City Holding Opts for Road Trips Over Risky Acquisitions

City Holding (CHCO) in Charleston, W. Va., has deployed a group of road warriors in a quest to book more loans and boost revenue.

The $3.4 billion-asset company is encouraging its commercial lenders to "adopt" neighboring cities and spend a day each month prospecting for loans those markets. The company — located within a few hours of cities such as Lexington, Ky., and Pittsburgh — hopes to generate leads without eating the cost of opening loan-production offices.

The strategy seems to fit within the general conservatism of Skip Hageboeck, who has been City Holding's chief executive for nearly a decade. Though the company has bought two banks in Virginia in recent years, and has opened a loan-production office in Charlotte, N.C., Hageboeck, who is also the company's president, prefers to focus on cost control and profits instead of growth, likening it to being a tortoise rather than a hare.

"We're not on a mission to become a certain size or do a certain number of acquisitions," Hageboeck says. "When you earn 1.5% on assets and you look for someone to get married to, you don't want to marry a bum."

City Holding declined to elaborate on its lender road trips, but industry observers say they like the company's balanced strategy of seeking revenue while keeping expenses in check.

"It's a low-risk way to prospect for new loan customers," says Kevin Fitzsimmons, an analyst at Sandler O'Neill. "They don't have to open an office in these markets — they can just say, 'drive there.'"

City Holding's true strength is its deposit franchise in West Virginia, which Hageboeck credits for a 1.5% return on assets. The company — the fourth-biggest bank in the state with about 7% of total deposits — has strong market share in core areas. Management also focuses on reaching the largest number of households per branch.

Hageboeck is keenly aware of the risks involved with costly, out-of-market acquisitions. He was part of a management team led by Gerald Francis that was recruited in 2001 to clean up City Holding. The company was on the brink of failure after making a series of disastrous deals in the late 1990s, including the purchase two California banks and an Internet-service provider.

The turnaround Hageboeck helped orchestrate was remarkably quick, with the company returning to profitability in less than two years. It has since become a "steady, stable, and very profitable story," Fitzsimmons says. City Holding's 2013 earnings rose 25% from a year earlier, reaching a record amount of $48.7 million.

Still, there are long-term dangers to sticking to an overly conservative strategy, industry observers warn. Since City Holding's core markets consist of rural communities in West Virginia known for slow growth, there is the risk of missing out on opportunities in more economically vibrant cities, Fitzsimmons says.

That is why Hageboeck is aiming to strike a balance between growth and conservatism. He admits to feeling some pressure to enter new markets, but he also refers to the mindset that banks have to go big in high-growth markets as "fiction." To him, competition fueled by swarms of new entrants typically offset expansion opportunities.

Banks can grow simply by taking market share, even in a slow-growth state like West Virginia, Hageboeck says. The company's commercial and investment-management services business has grown in the past decade, but "in each case we suspect we do not have our fair share of the market, and we see chance for growth by expanding those operations," he says.

Balance sheet growth seems to back Hageboeck up. Overall, total loans increased by 21% at Dec. 31 compared to a year earlier, to $2.6 billion, while deposits rose 19%, to $2.8 billion.

City Holding's success in West Virginia also means it doesn't have to pay up to have scale in the highest-growth markets, says Catherine Mealor, an analyst at Keefe, Bruyette & Woods. "They don't have to move into the D.C. market, for instance, to get better growth than West Virginia," she says.

For those reasons, City Holding is content to put out feelers into nearby cities without making a risky commitment. Even the practice of having loan officers "adopt" neighboring markets is informal and is more of a suggestion for best practices than a companywide system. Hageboeck says it is a common practice for rural banks and loan officers that don't have fixed territories, particularly in West Virginia, where communities are far-flung and long drives are the norm.

"Pittsburgh is only three and a half hours away — by our standards, not a terribly long drive," Hageboeck says. "Here, we're used to driving an hour just to get something to eat."