CPKF: First Quarter Earnings on Target

By Ann Heffron, CFA, CPA

OTC:CPKF

READ THE FULL CPKF RESEARCH REPORT

Chesapeake Financial’s (OTC:CPKF) first quarter net earnings rose $0.2 million, or 2%, year over year to $3.0 million, while 2019’s first quarter diluted EPS increased by $0.02, or 2%, to $0.72 from $0.70 posted a year ago.

This was a bit better than our estimate, which had called for a $0.1 million, or 1%, gain in net earnings to $2.9 million and diluted EPS of $0.71 (off by $0.01).

The main factors behind the difference between actual results and our estimate were: (1) compensation costs were $0.3 million less than expected and (2) other miscellaneous expense was $0.2 million less than anticipated. These positives were offset by: (1) merchant card income that was $0.2 million short of our expectations; (2) net interest income that was $0.1 million less than we had estimated due to a lower-than-expected net interest margin; and (3) a $0.1 million net loss on OREO, which was not included our estimate.

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 first quarter’s 2% increase in net earnings versus the prior-year quarter were a $0.2 million, or 2%, advance in net revenues due to growth in net interest income (up $0.1 million) and cash flow income (up by $0.1 million), partly offset by a $0.1 million, or 2%, rise in total noninterest expense, primarily from greater compensation costs.

We are maintaining our 2019 diluted EPS estimate at $2.63, a $0.02 increase from 2018’s $2.61, and initiating our 2020 EPS estimate at $2.65, a $0.02 increase from 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 2019 NIM estimate by another 10 basis points, to 3.90% from 4.00%, following a 10 basis-point reduction last quarter (to 4.00% from 4.10%). Secondly, CPKF expects several new hires to add to compensation costs. Finally, the Company expects to add a full-service branch to its network later on this year in the fourth quarter, which will also increase expenses. Positively, loan growth is expected to be solid, at 8% in both 2019 and 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.

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 #25 spot in 2018, out of the 85 banks listed, from a #34 place in 2017.

In other news, the ABA (American Bankers Association) elected Jeffrey M. Szyperski as Chairman.

Chesapeake Financial Shares, Inc. (CPKF or the Company) is a financial holding company headquartered in Kilmarnock, Virginia, with $893 million in total assets at March 31, 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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