Chesapeake Financial Shares (CPKF): Cheap based on forward P/E and adjusted book value
Chesapeake Financial Shares is a small community bank in Virginia with 16 branches. The bank also provides wealth management services. In 2024 wealth management generated about 5 million dollar of revenue and this is growing. According to the CEO/chairman the wealth management operations added significantly to consolidated net earnings.
The shares trade on the OTC with symbol CPKF. I wrote this note at the beginning of May 2025, with an addendum a couple of weeks later. Do not skip this addendum.
The numbers in this note are based on 19.335 dollar per share. At 19.335 dollar per share the market cap is 91.6 million dollar. Last Friday’s closing price is higher: 20.75 dollar. Even at 20.75 dollar the shares are cheap as I will explain below.
In 2003 the bank stopped filing with the SEC but the company still publishes annual reports on its website. I had a look at the annual report over 2024 and at the circular for the annual general meeting on 4 April 2025.
The stock is cheap based on P/E (8.0) and a high 8-year retained earnings/P of 0.87. Stock price volatility is low. Trading volume is pretty good for such a small stock. But beware, on days with a lower closing price than the day before relatively little trading volume was needed to drive down the stock. BTW, I think such relation between trading liquidity and price predicts higher than average returns.
The share count is 4.735492 million. The company pays a quarterly dividend. Currently the dividend is 0.16 dollar per quarter. Yahoo! displays dividends since March 2006. Then the dividend was 0.045814 dollar per quarter. That has been gradually increased over the last 19 years. According to data from Yahoo! the company did not decrease or suspend the quarterly dividends during the Great Financial Crisis in 2008 and 2009. Instead it increased the quarterly dividend in December 2008 and in August 2010.
Just based on the dividend increase the stock should be 3.5 times worth more than in March 2006. That comes down to a return of 6.8% excluding the dividend yield, which is currently 3.3%.
However, in hindsight March 2006 was not a great time to buy bank stock. At about 9.5 dollar in March 2006 investors only enjoyed a return of 3.8% annualized excluding dividends.
By the way, the company also repurchases shares. Since 2019 the share count has been reduced by about 200k shares but in 2013 and 2014 the share count was much lower.
The reason I like this stock much is because the liabilities are worth more than 114 million dollar less than their book value, according to level 2 fair value estimates in the annual report. There are some hidden losses of about 43 million dollar on the asset side. When taking these fair value estimates into account book value is about 71 million dollar higher than stated book value. That is a huge difference because stated book value is only 112 million dollar. In other words, the stock trades at slightly more than half of the corrected book value.
Not all community banks have such large hidden gains on their balance sheet but some have, for example Bank of Botetourt.
Leverage is high with Tangible Assets/Tangible Book at about 10. But this bank has much liquidity with their investments. So I do not think the bank is financially distressed.
Let’s talk about governance. The board has 10 members including the CEO who is also chairman. I do not like this combination. For small companies I think these roles can be combined to save costs.
This bank has about 1.6 billion dollar of assets, so it is not small anymore. But I stil think there are too many non-executive directors. In addition, the CFO should also be a director.
Four non-executive directors occupy their seat already for more than 10 years, which might make it difficult for them to have opinions independent from management.
I do not like the fact that the CFO is also the COO. Furthermore, I think all 10 directors can be voted away in one shareholder meeting, which is good. I have not been able to find how much the directors and the CEO/chairman earn per year, which is bad.
So I think the bank can improve on basic governance. On the other hand, I am not a community bank expert, not even an armchair community bank expert, but I think this bank has been much better managed than similar banks over the past two decades. This has all been under leadership of the current CEO/chairman, Jeffrey M. Szyperski.
The company has 18.4 million dollar of loans outstanding with “officers, directors and their affiliates”. Related parties had 11.9 million dollar of deposits with the bank. Business with related parties is on the same terms as with unrelated persons.
Substantial shareholders: According to the proxy for the annual meeting in 2024 there is one substantial shareholder, apart from the directors and officers. This is Chesapeake Wealth Management, Inc, who holds 7.74% for clients. According to Virginia law these shares do not have voting rights.
Furthermore, the CEO/Chairman owns 7.15% with his wife. Two other long time directors own for more than 500k dollar in shares. Yet two other directors own less than 500k dollar in shares but still several hundreds of thousands of dollars.
My take: Based on P/E and book value corrected for fair value estimates this bank stock is much undervalued. Other investors might have found out as well since this stock has a good momentum.
Furthermore, I like the ownership structure. There are several people in the board who care about the company and the stock. At the same time, it is possible to acquire this bank with an unfriendly bid. Finally, I think the company can improve on governance and transparency.
Addendum (May 2025): In this analysis I overlooked a subsequent event: the earnings over the first quarter of 2025, published on 29 April 2025. The company reported a net loss of nearly 4.5 million dollar. That means net income is about 3.5 million dollar over the last four quarters instead of 11.4 million dollar over 2024. The company realized a loss of 8 million dollar on securities held to maturity in a swap to higher yielding securities. Unfortunately, because of the recent loss the stock does not satisfy my investing criteria anymore: low P/E and low P/B.
The amount of securities swapped into “much higher yields” was 75 million dollar. I reckon this means earnings will increase by a couple of million dollar going forward. Suppose the difference in yield is 3% and the average time to maturity is 5 years. Then earnings will increase with 2.25 million dollar and the company will earn 3.25 million dollar just on this transaction over 5 years. So, forward P/E is still extremely low. All in all, I still think I should be flexible with my principles and hold on to this stock for at least one year.
Disclosure: long shares of Chesapeake Financial shares.