OTC:CPKF
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Chesapeake Financial Shares, Inc.’s (OTC:CPKF) fourth quarter net earnings fell $2.4 million year over year, or 74%, to $0.9 million, while 2023’s fourth quarter diluted EPS dropped by $0.52, or 73%, to $0.19 from $0.71 posted a year ago.
This was worse than our estimate, which had called for a $0.9 million decrease in net earnings to $2.5 million (off by $1.3 million) and a $0.17 decline in diluted EPS to $0.54 (off by $0.35).
The primary reasons for the difference between reported results and our estimate were that net revenues were $0.1 million less than the $15.5 million we had anticipated, largely consisting of noninterest income that was $0.7 million lower than our projection due to $1.0 million in net securities losses (versus our $0 estimate) and other miscellaneous income that was $0.3 million better than our estimate, partly offset by net interest income that was $0.6 million higher than our estimate.
We note that CPKF has been repositioning its securities portfolio in both 2023 and 2022 to take advantage of higher interest rates. This resulted in $1.0 million in net securities losses in 2023’s fourth quarter versus $0.1 million in net securities losses in the year-ago quarter, as well as $2.9 million in net securities losses for full-year 2023, compared to $3.3 million in net securities losses in 2022.
On the other hand, total noninterest expense of $14.0 million was $1.7 million more than we had projected, primarily reflecting compensation expense that was $0.3 million higher than anticipated, as well as larger other miscellaneous noninterest expense that was $1.1 million more than we thought it would be and occupancy expense that was $0.3 million higher than estimated.
The major reasons for the fourth quarter’s $2.4 million decrease in net earnings versus the prior-year quarter were a $1.7 million, or 14%, rise in total noninterest expense from greater compensation costs and other miscellaneous noninterest expense, as well as a $0.7 million, or 2%, drop in net interest income and a $0.2 million increase in income taxes due to a higher effective tax rate, partly offset by a $0.2 million, or 4%, increase in noninterest income.
For the year, CPKF posted net income of $10.1 million, or $2.15 per diluted share, down $5.8 million, or 36% from the $15.9 million, or $3.37 per diluted share, posted in 2022. Results in 2022 exclude a third quarter one-time gain on the sale of a partial interest in a brokerage firm of $2.2 million pretax and $1.7 million aftertax, or $0.36 per diluted share.
Primary contributors to this result were a $2.3 million, or 12%, gain in noninterest income from higher cash management fee income and miscellaneous noninterest income. These positives were more than offset by a $5.7 million, or 14%, increase in noninterest expense, largely due to higher other miscellaneous noninterest expense (up $2.8 million, or 18%) and compensation costs (up $2.8 million, or 11%), a $2.5 million, or 6%, decline in net interest income due to a lower net interest margin, and an effective tax rate that was 530 basis more than the 12.7% posted a year ago.
As to quarterly results, net interest income fell $0.7 million, or 6%, year over year in the fourth quarter to $10.8 million ($0.6 million above our $10.2 million estimate), as an estimated 3% increase in average interest-earning assets was offset by a net interest margin of 3.54% that was 39 basis points lower than the 3.93% earned in the year-ago quarter. Solid growth in interest income was not sufficient to offset accelerating increases in deposit costs, similar to the experience of much of the banking industry.
We are decreasing our diluted EPS estimate for 2024 by $0.40, from $2.60 to $2.20, a 2% gain from 2023’s actual diluted EPS of $2.15.
The main reasons for the reductions in our 2024 diluted EPS are flattish net interest income, as well as higher compensation costs due to the increases in full-time equivalent employees from the factoring acquisition, new hires in merchant services, and replacement staffing. Although top-line interest income is growing nicely, CPKF has experienced accelerating increases in deposit costs, similar to the rest of the banking industry, a trend we expect to continue over the near term. Moreover, CPKF is strategically increasing its use of brokered deposits and large time deposits (greater than $250,000) to invest in its available-for-sale securities portfolio to earn money on the spread and supplement interest income.
Loan demand appears solid, and we are maintaining our estimates of loan growth at 8% in 2024. Our net interest margin estimate for 2024 remains 3.30%, 20 basis points below 2023’s 3.50%.
As to cash management, we are raising our estimate for 2024. CPKF acquired a small factoring company in the Flexent division in May last year, which is expected to increase Flexent revenues by about 35% going forward. This acquisition also improves industry concentration risk making it especially attractive. Valuation accounting adjustments include the addition of $7.4 million in goodwill to the balance sheet and about $0.2 million in annual amortization charges to the income statement.
We are also increasing our 2024 estimate of merchant services income as CPKF exands this business.
For 2024, our estimate for the loan loss provision remains $0.8 million, flat with 2023, as asset quality continues exceptionally strong. Importantly, the Financial Accounting Standards Board’s Current Expected Credit Loss (CECL) impairment standard (adopted in 2023), which requires “life-of-loan” estimates of losses to be recorded for unimpaired loans, has not had a material impact on loss provisions. We note, however, there were some minor retroactive changes to CPKF’s capital account ($400,000) and the allowance for credit losses ($37,000) as a result of its adoption in 2023.
The provision for cash management losses, a separate line item listed under other noninterest expense, is expected to be stable at about $240,000 in 2024, the same as it was in 2023 and 2022.
During the second quarter, CPKF opened another branch, this time in a retirement community in Richmond, Virginia. It is CPKF’s sixth branch in a retirement community, which is attractive due to its low cost of entry, as well as being a feeder for the Company’s investment management and deposit-gathering activities. In addition, in August CPKF opened a loan production office in Newport News, Virginia.
At the October 27, 2023 Chesapeake Financial Shares Board of Directors meeting, the Board raised the quarterly dividend to $0.155 per share from $0.15 per share (a 3% increase), paid on December 15, 2023. Notably, CPKF has increased the annual dividend payment every year for the past thirty-one years since 1991.
In 2023 for the sixteenth 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 #58 in the nation out of approximately 6,000 community banks in the study, up from #130 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 14.34%.
Chesapeake Financial Shares, Inc. (CPKF or the Company) is a financial holding company headquartered in Kilmarnock, Virginia, with $1,471 million in total assets at December 31, 2023. CPKF is predominantly a small business lender with 17 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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