Rich in resources and culture, traditionally rural Central Appalachia has historically lagged the rest of the nation in economic growth. The area is seldom in play when money center banks talk up branch expansion plans, but City Holding Co., based in Charleston, West Virginia, has stayed loyal, achieving superior profitability in a region often neglected by much larger institutions.
The holding company for City National Bank, with $5.9 billion in assets at the end of 2022, has achieved consistent growth over the years despite — or maybe because of — its location in slower growth markets. But a steady focus on retail banking and asset quality, coupled with the occasional strategic acquisition, has delivered strong performance for City, which placed third among the 300 public banks in this year’s RankingBanking study. Contributing to its performance in 2022 were strong profitability metrics that were rewarded by the market — a return on average assets of 1.74% and a 16.76% return on average equity.
The bank’s executives attribute its success to doubling down on their community, providing retail banking and other services. It doesn’t spend much time pruning expenses, pursuing new niches or expanding into far-off metro areas.
“They’re not really a high growth bank,” says Catherine Mealor, managing director at Keefe, Bruyette and Woods. “Their strategy has been superior profitability with moderate, stable growth.” She notes that City still pays a dividend and regularly buys back its own shares, thus making it a relative safe haven for bank investors.
City consistently performs well in Bank Director’s annual ranking of the best banks. That consistency and predictability in its results, its focus on profitability and its basic banking business model are refreshing, particularly during a time when bank stocks have been experiencing a great deal of turmoil, analysts say. While the top 25 RankingBanking banks saw a median total shareholder return for 2022 of 6.5%, City Holding did better, with a 17.2% TSR. And through July 26, 2023, City’s stock price has held up fairly well, outperforming the KBW Nasdaq Bank Index amid the tumult that bank stocks suffered more broadly.
In contrast to banks that focus heavily on commercial customers, CEO Charles “Skip” Hageboeck sees retail as the bank’s bread and butter. “I think it’s really, really hard to achieve great financial performance if you are mostly a commercial lender,” he says. Relying on profit margins from commercial banking can be tough, he says, and retail banking, including businesses like mortgage lending and wealth management, provides some diversification that boosts profitability.
A low efficiency ratio is one contributor to City’s outperformance. The metric, which is calculated by dividing a bank’s noninterest expenses by its revenue, usually falls in the low 50% range. That figure stood at 44.6% in the second quarter of 2023. Hageboeck explains that City considers efficiency to be less a matter of tightly controlling expenses than it is of generating as much revenue as it can from its retail bank.
“The efficiency ratio is low because we’re a large community bank which can achieve economies of scale, and because we have a lot of customers which feed a lot of revenue into the bank,” Hageboeck says. “It’s really not about cost cutting. It’s about the depth of the retail franchise.”
City’s performance today is the result of a turnaround story that starts back in 2001, with Hageboeck and his predecessor as CEO, Gerald Francis.
At that time, City was struggling. Then around $2 billion in assets, the company had suffered losses stemming from a subprime lending business it entered in the 1990s. While those borrowers generally had high incomes, the loans were second and third mortgages that were high loan-to-value. Those loans underperformed in the first few years, and City had to write down their value and take losses on that book — though many of those borrowers eventually refinanced several years later when interest rates fell. The board was sued in a shareholder derivative lawsuit over those losses, Hageboeck says, and the company was also operating under a regulatory order at that time. A few acquisitions — two banks in California and some nonbank firms, including a printing company and an internet service provider — also dragged down performance.
“City did a number of weird things in the late 90s,” says Hageboeck, who served as chief financial officer during the turnaround phase. Board Chair Dallas Kayser, who has been with City since 1995, describes that period as “a very difficult time.”
Francis’s team downsized City’s national businesses and sharpened its focus on growing deposits in its core markets. After spending four years turning around the bank, Francis stepped down in 2005, and Hageboeck became CEO. Since that time, City weathered the 2007-08 financial crisis with minimal losses and without accepting funds from the Troubled Asset Relief Program. The bank also made it through the pandemic with earnings and credit quality intact. And it’s steadily grown to a little over $6 billion in assets through a combination of organic growth and a handful of acquisitions.
