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Guest Piece: “Full Steam Ahead” by “Catahoula”

[A regular guest contributor to the newsletter, Catahoula recently retired after a 25+ year career in the
financial services industry. He has attained two business degrees and achieved various professional
certifications. In 1995, he started managing his own investments; his portfolio now contains about
sixty Oddball stock positions, equally divided between land / real estate companies and OTC-traded
banks. Contact him via DM on the Oddball Stocks Newsletter Forum, twitter (@Catahoula_Value) or
Seeking Alpha.]

It felt like Christmas morning all over again when Big Boy came to town. This was the first tour in two
years, just a five-city event during pandemic summer 2021. We sat in standstill traffic for over an hour
to get to the venue, emerging into one of the hottest days of the year. We joined hundreds of other fans
sweltering in the humidity outdoors.

Who’s Big Boy? It’s that indie alt. rock band that your college roommate passionately followed--but
you never could quite get into--right? Nope, Big Boy No. 4014 is the only working copy of the largest
steam engine ever built. Union Pacific retired the engine in December 1961, after it had traveled
1,031,205 miles during its 20 years in service. That distance is to the moon (and back)—twice!

After painstaking renovation, a 2019 tour marked the 150th anniversary of the 1869 driving of the
Golden Spike in Promontory, Utah; the transcontinental Overland Route connected Central Pacific in
Sacramento with Union Pacific in Omaha. Now two years later, the 2021 Big Boy No. 4014 tour
included 80 Whistle Stops and five Display Days (Ft. Worth, Houston, New Orleans, St. Louis and
Denver).

As we drew near to the steam engine, engineers, conductors and crew members strutted around like
proud peacocks. Kids paraded about: after all, Thomas the Tank is steam-powered. I felt what rock fans
must feel when the Rolling Stones appear in concert at a nearby arena. You have a backstage pass to
meet the band after the show. Mick Jagger joins you for a selfie. He signs your T-shirt!

I was thrilled as a train enthusiast and a member of the Steam Club. 1 Furthermore, as a Union Pacific
shareholder, I supported the substantial costs for the great promotional benefits. For the same reason,
the U.S. Navy spends an estimated $35.5 million per year on the Blue Angels.

During a five-year renovation of Big Boy No. 4014, the railroad replaced unsound parts, converted
from coal to oil, and installed Positive Train Control (PTC) electronics for safety. Just as Union Pacific
successfully employs technology to allow Big Boy to ply the rails in modern times--while retaining the
charm of a bygone era 80 years ago—the oldest financial institutions in America are constantly
updating their technology while upholding their heritage as banking evolves.

In honor of Missouri’s 200th birthday on August 10, 2021, consider $19.4 Billion (assets) Central
Bancompany, Inc. in Jefferson City, Missouri (CBCY/B). The holding company formed in 1970 is
cloaked in relative obscurity as it combines 13 different banks—the oldest formed in 1902.

1 https://www.up.com/heritage/steam/

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Managing the bank’s information technology is affiliate Central Technology Services, a 250-person in-
house fintech group. While they don’t spend $9 -$12 billion / year that the Big 4 banks devote to tech,
Central Technology Services doesn’t rest on its laurels. For example, they developed AML / BSA
technology that likely allowed them to sidestep the regulatory missile that hit BHRB and CARE.

I first bought one share of CBCYB (Non-Voting) for $470 in early January 2018. While the dual share
classes are a concern for some, I was leerier of the corporate structure: many different banks under one
holding company. While no longer prevalent, in the past this structure has led to challenges in
regulatory oversight, made fraud more difficult to detect, and degraded operating efficiencies.2

After regularly appearing for over ten years on the 100 largest banks in the U.S., Central Bancompany,
Inc. was named the 4th best bank in the U.S. by Forbes magazine this year. Over the last seven years,
their ranking has been anywhere in the low teens (out of 100) to the mid-30’s. But this year they
jumped into the Top 5, as shown in the chart below:3

Year Ranking
2015 28
2016 30
2017 17
2018 38
2019 29
2020 17
2021 4

Forbes uses ten different performance metrics, which means that the ratings are not overly-swayed by
one particular measurement.4 For example, Central’s efficiency ratio (the # of cents in expense needed
to earn a $ in revenue) was 55.8% in FY20. That’s a far cry from Hingham Institution for Savings.
While not a top 100 bank, HIFS had an astoundingly low efficiency ratio of 25.4% in FY20. But note
that Central’s ratio has fallen by 350 basis points from 59.3% in FY16, quite an improvement!

