Zacks Small Cap Research – CPKF: Earnings Down 36% in 2023 – Technologist

By Ann Heffron, CFA, CPA

OTC:CPKF

READ THE FULL CPKF RESEARCH REPORT

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.

Noninterest income increased $0.2 million, or 4%, year over year to $4.6 million, primarily reflecting higher net securities losses (up $0.9 million), which were partly offset by gains in cash management fee income (up $0.5 million) and miscellaneous noninterest income (up $0.6 million).

Noninterest expense advanced $1.7 million, or 14%, to $14.0 million ($1.7 million more than the $12.3 million we had projected) from the prior-year quarter, largely reflecting greater compensation costs (up $1.0 million) and other miscellaneous noninterest expense (up $0.7 million), partly reflecting higher check fraud losses that CPKF is attempting to recoup from other banks.

The loan loss provision was flat at $175,000 compared to the year-ago quarter and was the same as our estimate. Loan loss reserves were flat at $7.8 million (0.95% of loans) compared with the third quarter (0.98% of loans) and were $0.3 million above the $7.5 million (1.00% of loans) in the year-ago quarter.

As to other asset quality measures, CPKF recorded net charge-offs of $137,000 in the fourth quarter. This compares to net charge-offs of $34,000 in the year-ago quarter and net charge-offs of $233,000 for the full year in 2023.

CEO Jeffrey M. Szyperski noted that CPKF’s total nonperforming assets to total assets fell 28 basis points to 0.255%% of total loans at December 31, 2023 from 0.539% at December 31, 2022.

Gross loans increased $81 million, or 11%, year over year, and about $27 million, or 3%, sequentially to $830 million.

CPKF posted a 3.9% ROE and 0.25% ROA for the fourth quarter of 2023, compared to 17.7% and 1.00%, respectively, in the prior-year quarter.

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%.

We are currently reviewing our estimates and will issue a more comprehensive report when detailed financial information becomes available within the next few weeks.

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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