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CPKF: Second Quarter EPS Tops Our Estimate

By Ann Heffron, CFA, CPA


OTC:CPKF


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Chesapeake Financial’s (OTC:CPKF) second quarter net earnings rose $0.4 million, or 14%, year over year to $3.3 million, while 2019’s second quarter diluted EPS increased by $0.10, or 15%, to $0.79 from $0.69 posted a year ago.

This was better than our estimate, which had called for a $0.2 million, or 5%, gain in net earnings to $3.0 million and diluted EPS of $0.73 (off by $0.06).

The main factors behind the difference between actual results and our estimate were: (1) net interest income that was $0.4 million more than we had estimated due to a higher-than-expected net interest margin and (2) a $0.8 million net gain on securities and a $0.1 million net loss on OREO, both of which were not included our estimate. These were offset by: (1) compensation costs that were $0.5 million more than expected due to an extra pay period during the quarter and (2) other miscellaneous expense that was $0.3 million more than anticipated.

We note that in last year’s fourth quarter the Company changed its method of presenting merchant card income and expense from separate line items in noninterest income and noninterest expense, respectively, to a single line item, entitled merchant card income, net, in noninterest income. This change had no impact on the bottom line, though noninterest income and noninterest expense are lower than previously reported, both reduced by the amount of merchant card expense. All data in this report have been modified to conform to this new method of presentation.

The major reasons for the second quarter’s 14% increase in net earnings versus the prior-year quarter were a $1.5 million, or 13%, advance in net revenues due to growth in net interest income (up $0.6 million), net securities gains (up by $0.8 million) and other miscellaneous income (up $0.1 million), partly offset by a $1.0 million, or 12%, rise in total noninterest expense, primarily from greater compensation costs (up $0.6 million) and higher other miscellaneous expense (up $0.4 million).

We are raising our 2019 and 2020 diluted EPS estimates—for 2019, from $2.63 to $2.70, a $0.09 increase from 2018’s $2.61, and for 2020, from $2.65 to $2.70, flat with our 2019 estimate. We recognize that this is down from the prior two years’ record earnings growth, but there are three factors contributing to this reality. First, competitive deposit pricing pressures that began in 2018’s fourth quarter are expected to continue, reducing our NIM estimates to 3.94% in 2019 from 4.10% actual in 2018 and by another 4 basis points, to 3.90% in 2020 from an estmated 3.94% in 2019. Secondly, CPKF expects several new hires to add to compensation costs. Finally, the Company expects to add a full-service branch to its network in next year’s first quarter, which will also increase expenses. Positively, loan growth is expected to be solid, at 10% in 2019 and 8% in 2020.

On January 18, 2019, Chesapeake Financial Shares, Inc. approved a 4% quarterly dividend increase to $0.145 per share from $0.14 per share, effective March 1, 2019. Notably, CPKF has increased the annual dividend payment every year for the past twenty-eight years since 1991. More recently, at its July 19, 2019 meeting, the Chesapeake Financial Shares’ Board of Directors declared a 6-for-5 share stock dividend to shareholders of record October 1, 2019, payable on or before October 15, 2019.

In 2019 for the twelfth consecutive year, Chesapeake Financial Shares, Inc. has been included in the American Banker magazine listing of the “Top 200 Community Banks” in the United States. The bank ranked at #107 in the nation out of approximately 601 publicly traded banks and thrifts with less than $2 billion in assets in the study, up from #148, when CPKF first broke into the rankings in 2008. The ranking is based on a three-year average of return on average equity (ROAE), which for CPKF was 10.59%.

Chesapeake Bank again garnered a top ranking in the American Banker’s list of “Best Banks to Work for”, moving up to a #19 spot in 2019, out of the 85 banks listed, from a #25 place in 2018.

In other news, the ABA (American Bankers Association) elected Jeffrey M. Szyperski as Chairman. More recently, Chesapeake Financial Shares, Inc. graduated from the OTCQB Venture Market to the OTCQX Best Market, trading on OTCQX under the symbol CPKF.

Chesapeake Financial Shares, Inc. (CPKF or the Company) is a financial holding company headquartered in Kilmarnock, Virginia, with $934 million in total assets at June 30, 2019. CPKF is predominantly a small business lender with 15 branch offices and one loan production office that serve customers in the eastern region of Virginia between the Potomac and James Rivers. CPKF, which began as Lancaster National Bank on April 13, 1900, has a long history and strong ties with the communities it serves.

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