Clarkston Financial Corp. in Michigan wanted to expand to Milford, which is about 20 miles away from its hometown.
But rather than opening a branch of its Clarkston State Bank, the company is chartering a new bank with local investors and a more localized name.
J. Grant Smith, the chief operating officer and chief financial officer of the $158 million-asset Clarkston Financial Corp., and Clarkston State Bank, said that the new bank would be called Huron Valley State Bank. (Milford is in Michigan’s Huron River Valley.)
Locals will be more receptive to a bank called Huron Valley State than they would to a branch of Clarkston State, Mr. Smith said. “If we were to go there and open up our branch, we wouldn’t have the same impact. Our philosophy is you need to go into a community and sell some stock to the locals in the area and have them embrace it as a local community bank.”
Clarkston Financial, which was founded in 1998, plans to put up about $4.4 million of capital for the new bank and own 55% of it. Another $3.6 million would come from stock sold to Milford-area investors, bank directors, and employees. Mr. Smith said Huron Valley State would be run as its own bank, but Clarkston Financial will handle its back-office accounting and processing.
This approach to expansion, while rare, is similar to that of another Michigan company. The $3.1 billion-asset Capitol Bancorp Ltd. of Lansing has opened more than 30 banks in nine states in the last 16 years; it typically provides about half of the capital at the outset and then acquires the bank outright within three years. It is currently organizing two banks in Michigan.
Also, the $337 million-asset Paragon Commercial Corp. of Raleigh is planning to expand in the major Southeast markets by chartering new banks, staffed by local bankers, rather than opening branches.
Clarkston Financial filed its charter application with state regulators Tuesday and plans to open Huron Valley State in July. In an interview Wednesday, Mr. Smith said his company would consider chartering banks in other Michigan markets if Huron Valley State proves to be successful.
Joseph D. Reid, Capitol’s chairman and chief executive officer, said the biggest challenge in executing his company’s model is finding the right people in new markets who can both raise start-up capital and run the bank.
“I’d like to tell you we’ve got an incredibly wonderful secret recipe for the success of these things, but that would be seriously misrepresenting reality,” Mr. Reid said.
John Bergquist, and analyst with Sandler O’Neill & Partners LP in Chicago, said Capitol’s model works because it brings in business by putting local business leaders on the banks’ boards. Also, because the local management puts up its own money, it has a stronger incentive to run the banks efficiently, he said.
Terry J. McEvoy, an analyst with Oppenheimer & Co. Inc., said that even though Capitol has proven it can make its model work on a large scale, other banks need to start small and work near their homes first if they wanted to imitate that model.
“The state of Michigan is a small enough world where I think you could bring people over and grow using Capitol’s model,” Mr. McEvoy said.
