OTC:CPKF
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Chesapeake Financial Shares, Inc.’s (OTC:CPKF) third quarter net earnings increased $0.1 million, or 5% to $2.6 million year over year, while 2024’s third quarter diluted EPS rose $0.02, or 5%, to $0.55.
This was about the same as our estimate, which had called for a $0.1 million increase in net earnings to $2.6 million, but a $0.03 increase in diluted EPS to $0.56 (off by $0.01), the result of higher average shares outstanding than we had estimated.
While net earnings and our estimate were the same, there were differences between reported results and our estimates for certain individual line items. Net revenues were $0.6 million more than the $17.3 million we had anticipated, as net interest income of $11.8 million was $0.4 million higher than our $11.4 million estimate and total noninterest income was $0.2 million greater than our $6.0 million estimate. This was partly offset by total noninterest expense of $14.7 million that was $0.8 million more than the $13.9 million we had projected. In addition, income tax expense of $0.5 million was $0.1 million less than we expected due to a lower effective income tax rate, while the provision for credit losses was $0.1 million below our $0.3 million estimate.
We note that CPKF improved disclosure for noninterest expense by separately reporting FDIC insurance, technology expense, and professional fees, all of which had previously been lumped together in other expenses. This change had no impact on the bottom line.
Compared to the year-ago quarter, net earnings increased $0.1 million, or 5% to $2.6 million. Of note, net interest income rose $1.8 million, or 18%, to $11.8 million due to a 15 basis-point increase in the net interest margin to 3.52% from 3.37% and a larger earning asset base, though this was partly offset by a $0.2 million, or 5%, decline in total noninterest income, the result of a $0.7 million, or 30%, fall in other miscellaneous income. Notably, all business lines demonstrated strength, posting higher year-over-year net revenues. On the expense side, there was a $1.5 million increase in total noninterest expense, the result of $1.1 million higher compensation costs and a $0.4 million gain in other miscellaneous expense.
We are increasing our diluted EPS estimate for 2024 by $0.02, from $2.30 to $2.32, an 8% gain from 2023’s actual diluted EPS of $2.15. At the same time, we are raising our diluted EPS estimate for 2025 from $2.40 per share to $2.45 per share, representing a 6% gain over our 2024 estimate.
We expect good gains in net interest income in 2024 and 2025 as solid loan growth, estimated at 8% in 2024 (down from our previous 10% estimate as loan growth softened a bit in the third quarter) and 8% in 2025, will be aided by improving prospects for CPKF’s net interest margin. In fact, we are raising our net interest margin estimates for both 2024 and 2025, reflecting better loan pricing as loan rates reset, gains in investment income from a larger securities portfolio, reduced deposit cost pressures, and a greater contribution from swaps income. We note that 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, as well as derivatives, to supplement interest income.
We have raised our net interest margin estimate for 2024 by 4 basis points from 3.45% to 3.49%, down 1 basis point from 3.50% in 2023, and our 2025 NIM estimate by 2 basis points from 3.50% to 3.52%, up 3 basis points from our 2024 estimate.
We also expect continuing growth in the contribution to revenues and earnings of CPKF’s specialty lines of business. Merchant services income should benefit as CPKF expands its footprint in this business by adding several new merchant services relationships this year and next year. Just as important, cash management should continue to profit from the acquisition of a small factoring company in the Flexent division in May last year. Positively, this acquisition also improved industry concentration risk making it especially attractive. Valuation accounting adjustments included 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 maintaining our estimates for the loan loss provision in 2024 at $1.0 million and in 2025 at $1.2 million.
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 and 2025, the same as it was in 2023 and 2022.
On the expense side, higher compensation costs due to the increases in full-time equivalent employees from the factoring acquisition, new hires in merchant services, and replacement staffing will be a headwind. However, we expect noncompensation costs to be well controlled and to provide a partial offset to this.
At the October 18, 2024 Chesapeake Financial Shares Board of Directors meeting, the Board raised the quarterly dividend to $0.16 per share from $0.155 per share (a 3% increase), paid on December 15, 2024. Notably, CPKF has increased the annual dividend payment every year for the past thirty-two years since 1991.
On October 3, 2024, Chesapeake Bank announed a new partnership with Silverflow, an innovative cloud-native payment processing company. Chesapeake Bank through its division, Chesapeake Payment Systems, will significantly enhance its service offerings, adding the capabilities of a more advanced infrastructure. This partnership not only improves the bank’s processing capabilities but also positions it as an early adopter of new technology.
On October 18, 2024, Chesapeake Bank announced the addition of Ron Andrews to the Bank’s Board of Directors. Mr. Andrews is an experienced senior bank operations leader who has built and led banking businesses and operations in the United States and the United Kingdom during the course of his 37-year career. Mr. Andrews has served on Chesapeake Bank’s Technology Advisory Board since 2016.
In 2024 for the seventeenth consecutive year, Chesapeake Financial Shares, Inc. has been included in the American Banker magazine listing of the “Top 100 Community Banks” in the United States. The bank ranked at #54 in the nation out of approximately 361 community banks with total assets under $2 billion in the study, up from #58 last year and #148 when CPKF first broke into the rankings in 2008, when it was the “Top 200 Community Banks” and there were many more community banks. The ranking is based on a three-year average of return on average equity (ROAE), which for CPKF was 14.73%. Chesapeake Bank again garnered a top ranking in the American Banker’s list of “Best Banks to Work for”, and had a #41 spot in 2024, out of the 90 banks listed.
Chesapeake Financial Shares, Inc. (CPKF or the Company) is a financial holding company headquartered in Kilmarnock, Virginia, with $1,589 million in total assets at September 30, 2024. 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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