Few banking companies are benefiting from investors' "flight to quality" as much as City Holding Co. in Charleston, W.Va.
Though the $2.5 billion-asset City Holding operates in some of the nation's slowest-growing markets, investors view it as a safe bet because of its strong capital position, stable earnings, and above-average asset quality.
With its shares up roughly 14% in the last month and now trading at close to a 10-year high, analysts say City Holding is well positioned to make an acquisition or two — at a time when most of its peers are sticking to the sidelines.
One hint that the parent company of City National Bank might be ready to make a deal: It recently decided to refinance $16 million of trust-preferred securities rather than pay down the debt as it previously had said it would.
In a research note this week, Janney Montgomery Scott LLC analyst Stephen M. Moss called the decision "curious" and said it "suggests that an acquisition is in the offing."
In an interview Tuesday, City Holding's president and chief executive, Charles R. "Skip" Hageboeck, said that while no deals are in the works, the company is looking.
City Holding's last bank acquisition was in 2005, when it bought the $333 million-asset Classic Bank in Ashland, Ky. It was the company's first purchase of a bank in a neighboring state, and Mr. Hageboeck said it wants to do more like it. He said it is eyeing banks with assets of $200 million to $500 million and scouting such markets as southern Pennsylvania, western Maryland, southeastern Ohio, western Virginia, and eastern Kentucky, as well as its home state. (All but 13 of its 72 branches are in West Virginia, according to Federal Deposit Insurance Corp. data.)
Still, Mr. Hageboeck said his company is being "picky" about acquisitions. It has been one of the top-performing community banking companies for much of the decade — though its assets have increased only marginally — and the CEO is not about to do a deal that could disrupt that run.
"We haven't set our sights on doubling the size of the bank by any means or stretch of the imagination," he said.
Even if City Holding does not make an acquisition, Mr. Hageboeck said refinancing the trust-preferred securities was a prudent decision because, in a slowing economy, it could use the extra capital to repurchase shares.
But Mr. Moss said he believes City Holding, which is already very well capitalized, would not have refinanced the securities at 3.50% above three-month London interbank offered rate if it was not looking at acquisitions.
"That's not cheap," Mr. Moss said in an interview. "If you don't have a need for high-cost borrowing, which is basically what this is, it would signal to me that there are other interests."
Other analysts agree now is a good time for the company to buy. The housing and credit crises have punished bank and thrift stocks in recent quarters, and many once-active acquirers simply do not have the currency to do deals. Though City Holding's shares dipped over the summer and again in January, they have quickly rebounded and last week were trading as high as $42. They closed at $39.05 Wednesday.
Mr. Hageboeck joined City Holding as chief financial officer in 2001 and has been CEO since early 2005. Under previous management the company had made some ill-advised acquisitions that led to tens of millions of dollars of losses, and Mr. Hageboeck was part of a team brought in to return it to health. Within a year the company was making money again, and it has been a top performer since. At Dec. 31 its return on assets was 1.99%; the average for banks with assets of $1 billion to $10 billion was 1.08%.
Gerard Cassidy, managing director of bank equity research at Royal Bank of Canada's RBC Capital Markets, attributed the strong return on assets in part to high-interest loans inherited from previous management. But those loans are starting to run off, and City Holding will "have to offset that with growth or an acquisition," Mr. Cassidy said.
The challenge is finding the right bank to buy. "Prices are down, but just like anything in life, you get what you pay for," he said.
Avi Barak, a managing director with Sandler O'Neill & Partners LP, agreed, saying it should hold off on deals for the time being "to see how credit quality turns out for the first and second quarter.
"You could buy something for two times tangible book value and find out you have losses and end up spending four times tangible book," he said.