After the Forbes article appeared on January 28, 2021, was the large jump in Central Bancompany’s
ranking obviously met with a huge mad rush to buy shares? Nope! During a time of strong overall bank
share appreciation, CBCYB has been “stuck in the mud” for the last two years. Why?

One reason might be mistaken identity. The Forbes article cited “Colorado Springs-based Central
Bancorp,” which I believe is the parent of Farmers & Stockmens Bank based in Clayton, New Mexico
and Central Bank & Trust in Colorado Springs. Ironically, several years ago, Central Bancompany in
Jefferson City, MO and Central Bancorp in Colorado Springs, CO litigated and made regulatory
pleadings about who had the right to use the name “Central Bank” in Colorado.

2 On May 28, 2021, the Central Bancompany received regulatory approval from the Fed to collapse the charters.
3 https://www.forbes.com/americas-best-banks/
4 Based on average tangible common equity, Return on Average Assets, Net Interest Margin, Efficiency Ratio, Net
Charge-offs / Total Loans, Non-Performing Assets / Total Assets, CET1 Ratio, Risk-Based Capital Ratio, Reserves as a
% of Non-Performing Assets, Operating Revenue Growth.

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Central Bancompany appears to have lost the name battle. While they still operate as “Central Bank” in
Missouri, Kansas, Illinois and Oklahoma, they are no longer using this name in Colorado. Instead, they
reversed their name and now operate in Colorado as “Bank Central,” a division of The Central Trust
Bank, the flagship bank of Central Bancompany. The same iconic dogwood flower logo common to all
banks is incorporated into the marquee sign.

How does Central Bancompany compare to the common metrics investors use for banks? The closest
comparable for industry valuation appears to be SPDR S&P Regional Banking ETF (“KRE”), which
contains 133 separate issuers and maintains significant exposure to small and mid-cap banking stocks:

Fiscal Year Earnings Stock Mkt Cap Price / Book Price / Price / ROTCE
($MMs) Price / ($MMs) Earnings Value Book Tang.
Share (1) ($MMs) Book
FY 2015 – CBCYB $121,492 $347.72 $1,538,673 12.66 $1,535,901 100.2% 122.7% 9.69%
FY 2020 – CBCYB $240,776 $571.56 $2,529,173 10.50 $2,330,665 108.5% 130.8% 12.45%
6 mo. 6/30/21 – $121,172 $580.00 $2,566,520 10.59 $2,426,624 105.8% 126.7% 11.97%
CBCYB
KRE @ 6/30/21 12.61 131.0
%
(1) For CBCYB, based on historical earnings; for KRE based on forecasted earnings.

Over the last five years, Central Bancompany’s earnings have almost doubled (up by 98.2%), while the
stock price appreciation for CBCYB is up by just 65% (64.4%). That’s hard to explain. Furthermore,
Central Bancompany is 20 – 25% cheaper than the average bank in the KRE index based on Price /
Earnings and Price / Book ratios.

An even stronger indication that Central Bancompany is under-valued comes from a comparison
metrics by Market Capitalization. In a May 2021 Substack article entitled “Continued Opportunity in
Small Banks,” Derek Pilecki cited the epic run in larger, regional bank stocks in the 8 months between
September 2020 and May 2021, where the SPDR S&P Regional Banking ETF returned 101%.5

After such a large move, Mr. Pilecki believes that regional banks have transitioned from extremely
undervalued to fairly valued, but he cites opportunity in small banks due to their low valuations. I have
continued to buy the smaller banks, particularly one that was deleted from the Russell 2000 Index at the
end of June 2021. Parke Bancorp (PKBK) is a new favorite and a nice bargain.

