CPKF: First Quarter Better Than Expected

By Ann Heffron, CFA, CPA



CPKF’s (OTC:CPKF) first quarter net earnings decreased $1.0 million, or 19%, year over year to $4.3 million, while 2022’s first quarter diluted EPS fell by $0.18, or 18%, to $0.90 from $1.08 posted a year ago.

This was better than our estimate, which had called for a $1.8 million decrease in net earnings to $3.5 million and a $0.36 decline in diluted EPS to $0.72.

We note that last year’s first quarter benefitted from the inclusion of $1.89 million of Paycheck Protection Program fees, which this quarter did not.

The main factors behind the difference between actual results and our estimate were: (1) net interest income was $0.7 million higher than our estimate due to a larger-than-expected net interest margin of 3.53% (versus our 3.30% estimate); (2) other miscellaneous income was $3.9 million higher than projected due to the sale of an interest rate cap, which was mostly offset by a $3.5 million loss on sales of securities; and (3) compensation expense was $0.1 million lower than our estimate. These positives were partly offset by: (1) other miscellaneous expense that was $0.3 million more than projected and (2) income tax expense that was $0.1 million larger than our estimate due higher pretax earnings.

The major reasons for the first quarter’s $1.0 million, or 19%, decrease in net earnings versus the prior-year quarter were a $0.1 million, or 0.4%, decline in net revenues, as a $0.2 million, or 6%, gain in other noninterest income was partly offset by a $0.3 million fall in net interest income. In addition, noninterest expense was $1.2 million more than last year’s first quarter due to greater compensation costs (up $0.5 million) and growth in other miscellaneous expense of $0.7 million. These negatives were partly offset by income tax payments that were $0.3 million less than those a year ago due to lower pretax earnings and a slightly reduced effective tax rate that was 2.3 points below last year’s 16.6%.

We are raising our diluted EPS estimate for 2022 by $0.20, from $2.70 to $2.90, primarily reflecting better-than-expected results in the first quarter. We note our 2022 diluted EPS estimate is still 7% below 2021’s diluted EPS of $3.11. The main reasons for the EPS decline in 2022 reflect the winding down of the PPP (and related decrease in recognition of deferred processing fees of an estimated $4.13 million in 2021), a loss provision of $0.7 million (compared to a credit of $0.4 million in 2021), and a $0.7 million drop in mortgage banking income, partly offset by a strong turnaround in the cash management business, including a $0.8 million gain in fee income (up 38%) and a $1.6 million decrease in the cash management loss provision.

Our initial diluted EPS estimate for 2023 is $3.10, a 7% gain over our revised 2022 EPS estimate of $2.90. We expect most operations to post solid improvement in 2023, with the exception of mortgage banking, which should experience some pressure due to rising interest rates. Notably, we are not projecting any one-time gains or losses from sales of securities or interest-rate caps, as occurred in 2022’s first quarter.

Loan demand appears to be solid, and we are maintaining our estimate of loan growth in 2022 at 8% and initiating our estimate of 5% growth in 2023. The net interest margin will decline significantly in 2022 due to the loss of PPP fee income (to 3.43%from 3.80% in 2021) and experience lesser erosion in 2023 (to 3.30% from 3.43%).

We are continuing our estimate of merchant services income at $4.1 million in 2022 and estimating $4.4 million in 2023, though a recently added ISO relationship may provide higher growth going forward. We are sharply increasing our estimate of cash management income by $0.8 million (up 38%) in 2022 and by $0.4 million (up 14%) in 2023, as we expect solid receivables growth. This reflects the addition of new clients, as well as growth in existing client credit lines, following the stoppage of the PPP program.

For the first time in 2021, CPKF showed a separate line item for its mortgage banking operations (previously included in other income), while at the same time folding the ATM income line item into other income. Our stand-alone estimate for mortgage banking income is $2.2 million in 2022 and $1.8 million in 2023, down from $2.8 million actual in 2021, reflecting reduced activity due to the impact of higher mortgage rates.

For 2022, our estimate for the loan loss provision remains $0.7 million, up from $2021’s loan loss reversal (credit) of $0.4 million in 2021, but down from 2020’s $1.95 million loss provision, which reflected the bulking up of loan loss reserves in preparation for the possibility of asset quality deterioration due to economic distress caused by COVID-19 (which failed to materialize, as asset quality remains strong). Our initial estimate for 2023’s loss provision is $0.7 million, the same as in 2022.

The provision for cash management losses, a separate line item listed under other noninterest expense, is expected to decline to about $240,000 in 2022, down $1.6 million from 2021’s $1.8 million, which reflected strong growth in receivables during the first quarter, as well as the charge-off of one $2.3 million credit. We are projecting that losses will remain stable and estimate the cash management provision at $240,000 again in 2023.

There are other factors adding to CPKF’s expense burden going forward. CPKF expects several new hires to increase compensation costs. CPKF’s digital strategy for its new online banking platform requires investing in new technology, leading to higher IT expense. CPKF recently opened a new tech center, which will house IT operations, marketing, and merchant card processing, and will add to depreciation expense beginning in 2021’s third quarter.

Chesapeake Financial Shares increased the quarterly dividend twice in 2021. On October 14, 2021, the Board of Directors raised the dividend by 8% to $0.14 per share from $0.13 per share, paid on December 15, 2021, to shareholders of record at December 1, 2021. This follows a 4% dividend increase to $0.13 per share from $0.125 per share declared in January 2021 and paid on March 15, 2021. Notably, CPKF has increased the annual dividend payment every year for the past thirty years since 1991.

In 2021 for the fourteenth 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 #117 in the nation out of approximately 479 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 11.14%. Chesapeake Bank again garnered a top ranking in the American Banker’s list of “Best Banks to Work for”, and had a #24 spot in 2020, out of the 85 banks listed.

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