Zacks Small Cap Research – CPKF: Initiating our 2025 Estimates for CPKF – Technologist

By Ann Heffron, CFA, CPA

OTC:CPKF

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CPKF’s (OTC:CPKF) first quarter net earnings rebounded sharply from the fourth quarter (up more than 200%), but fell $0.9 million year over year, or 26%, to $2.8 million, while 2024’s first quarter diluted EPS dropped by $0.20, or 25%, to $0.58 from $0.78 posted a year ago.

This was better than our estimate, which had called for a $1.1 million decrease in net earnings to $2.6 million (off by $0.2 million) and a $0.23 decline in diluted EPS to $0.55 (off by $0.03).

The primary reasons for the difference between reported results and our estimate were that net revenues were $0.4 million less than the $16.3 million we had anticipated, consisting of noninterest income that was $0.8 million lower than our projection, primarily the result of a $0.3 million shortfall in merchant services income ($1.2 million versus our $1.5 million estimate) and a $0.6 million gap in other miscellaneous income ($0.9 million compared to our $1.5 million estimate), partly offset by net interest income of $10.6 million that was $0.4 million higher than our $10.2 million estimate.

In addition, total noninterest expense of $12.3 million was $0.6 million less than the $12.9 million we had projected, reflecting compensation expense that was $0.6 million lower than anticipated. Noncompensation costs of $5.1 million came in on target. We note that in the first quarter 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.

The major reasons for the first quarter’s $0.9 million decrease in net earnings versus the prior-year quarter were a $1.3 million, or 12%, rise in total noninterest expense, mostly from greater compensation costs (up $1.1 million), partly offset a $0.2 million, or 1%, gain in net revenues (split equally between net interest income and noninterest income) and a $0.2 million reduction in income taxes due to lower pretax earnings.

We are slightly decreasing our diluted EPS estimate for 2024 by a penny, from $2.20 to $2.19, a 2% gain from 2023’s actual diluted EPS of $2.15. Our initial estimate for 2025 is $2.35 per diluted share, representing a 7% gain over our 2024 estimate.

We expect moderate gains in net interest income in 2024 and 2025 as solid loan growth, estimated at 8% in 2024 and 8% in 2025, will be partly offset by a lower net interest margin. We have estimated a net interest margin of 3.30% for full-year 2024, down 20 basis from 3.50% in 2023. Our initial NIM estimate for 2025 shows a gain of 5 basis points to 3.35% as deposit cost pressures ameliorate somewhat and better loan pricing improves portfolio yields.

Although top-line interest income is growing nicely, CPKF has experienced increases in deposit costs, similar to the rest of the banking industry, a trend we expect to continue over the near term but to ease somewhat in 2025. 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, as well as derivatives, to supplement interest income.

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 in the second and third quarters this 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.

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. Our initial estimate for 2025 is $1.0 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.

During 2023’s 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 $1,512 million in total assets at March 31, 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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