By Ann Heffron, CFA, CPA

OTC:CPKF

READ THE FULL CPKF RESEARCH REPORT

Chesapeake Financial's (OTC:CPKF) third quarter net earnings rose $47,000, or 2%, year over year to $3.2 million, while 2019's third quarter diluted EPS increased by $0.01, or 2%, to $0.65 from $0.64 posted a year ago. All data in this report have been adjusted for a 6-for-5 stock dividend, paid on October 15, 2019.

This was better than our estimate, which had called for a $0.2 million, or 7%, decrease in net earnings to $3.0 million and diluted EPS of $0.60 (off by $0.05).

The main factors behind the difference between actual results and our estimate were: (1) net interest income that was $0.4 million more than we had estimated due to a net interest margin and average interest-earning asset base that both were higher than expected and (2) compensation costs that were $0.1 million less than estimated. These were offset by: (1) other miscellaneous expense that was $0.2 million more than anticipated and (2) income tax expense that was $0.1 million larger due to higher-than-estimated pretax earnings and a tax rate of 14.4% versus our 13.0% estimate.

We note that in last year's fourth quarter the Company changed its method of presenting merchant card income and expense from separate line items in noninterest income and noninterest expense, respectively, to a single line item, entitled merchant card income, net, in noninterest income. This change had no impact on the bottom line, though noninterest income and noninterest expense are lower than previously reported, both reduced by the amount of merchant card expense. All data in this report have been modified to conform to this new method of presentation.

The major reasons for the third quarter's 2% increase in net earnings versus the prior-year quarter were a $1.0 million, or 9%, advance in net revenues due to growth in net interest income (up $0.6 million), net securities gains (up by $0.3 million) and other miscellaneous income (up $0.1 million), partly offset by a $0.9 million, or 11%, rise in total noninterest expense, primarily from greater compensation costs (up $0.6 million) and higher other miscellaneous expense (up $0.3 million).

We are maintaining our 2019 and 2020 diluted EPS estimates at $2.25 each year—for 2019, a $0.08 increase from 2018's $2.17, and for 2020, flat with our 2019 estimate. We recognize that this is down from the prior two years' record earnings growth, but there are several factors contributing to this reality.

First, there is pressure on lending rates due to the recent Fed cut in interest rates, though somewhat offsetting influences are reductions in deposit rates and the call of certain higher rate brokered certificates of deposit. This is reducing our NIM estimates to 3.97% in 2019 from 4.10% actual in 2018 and by another 7 basis points, to 3.90% in 2020 from an estimated 3.97% in 2019. Secondly, CPKF expects several new hires to add to compensation costs. Thirdly, CPKF is investing in new technology, leading to higher IT expense. Finally, the Company expects to add a full-service branch to its network late in next year's first quarter, which will also increase expenses. Positively, loan growth is expected to be solid, though we are cutting our estimate from 10% to 7 ½% in 2019, following a flat third quarter, while continuing our 8% loan growth estimate in 2020.

On October 18, 2019, Chesapeake Financial Shares, Inc. approved a 3% quarterly dividend increase to $0.125 per share from $0.121 per share, payable on or about December 15, 2019 to shareholders of record on December 1, 2019. Notably, CPKF has increased the annual dividend payment every year for the past twenty-eight years since 1991. This follows on the heels of a 6-for-5 stock dividend, paid October 15, 2019, for which all data have been adjusted.

In 2019 for the twelfth 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 #107 in the nation out of approximately 601 publicly traded banks and thrifts with less than $2 billion in assets 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 10.59%. Chesapeake Bank again garnered a top ranking in the American Banker's list of "Best Banks to Work for", moving up to a #19 spot in 2019, out of the 85 banks listed, from a #25 place in 2018.

In other news, Chesapeake Financial Shares, Inc. graduated from the OTCQB Venture Market to the OTCQX Best Market, trading on OTCQX under the symbol CPKF.

Chesapeake Financial Shares, Inc. (CPKF or the Company) is a financial holding company headquartered in Kilmarnock, Virginia, with $944 million in total assets at September 30, 2019. CPKF is predominantly a small business lender with 15 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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