By Ann Heffron, CFA, CPA
OTCQX: CPKF
READ THE FULL CPKF RESEARCH REPORT
Chesapeake Financial Shares, Inc. (OTCQX: CPKF) produced another outstanding quarter with 2025 fourth quarter net earnings excluding a one-time gain on the reversal of a contingency liability accrual ($1.0 million pretax, $0.8 million aftertax, and $0.16 per diluted share) surging, rising $2.6 million, or 85%, to $5.6 million year over year, while 2025’s fourth quarter diluted EPS rose $0.56, or 86%, to $1.20.
This was much better than our estimate, which had called for a $0.8 million increase in net earnings to $3.9 million (off by $1.7 million) and a $0.18 increase in diluted EPS to $0.82 (off by $0.38).
The primary reasons for the difference between reported results and our estimate were net revenues were $0.5 million more than the $20.6 million we had anticipated, largely consisting of net interest income that was $0.7 million higher than our estimate and noninterest income that was $0.2 million below our projection due to a $0.2 million shortfall in other miscellaneous income.
Furthermore, total noninterest expense of $14.3 million was $1.2 million below what we had projected, primarily reflecting technology expense that was $0.3 million lower than anticipated, as well as total compensation costs that were $0.4 million less and other miscellaneous expense that was $0.5 million less.
The major reasons for the fourth quarter’s $2.6 million increase in net earnings versus the prior-year quarter were a $2.6 million, or 21%, increase in net interest income plus a $0.8 million, or 15%, rise in total noninterest income, partly offset by $0.2 million growth in total noninterest expense, a $0.1 million larger credit loss provision, and $0.5 million more income taxes.
For the year, CPKF posted 2025 net earnings of $16.8 million, up $5.4 million, or 47%, year over year, while diluted EPS increased $1.16, or 48%, to $3.58. This excludes one-time items totaling a $6.8 million charge, consisting of an aftertax charge from repositioning the investment securities portfolio of $8.0 million or $1.69 per diluted share, a $0.3 million aftertax gain or $0.07 per diluted share on the sale of a building, and an aftertax gain on the reversal of a contingency liability accrual of $0.8 million or $0.16 per diluted share.
Primary contributors to this result were an $8.0 million, or 17%, gain in net interest income on growth in average interest-earning assets and a higher net interest margin of 3.80%, up 30 basis points from 3.50%, as well as a $3.0 million, or 13%, gain in noninterest income as most business lines posted notable revenue improvement (though these were offset by a $0.1 million decline in cash management income). These positives were partly offset by a $4.6 million, or 8%, increase in noninterest expense, largely due to higher compensation costs (up $2.8 million, or 9%) and other miscellaneous expense (up $1.8 million, or 21%), $0.8 million more taxes, reflecting higher pretax earnings (the effective tax rate was flat at about 14 ½%), and a $0.2 million rise in the provision for credit losses to $1.0 million.
We are increasing our diluted EPS estimate for 2026 by a $0.58 from $3.32 to $3.90, representing a 9% gain over 2025’s actual EPS of $3.58, excluding nonrecurring items.
The restructuring of the investment securities portfolio will continue to 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.
We expect good gains in net interest income as solid loan growth, estimated at 8% in 2026 (up from 7% previously, reflecting stronger loan demand in the fourth quarter), 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 continued contribution from swaps income. We note that CPKF is strategically using 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. Moreover, loan growth will be supplemented by new lending initiatives in newer markets such as Midlothian and Newport News, Virginia.
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 manager, who is expected to generate new receivables growth in the factoring business.
We are maintaining our estimate for the loan loss provision in 2026 at $1.2 million, which compares to $1.1 million actual in 2025.
The provision for cash management losses, a separate line item listed under other noninterest expense, is expected to be about $120,000 in 2026, compared to $40,000 reported in 2025.
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 17, 2025, Chesapeake Financial Shares Board of Directors meeting, the Board raised the quarterly dividend to $0.17 per share from $0.16 per share (a 6% increase), to be paid on or before December 15, 2025. Notably, CPKF has increased the annual dividend payment every year for the past thirty-three years since 1991.
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.
In 2025, for the eighteenth 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 #60 in the nation out of approximately 348 community banks with total assets under $2 billion in the study, up from #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 return on average equity (ROAE). Chesapeake Bank again garnered a top ranking for the thirteenth consecutive year in the American Banker’s list of “Best Banks to Work for: Less than $3 Billion of Assets,” and had a #32 spot in 2025, out of the 51 banks listed.
Chesapeake Financial Shares, Inc. (CPKF or the Company) is a financial holding company headquartered in Kilmarnock, Virginia, with $1,670 million in total assets at December 31, 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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