By Ann Heffron, CFA, CPA
OTC:CPKF
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CPKF’s (OTC:CPKF) second quarter net earnings increased $0.1 million, or 4%, to $3.1 million year over year, while 2025’s second quarter diluted EPS rose $0.02, or 7%, to $0.67.
This was better than our estimate, which had called for a slight decline in net earnings of about $55,000 (off by about $50,000), as well as a $0.02 drop in EPS (off by $0.04).
The major reasons for the difference between operating results and our estimate were net revenues were $0.8 million more than the $18.7 million we had anticipated, largely consisting of net interest income that was $0.3 million higher than our estimate and noninterest income that was $0.6 million more than our projection, primarily due to a revenue surplus relative to our estimate of $0.4 million in merchant services and of $0.1 million each in trust and wealth management and other miscellaneous income. This was partially offset by a $0.5 million rise in noninterest expense to $15.2 million, which was more than $14.7 million we had projected, primarily due to larger other miscellaneous expense. In addition, income tax expense was $0.2 million more than our $0.7 million estimate due to an effective tax rate of 24.0% that was 4 points higher than our 20% estimate.
The major reasons for the second quarter’s $0.1 million increase in net earnings versus the prior-year quarter were a $1.6 million, or 14%, increase in net interest income and a $0.6 million, or 10%, rise in total noninterest income as all businesses posted gains except cash management, which fell by $0.2 million, or 15%. Notably, merchant services was particularly strong at a 40% gain.This was partly offset by $1.8 million, or 14%, growth in total noninterest expense, on the back of higher compensation costs (up $1.0 million, or 13%) and other miscellaneous expense (up $0.8 million, or 14%). In addition, income tax expense was $0.3 million higher than that of the year-ago quarter due to a greater effective tax rate (24.0% versus 17.7% a year ago).
We are increasing our diluted EPS estimate for 2025 by a nickel from $2.70 to $2.75, representing a 14% gain over 2024’s actual EPS of $2.42. Our 2025 estimate excludes a first-quarter one-time charge from repositioning of CPKF’s investment securities portfolio of $8.0 million aftertax, or $1.69 per diluted share. At the same time, we are raising our 2026 diluted EPS estimate by $0.03 from $2.85 to $2.88, or a gain of 5% over our 2025 estimate.
The restructuring of the investment securities portfolio will have a beneficial impact on the net interest margin and future earnings. To summarize, CPKF sold $75 million of lower-yielding municipal debt securities at the Bank, resulting in a pretax loss of $9.35 million and an aftertax loss of $8.0 million (a loss of $1.69 per diluted share). CPKF replaced these with higher-yielding, shorter-maturity debt securities, primarily U.S agencies ($90 million) and private-label mortgage securities ($22 million), in part funded with additional brokered deposits, as well ($47 million added in the second quarter).
We expect good gains in net interest income as solid loan growth, estimated at 6% in 2025 (though down from 8% previously, reflecting weaker loan demand in the second quarter) and 8% in 2026, will be aided by better prospects for CPKF’s net interest margin, reflecting higher loan pricing as loan rates reset, gains in investment income from the larger restructured 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. Moreover, loan growth will be supplemented by new lending initiatives targeting selected areas for development, such as multifamily homes and CPA firms. In addition, CPKF opened a new loan production office in Midlothian, Virginia this month, which is expected to generate new commercial credits.
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 ISOs (independent sales organizations), processors, and merchant services relationships in the next year or so. Just as important, cash management should profit from the addition of a new sales person, who is expected to generate new receivables growth in the factoring business, though this may take time to materialize.
We are maintaining our estimate for the loan loss provision in 2025 at $1.1 million, which compares to $878,000 actual in 2024. Our initial estimate for the loan loss provision in 2026 is $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 2025 and 2026, a bit more than the $220,000 reported in 2024.
On the expense side, higher compensation costs due to the increases in full-time equivalent employees from new hires and replacement staffing will be a headwind. However, we expect non-compensation 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 May 28, 2025, Chesapeake Bank announced the strategic leadership hires of Grant Garber as Assistant Vice President, Director of Fraud Prevention, and Nate Cobb as Assistant Vice President, Director of Operations. These additions reflect the bank's continued investment in security, operational excellence, and customer protection. At the same time, the Bank announced that Chesapeake Bank was one of 193 financial firms that had recently been awarded the prestigious AARP BankSafe Trained Seal, an award demonstrating that a financial institution’s frontline employees have been substantially trained in financial exploitation prevention.
On March 3, 2025, CPKF completed a private placement of $25 million of fixed-to-floating rate subordinated notes. The notes have been structured to qualify as Tier 2 capital for the Company under regulatory capital guidelines. Of the total $25 million issued, $18 million has been contributed to the Bank as Tier 1 capital, $4 million has been retained at the holding company for share buybacks, and another $3 million has been designated for future interest payments on the subordinated notes. The offering size was increased due to significant investor demand at favorable pricing. The notes will initially bear interest at 8.00% per year, from and including February 28, 2025, to but excluding March 1, 2030, payable semi-annually in arrears, and mature on March 1, 2035.
On February 10, 2025, CPKF announced the promotion of DJ Seeterlin to President of Chesapeake Payment Systems, which will be celebrating 30 years as a division of the bank in 2025, is headquartered at the Chesapeake Tech Center in Norge, VA just outside of Williamsburg, and offers merchant acquiring services. Seeterlin, who has been with Chesapeake Financial Shares for 13 years, most recently in the role of Chief Innovation and Strategy Officer, will be taking over duties for long-time executive Kate Root as she transitions to a part-time role as Director of Partner Strategy within Chesapeake Payment Systems.
On January 13, 2025, CPKF announced the appointment of Dede Ramoneda to its Board of Directors. Ramoneda's career spans multiple industries, including financial services, energy, and consulting, with her most recent postion Chief Information Officer and Executive Vice President at First Citizens Bank.
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 for the twelfth consecutive year 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 $1,635 million in total assets at June 30, 2025. CPKF is predominantly a small business lender with 17 branch offices and two loan production offices 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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