“Consistent, stable stories in the banking industry are the ones that do the best over a long period of time in and out of various cycles,” Mealor says. “That’s really what you get with City, and why it’s outperformed over the past couple of years with Covid, and now with the banking failures and the focus around deposits.”
City’s aim, first and foremost, is to win households’ core checking account business, says Tim Quinlan, executive vice president of retail banking. It does so by offering a suite of basic consumer banking products and services, including home mortgage lending, an array of checking account options and some wealth management. It’s maintained its branch network while at the same time investing in mobile banking options to appeal to younger customers.
“Usually, if somebody has their main checking account with you, that’s who they think of as their bank,” Quinlan says. The bank made the choice, for example, to offer consumers seven different checking account options, even after it was advised to pare that back to two or three. “So if we’re their core bank and their core service provider,” he says, “that gives us that opportunity” to grow the customer relationship with other products and services.
The branch has been critical to City’s retail strategy. Bank leaders understand the local, geographic nuances to the market that larger banks headquartered out of state may miss. Closing a branch because there’s another a few miles away could put an extra hurdle in a customer’s journey to that other branch.
“One thing I’ve learned in my banking career, at least in our markets, is if you close down a branch on one side of the river, [customers] won’t cross the river to do business on the other side,” Quinlan says. “Geographical barriers are a reality in our markets, and I think the big banks miss that.”
Successfully banking older and younger generations of consumers means investing in both the branch network and digital banking channels.
“The big banks can’t do great relationships, and the small banks can’t do great technology. So banks like us — those in the middle, and there just aren’t a lot of us — have the best opportunity to be high performing retail banks,” Hageboeck says.
City has 99 branches and serves around 200,000 households, for an average of about 2,000 households per branch, making it more efficient than competitors, he adds.
“We don’t spend a ton of time and energy cutting expenses here,” Hageboeck says. “Revenues are high because we have a lot of branch-related fee income.” City’s branch network brings in deposits. More accounts results in more fee income, he explains. Debit card revenue makes up more than a third of noninterest income for the bank, totaling $27.3 million in 2022.
In addition to its branch network, City has invested in its mobile banking app to help win over younger consumers. That means making sure the app is available to customers around the clock, with minimal downtime for maintenance, and offering dark mode, a user interface display setting often preferred by Gen Z, according to Quinlan. “The app [has] those little fundamental features that matter,” he says.
City adopted Zelle in 2020. It also issues tap-to-pay debit cards, another feature that appeals to younger consumers, he says.
And a long track record of taking care of customers has paid off. Almost a quarter of its new customers in 2022 were under the age of 24, according to the bank, and 41% of all new customers were under the age of 34. Quinlan says most of those young customers come to the bank because their parents refer them.
“They come in and open their accounts, often in high school, and then they’re able to carry that on through college,” Quinlan says. “And then hopefully they become a long-term customer.”
Staying loyal to customers in its slow growth, Appalachian markets has worked to City’s benefit. When other banks have exited the region or merged out of existence, City has hung on, doubling down on marketing efforts so it stays at the forefront of potential customers’ minds. Quinlan says the bank has achieved a lot of brand recognition by being engaged in the community, sponsoring local school events and youth sports teams. Branch staff regularly report that new customers end up banking with City because they’ve decided to go with a bank that supports their hometown, he adds.
“You never know when a customer’s going to get mad at their existing institution and start looking for something else,” he says. “Being active in our communities helps City to be top of mind as the customer looks for a new bank.”
As of June 30, 2022, City had the third-highest deposit market share in Charleston, West Virginia, with 15.21% of total deposits in that metro area, according to the Federal Deposit Insurance Corp. With 7.75% of all deposits across West Virginia, City had the fourth-highest deposit share in the state, behind Truist Financial Corp., United Bankshares, also in Charleston, and Wesbanco, based in Wheeling.
Retail lending, primarily residential mortgages, made up around half of the bank’s loan portfolio as of the second quarter of 2023. City has made the choice to keep all the mortgage loans it makes on its books, and keep servicing in its branches and call centers, rather than sell those loans on the secondary market. Quinlan says that’s ultimately proven to be a competitive advantage with customers and gives the bank some extra word-of-mouth marketing.