But what about CBCYB, a regional bank stock that’s refused to budge, despite a doubling of the
comparable index in those eight months? Central Bancompany started and ended that period at ~$590 /
share, falling as low $528.10 in November 2020. Today, a median regional bank with a $2.6 B Market
Capitalization trades in the range of 163% - 174% Price to Tangible Book, but CBCYB is at 127%.

5 https://gatorcapital.substack.com/p/continued-opportunity-in-small-banks

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Heading back to the Central Bancompany statements, the most recent Bank Holding Company Report
shows earnings for 6 months ended 2021 were $121.1 million, up 13.0% from $107.2 million in 2020. 6
Growth in the loan book is quite flat, up by 4.4% from $10.09 to $10.13 Billion, but all regional banks
are facing slack loan demand right now. Credit quality looks solid. Everything appears fine here.

Ultimately, I have found that illiquidity in closely-held bank stocks does not impact long-term returns. I
am content holding a quality bank like CBCYB at 127% P/TBV, since it is producing a 12% return on
tangible capital. If CBCYB ever appreciates to 150% - 200% P/TBV – where it would match regional
peer bank valuations – I would consider lightening up my position or selling out altogether.

Aren’t regional banks vulnerable to competition, particularly when it comes to technology? Over the
last year, we’ve been exposed to sensational headlines. Super-heated venture funding rounds occur at
unfathomable valuations. The accompanying narrative portrays legacy bankers as greedy, slow-witted
and unable to innovate. The fintechs are here to disrupt the trillion-dollar financial services industry
and save the world in the process! Here’s sincerely wishing them extraordinary success in reaching the
unbanked and underbanked. However, do these valuations make sense?

Chime’s valuation in the latest capital raise was $25B based on 20 million customers, who pay nothing
for a checking account and no overdraft fees. Chime appears to rely on enriched income from credit
and debit card transactions by being affiliated with two sub-$10 billion institutions, resulting in higher
compensation under the Durbin amendment. The customers are worth $1,250 / apiece!? One recent
article speculates that Varo—which originally raised $500 million—will run through all of its resources
within the next 100 days, facing regulatory consequences if they can’t raise more capital.7

Over the last 120 years, the banks affiliated with Central Bancompany have faced many technological
changes. They haven’t flinched. Although St. Louis banks installed the nation’s first auto drive-through
lanes in the early 1930’s, Central launched Automated Teller Machines in 1977. They implemented
Internet Banking technology in 1998.

Central’s Mobile Banking App punches above its weight, receiving 4.8 / 5.0 stars in the Google App
Store (based on 10,001 reviews as of late August 2021). By comparison, Wells Fargo also received 4.8 /
5.0 stars based on 1,150,000 reviews. However, Bank of America obtained 4.6 / 5.0 stars based on
879,000 reviews and the Chase Mobile App received 4.4 / 5.0 stars based on over 1 million reviews.

What about the dual-share class? This appears to be the main reason that Central Bancompany lacks
institutional interest / holdings. While CBCY (Class A Voting) shares are occasionally available in the
public markets, it is my conjecture that a controlling interest in Central Bancompany, Inc. is held by
Central Bancompany Voting Trust.

Five years ago, Robert R. Hermann, Jr. of Palm Beach, Florida appeared in a regulatory filing as co-
trustee of the Central Bancompany Voting Trust. 8 The Palm Beach Daily News said that Robert R.

