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CPKF: Strong Growth in Loans and Merchant Card Income Drive a 50% Gain in Fourth Quarter EPS Year Over Year

02/24/2017
By Ann Heffron, CFA, CPA

OTC:CPKF

Chesapeake Financial Shares, Inc.’s (OTC:CPKF) fourth quarter net earnings rose $0.5 million year over year, or 51%, to $1.4 million, while 2016’s fourth quarter diluted EPS increased by $0.11, or 50%, to $0.33 from $0.22 posted a year ago.

This was slightly better than our estimate, which had called for a $0.4 million gain in net earnings to $1.3 million (off by $0.1 million) and a $0.10 advance in diluted EPS to $0.32 (off by $0.01).

The primary reason for the difference between reported results and our estimate was that compensation expense was $0.2 million better than we had expected, with this partly offset by net interest income that was $0.1 million worse than our projection.

The major reasons for the fourth quarter’s $0.5 million increase in net earnings versus the prior-year quarter were a $1.1 million, or 10%, advance in net revenues due to higher net interest income (up $0.2 million) and larger noninterest income (up $0.9 million from merchant card income and other miscellaneous income), partly offset by a $0.5 million, or 5%, rise in total noninterest expense from greater merchant card and ATM expense. Positively, compensation costs were flat year over year.

For the year, CPKF posted net income of $7.0 million, or $1.71 per diluted share, up 5% from the $6.7 million, or $1.64 per diluted share, posted in 2015. Results in 2015 exclude a $1.0 million pretax gain on the redemption of trust preferred securities ($0.7 million or $0.18 per share on an aftertax basis).

Major contributors to this were a $3.2 million, or 8%, gain in net revenues from a $1.0 million, or 4%, rise in net interest income, and a $2.2 million, or 12%, advance in noninterest income, the result of higher merchant card income partly offset by reduced securities gains and miscellaneous income. These positives were partly offset by a $2.6 million, or 8%, increase in total noninterest expense, largely stemming from a $1.2 million rise in compensation costs and a $1.7 million increase in merchant card expense. In addition, the loan loss provision more than doubled to $550,000 from $240,000 in the prior year.

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

In July, CPKF’s Board of Directors approved a 4.2% increase in the quarterly dividend to $0.125 from $0.12. Notably, CPKF has increased the annual dividend payment every year for the past twenty-five years since 1991.

In 2016 for the ninth consecutive year, Chesapeake Financial Shares, Inc. was included in the American Banker magazine (formerly US Banker magazine) listing of the “Top 200 Community Banks” in the United States. The bank ranked at #67 in the nation out of approximately 6,000 community banks in the study, up from #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 11.18%.

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 $721 million in total assets at December 31, 2016. CPKF is predominantly a small business lender with 14 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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