The relatively low housing prices in its markets — around $175,000 to $200,000 — work in City’s favor. Consumers are generally taking out modest mortgages well within their means, says Chief Financial Officer David Bumgarner. “We will do some mortgage loans exceeding half a million dollars, but our bread and butter is more at that lower level,” he says.
Being one of the main players in its markets also means a lower employee turnover rate. Quinlan pegs the average employee tenure around 11 years across the organization. While there’s somewhat higher turnover among branch staff, it’s also not unheard of to celebrate workers with decades of experience at City.
“It’s not unusual for staff members to have 30, 35 years of experience in these markets,” Hageboeck says. “It makes running the bank a lot easier when you have that kind of tenure. And that kind of tenure also gets you strong employee engagement.”
Quinlan attributes that high level of engagement to Hageboeck, who attends new employee orientations either in person or virtually. Frontline and retail employees regularly interact with branch, district and regional managers, he adds.
City has completed seven acquisitions under Hageboeck’s leadership, most recently closing on Citizens Commerce Bancshares in Versailles, Kentucky, in March 2023. That deal added around $336 million in assets and $302 million in deposits to its balance sheet, and strengthened City’s presence in the Lexington, Kentucky market.
Despite being an experienced acquirer, Hageboeck says the bank would generally rather buy back its stock, thereby raising value for its shareholders, than engage in dealmaking for its own sake.
“We do not believe that we have to accomplish the next acquisition to be successful,” Hageboeck says, adding that City has never overpaid for a deal during his tenure at the bank. He looks for targets with strong retail distribution and meaningful market share, either in legacy or adjacent markets where City has some name recognition.
Analysts say investors like the bank’s low-cost retail deposit base, with a high proportion of insured deposits and low loan-to-deposit ratio, which stood at 78.2% in the second quarter 2023. Its rural markets have been key to building a sticky deposit base, and City does not have a lot of competition for those funds. It also has a conservative credit profile and little exposure to riskier asset classes. The bank sticks to what it knows, and does not dabble in new lines of business or exotic financing. Its underwriting fundamentals haven’t really changed under Hageboeck’s leadership. Like many banks in the RankingBanking study, its credit quality remains solid. Nonperforming assets totaled 0.17% of total assets and other real estate owned for 2022, and as of the end of the second quarter of 2023.
“This bank is everything that an investor would want from a safety perspective in the current environment,” says Russell Gunther, a managing director at Stephens, who covers the company. “They are built for the environment that we’ve been in.”
City’s commercial underwriting standards tend to be fairly conservative, Bumgarner says. For example, while appraised value is important when making a deal, the bank places an even higher value on its clients’ debt service coverage ratio or the borrower’s ability to repay.
“The fact that we are such a strong retail franchise means we don’t have to go out and push the envelope on credit. We are able to be a little bit more conservative and still generate enough net interest income,” he says. “How we run our bank works in good times and in bad times.”
Still, one strategic challenge may be the $10 billion asset threshold, if City should ever cross that mark at some point. Passing $10 billion would mean scrutiny by the Consumer Financial Protection Bureau, particularly over deposit account fees, as well as a loss of interchange revenue under the Durbin Amendment. That would reduce debit interchange income by almost half, according to Gunther.
“Because we’re a very strong debit card bank, it would be a very big tax on us to go over that number,” Hageboeck says.
But that threshold could still be a ways off for City Holding Co. Casey Whitman, managing director and senior research analyst at Piper Sandler & Co., believes City would most likely cross $10 billion as a result of M&A. In that case, “cost saves would offset the revenue loss,” he says.
While City will likely continue to make acquisitions in the future, Hageboeck emphasizes that it doesn’t need to engage in M&A to continue to be a top performing bank.
“Most banks believe that you have to be bigger and bigger and bigger, and we just view that very differently,” Hageboeck says. “We have a great franchise. We don’t see the need to grow into a bigger bank, unless it is a better bank.”
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Laura Alix is the director of research for Bank Director.