When Philip E. Norwood was mapping Summit Bancshares' future, he figured the Fort Worth bank would grow by buying other banks or their branches.

But after a two-year fruitless search for reasonably priced deals, Summit decided to ignore its consultants' advice and build its own.

"Branches were cheaper then, but it was still too expensive for us," said Mr. Norwood, Summit's chairman and chief executive officer. "The de novo worked so well we've never since done an acquisition."

Other community bankers are telling similar stories. As prices for branches hit new highs, many bankers say it is cheaper to build a branch than buy a competitor's cast-offs. That is a real shift from less than a year ago when buying a branch was almost always cheaper than starting from scratch.

According to Sheshunoff Information Services, the average premium paid for deposits in the 10 largest branch deals last year rose nearly a third, to 8.53%. And industry experts said branches are fetching even higher prices this year.

"We've worn out three PCs doing branch cost analysis work," said Michael L. Cox, chief operating officer for First Merchants Corp., Muncie, Ind. "It's awfully hard to make the numbers work."

"With branch premiums that high, it's fairly hard to justify a purchase," added Jeffrey C. Gerrish, a banking lawyer with Gerrish & McCreary in Memphis. "The economics are too tough."

The cost of buying branches can add up quickly. Acquirers must amortize goodwill, which eats into earnings. And because most branch sales include many more deposits than loans, buyers must quickly lend out the acquired funds to build earning assets.

Branches come with even higher price tags when they are located in high- growth areas. First Merchants scoured Hamilton County, a booming area southwest of the company's headquarters, but opportunities were scarce.

Yet when Union Federal Savings Bank of Indianapolis sold some Hamilton County branches this year, $1 billion-asset First Merchants did not even bid. Mr. Cox said he feared the premium would exceed 10%.

First Merchants has since elected to build its own office, and expects the new branch to be profitable within a year.

In some cases, banks are forced to build branches because no one is selling.

For example, Bridgeview (Ill.) Bank Group wanted to buy an office on Chicago's affluent North Side but found nothing for sale in the area, said chairman Peter J. Haleas.

When a bank customer said he had a lot for sale on a busy intersection in the neighborhood, Mr. Haleas said the bank agreed to buy it "in about 30 seconds." The branch opened this spring and is already in the black.

Community bankers say the key to establishing a profitable branch is hiring experienced managers and building on existing customer relationships.

Summit, the $475 million-asset bank in Fort Worth, employed that strategy in opening two new branches, the second of which was built in 1997. Both branches are already profitable.

"When you're not dealing with totally new relationships, there is less risk," Mr. Norwood said.

Brent L. Clifton, president of Grabill (Ind.) Bank, subscribes to a similar philosophy. He said the $200 million-asset bank would like to open more branches, but won't unless it can hire a commercial lender with strong contacts.

Still, while many bankers rave about the benefits of starting a new branch, experts say not to rule out acquisitions. Mr. Gerrish, for one, said banks would be wise to pay up for a branch if it means keeping a competitor out of the market, estimating that 40% of recent branch deals fit into this "defensive" category.

Bank of the Ozarks in Little Rock made such a move last month when it agreed to buy the Marshall, Ark., branch of Superior Federal Bank of Fort Smith, Ark.

Though Bank of the Ozarks' strategy has been to build branches-it has opened 11, including one in Marshall, since 1994 while increasing assets to $423 million-it opted to buy the branch to gain the top market position in Marshall, said CEO George G. Gleason 2d.

Banks may also be better off buying if executives are uncomfortable supervising construction projects, said Craig McCrohon, a lawyer with Freeborn & Peters in Chicago.

"It can be very distracting for management," he said. "With an acquisition, you review the numbers, hire a lawyer, and do the deal. With de novos, you have all that work, plus the construction."

Bank of the Ozarks has solved that problem by hiring a construction manager. "It makes things much easier," said Mr. Gleason. "We concentrate on the banking."

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