Brian Hyzdu, the president and chief executive of Service 1st Bank in Stockton, Calif., had so much fun opening it in 1999 that a few years later he started a side business: advising on organizing banks.
Now, Mr. Hyzdu has persuaded the other board members of its $161 million-asset parent, Service 1st Bancorp, to buy his 2-year-old consulting firm, Charter Capital Services LLC. He says owning a bank-organizing firm would provide not only fee income but the opportunity to invest in clients' start-ups and maybe buy them later.
Mr. Hyzdu said that having a banking company for a parent would give the consulting firm an edge. "It's like having a big brother mentor built into the structure," he said. "Most consulting firms strictly offer advice."
The deal is expected to close next month or early next year. Mr. Hyzdu would give up his bank jobs once a successor was named but remain the holding company's president.
Charter would prepare and file bank charter applications in Service 1st's market and elsewhere. Mr. Hyzdu insists that helping neighbors could help Service 1st, particularly if it also invested in the start-ups.
It is not unusual for banking companies to have subsidiaries that advise other banking companies on certain strategies. For example, SunTrust Banks Inc. now has a division that helps banks enter supermarket branching. (It got it by buying National Commerce Financial Corp. of Memphis last year.)
But few banks advise organizers of start-ups, particularly in their own markets.
Sale to Service 1st would give Charter resources to hire more employees so it could handle more assignments at the same time.
Charter has helped three banks open. All were referred by NuBank, a bank organizing firm in San Luis Obispo, Calif., to ease its own backlog. Mr. Hyzdu hopes that Service 1st's backing will attract bank organizers to Charter directly.
If Service 1st bought a 15% to 20% stake in a start-up, it would want a seat on the start-up's board to speed its growth, Mr. Hyzdu said. If the start-up decided to sell itself, Service 1st would probably be a leading suitor, he said - but if a higher bidder won, Service 1st would earn a good return on the sale.
Service 1st has increased assets modestly by opening three branches in the San Joaquin Valley towns of Stockton, Tracy, and Castro Valley. Its first profitable quarter was the first quarter of 2002.
Mr. Hyzdu said management hopes to hit $500 million of assets in five to seven years by opening branches in other valley cities - and possibly through acquisitions. It would have more chance for the latter by investing in start-ups through Charter, he said.
John C. Donnelly is the managing director of Donnelly, Penman, French, Haggarty & Co., a Detroit investment banking firm that also helps charter banks. He said community banking companies have been known to invest in start-ups outside their own markets from time to time with the intention of buying them if they succeed.
For example, the $3.4 billion-asset Capitol Bancorp Inc. of Lansing, Mich., has helped nearly 40 banks open, in numerous states. The company generally provides 51% of initial capital and buys out the minority shareholders after roughly three years.
But it is rare, Mr. Donnelly said, to help open a bank in your own bank's market. In fact, Charter's being owned by a banking company might "be a slight negative" to bank organizers, he said.
"I would think that a de novo would be a little skittish in wanting to hire competitors to get them into the business and then to have to share their business plan and other confidential information with them," he said.
Dan Hudson, NuBank's CEO, disagreed. Charter "would have a bank that people could come to - to learn how it works," he said. It was he who recommended that to increase fee income Service 1st buy Charter.
He said NuBank also refers would-be bank organizers to 10 other firms, staffed with ex-bankers or ex-regulators, around the country.
Mr. Hudson said NuBank will benefit from Charter's sale. Charter has agreed to keep helping NuBank work through its backlog of charter applications for start-up organizers, he said.
NuBank helped 135 banks open over the last 20 years, Mr. Hudson said. It has 24 applications pending and 40 more "in the queue," he said.
