CPKF: Record 2018 Earnings

By Ann Heffron, CFA, CPA

OTC:CPKF

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Chesapeake Financial’s (OTC:CPKF) fourth quarter net earnings rose 1% year over year to a record $1.85 million, while 2018’s fourth quarter diluted EPS increased by $0.01, or 1%, to $0.45 from $0.44 posted a year ago.

This was worse than our estimate, which had called for $0.4 million gain in net earnings to $2.2 million and diluted EPS of $0.54 (off by $0.09).

The main factors behind the difference between actual results and our estimate were: (1) compensation costs were $0.4 million more than expected, primarily due to a one-time additional ESOP contribution; (2) noninterest expense was $0.2 million more than anticipated, largely due to a one-time adjustment to fee income; and (3) net interest income was $0.2 million less than we had estimated due to a lower net interest margin. These negative items were partially offset by items that had a positive impact on earnings: a loan loss provision that was $75,000 less than we had thought and income taxes that were $0.3 million lower than expected.

The major reasons for the fourth quarter’s 1% increase in net earnings versus the prior-year quarter were a $0.2 million, or 2%, advance in net revenues due to higher net interest income (up $0.2 million), partly offset by a $0.9 million, or 11%, rise in total noninterest expense, primarily from greater compensation costs and other miscellaneous expenses. In addition, the effective tax rate fell 23.5 points to 5.4% from 28.9% in the year-ago quarter, adding $0.6 million to the bottom line, and the provision for credit losses dropped by $75,000 to $125,000.

For the year, CPKF posted record net income of $10.8 million, or $2.61 per diluted share, up 21% from the $8.9 million, or $2.17 per diluted share, posted in 2017.

Primary contributors to this result were a $1.9 million, or 4%, gain in net revenues from a $1.4 million, or 5%, rise in net interest income, and a $0.5 million, or 3%, advance in noninterest income, primarily the result of higher income from merchant card, net ($0.4 million), cash flow ($0.4 million), fiduciary services ($0.3 million), and ATM ($0.1 million), partly offset by a $0.7 million decline in other miscellaneous income. These positives were partly offset by a $1.5 million, or 5%, increase in total noninterest expense, largely stemming from a $0.7 million rise in compensation costs and an $0.8 million advance in other miscellaneous expense. In addition, the loan loss provision fell $425,000 to $525,000 from $950,000 in the prior year, while the effective tax rate dropped 10 points to 11.3% from 21.3%.

We are decreasing our 2019 diluted EPS estimate from $2.80 from $2.63, a $0.02 increase from 2018’s $2.61. There are three factors contributing to this decline. First, competitive deposit pricing pressures that began in 2018’s fourth quarter are expected to continue, reducing our NIM estimate by 10 basis points 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, which will also increase expenses. Positively, loan growth is expected to be solid, at 8%.

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 2018 for the eleventh 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 #97 in the nation out of approximately 633 publicly traded banks and thrifts with less than $2 billion in assets in the study, up from #123 last year and #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 10.08%.

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 $855 million in total assets at December 31, 2018. 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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