6 https://www.ffiec.gov/npw/FinancialReport/ReturnFinancialReportPDF?rpt=FRY9C&id=1094314&dt=20200630
7 https://www.bankersdigest.com/will-varo-bank-be-the-pin-that-pops-the-fintech-valuation-bubble/
8 https://www.federalregister.gov/documents/2016/05/02/2016-10239/change-in-bank-control-notices-acquisitions-of-
shares-of-a-bank-or-bank-holding-company

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Hermann, Jr. is the grandson of the late August “Gussie” Anheuser Busch Jr., who grew his family’s
beer manufacturer into an empire.9

S. Bryan Cook has capably served as a Chief Executive Officer since 2008, continuing the bank’s
strong family legacy in its executive succession. His father, Sam B. Cook, a great visionary and
innovative banker, passed away in July 2016. Here’s the capital structure:

Type Authorized Issued Treasury Outstanding

Class A Voting 3,993,779 1,993,779 (447,682) 1,546,097
Class B Non-Voting 7,962,278 3,962,278 (1,083,290) 2,878,988
Total Shares 4,425,085

Despite an October 2019 speech by Rick Fleming posted on the Securities and Exchange Commission
website “Dual-Class Shares: A Recipe for Disaster,” it’s clear Central Bancompany continues to
outperform most other financial institutions.10

Although research suggests that, over the long term, entrenchment of founders produces lower returns
for investors, I believe that Central Bancompany is one of a few companies that has thrived as a result
of its admirable heritage and strong executive management succession.

Furthermore, it’s not clear to me what a bank activist would stand to gain here, with excellent
management, good expense control and acceptable capital management. I’m content as a minority
shareholder—and expanded my position in Non-Voting B shares--because this is a first-class
institution.

While I believe that it’s very unlikely that Exchange Bank of Santa Rosa (EXSR) or Bank of Utica
(BKUT / BKUTK) will ever be acquired by another institution, I believe that the chance of Central
Bancompany being acquired is certainly “higher than zero”. How’s that for specificity?

A dual share class doesn’t prevent a sale. Any discount for a minority ownership position becomes
moot when control is conveyed to another unrelated entity. In other words, in a sale the control
position has incentives fully aligned with minority interests. Maximizing the sale price benefits both
the majority and minority shareholder alike.

For example, Century Bancorp, Inc. (CNBKA/B - OBSN #24: March 2019 – “Ten Banks to Consider
as a Minority Shareholder”) was recently acquired by Eastern Bankshares (EBC) for $115.28 cash, a
26.1% premium. The transaction was valued at $642 million, or 175% of Tangible Book Value.

Just like Big Boy No. 4014 had many years of successful years of service, I believe that Central
Bancompany will stay on track and continue to thrive in the years ahead. As a professional money
manager in St. Louis recently told me: “It’s a good bank just lost down in the weeds”.

9 https://www.palmbeachdailynews.com/business/real-estate/busch-heir-hermann-and-wife-buy-estate-section-house-for-
million/
10 https://www.sec.gov/news/speech/fleming-dual-class-shares-recipe-disaster

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If all goes as scheduled, Big Boy No. 4014 will conclude its 2021 tour on Tuesday, September 7, the
day after Labor Day, when it pulls into the Steam Shop in Cheyenne, Wyoming. This location is not too
far from the Continental Divide, the highest place on the Overland Route at over 8,000-foot elevation.

When the Big Boy No. 4014 tour is over, I will continue to log into Virtual Railfan, which maintains
Webcams throughout North America and Canada. La Plata, Missouri (110 miles due north of Jefferson
City) is the site of my favorite railcam.11 It is on the BNSF Southern Transcon LA-Chicago main line.
Amtrak’s famous Southwest Chief passenger train stops here twice a day.

Holding Berkshire Hathaway (BRK/B), you will be gratified at the 50 - 70 BNSF freight trains per day
passing through La Plata. The “Z” Intermodal trains run at 70 mph. Similarly, even in a fast-moving
world, a strong bank with an impressive heritage – keeping up with technology – is a fine investment.

Note: This article expresses the opinions of author and does not constitute a recommendation. Do your
own due diligence before investing. The author owns CBCYB, UNP, BHRB, PKBK, EXSR, BKUTK
and BRK.B.

11 https://www.youtube.com/watch?v=xKp9CQf-meo

Copyright Oddball Media, LLC 2021 ISSUE 36 (August 2021)