coffee County, Elba, Ala., also became profitable almost immediately.

The belief that most start-ups need three years to turn a profit is deeply embedded in banking lore. The Federal Deposit Insurance Corp., for example, gives newly insured banks three years to attain profitability, though it won't necessarily withdraw insurance or penalize a bank if it exceeds that limit.

One reason new banks are becoming profitable quickly-and, in many cases, growing rapidly-is that regulators have ratcheted up the level of capital needed to start a bank.

Where banks might have been able to open in the past with less than $5 million, now they're often starting with $7 million or $8 million. And the FDIC requires that banks retain a Tier 1 leverage capital ratio of at least 8% for the first three years.

That means new banks can make larger loans than they otherwise would, or put the low-cost capital into other high-yielding investments without having the interest expense that comes with traditional deposits.

It also forces the banks to grow quickly so that returns on equity are not stifled by having too much unused capital on hand.

"I don't know if going into a hot market is important. What is important is growing to $30, $40, or $50 million as quickly as possible to leverage all that capital you have to raise," said Chris Hargrove, president of a consulting firm, Professional Bank Services, Louisville, Ky.

Banks have also been aided by mergers and cost-cutting. As established banks disappear and employees lose their jobs, new banks are finding support from experienced but unemployed bankers and disgruntled customers who want local service.

Bankers are more conservative, too, having learned lessons from the disasters of the 1980s, when many start-ups grew too fast and were hammered in the early-'90s recession. Finally, the economy has markedly improved, giving many new banks a healthy push.

"The economy in the past few years has been better and certainly helped the start-up banks," said Mr. Richardson, the Georgia consultant. "That is certainly another contributing factor, and I don't think it's one that anybody should overlook."

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