By Ann Heffron, CFA, CPA

OTC:CPKF

READ THE FULL CPKF RESEARCH REPORT

CPKF's (OTC:CPKF) second quarter net earnings increased $0.1 million, or 2%, year over year to $4.1 million, while 2022's second quarter diluted EPS rose by $0.04, or 5%, to $0.86 from $0.82 posted a year ago.

This was better than our estimate, which had called for a $0.6 million decrease in net earnings to $3.4 million and a $0.10 decline in diluted EPS to $0.72.

We note that last year's second quarter benefitted from the inclusion of $660,000 of Paycheck Protection Program fees, which this quarter did not.

The main factors behind the difference between actual results and our estimate were: (1) net interest income was $0.5 million higher than our estimate due to a larger-than-expected net interest margin of 3.64% (versus our 3.40% estimate); (2) merchant services income was $0.3 million higher than expected and (3) other miscellaneous income was $0.2 million more than projected. These positives were partly offset by: (1) other miscellaneous expense that was $0.1 million more than projected and (2) income tax expense that was $0.2 million larger than our estimate due greater pretax earnings and a higher effective tax rate.

The major reasons for the second quarter's $0.1 million, or 2%, increase in net earnings versus the prior-year quarter were a $0.7 million, or 0.5%, rise in net revenues, as a $1.1 million, or 12%, gain in net interest income was partly offset by a $0.4 million, or 7%, decrease in other noninterest income. In addition, noninterest expense was $1.0 million more than last year's second quarter due to greater compensation costs (up $0.8 million) and growth in other miscellaneous expense of $0.2 million. Income tax payments were $0.4 million less than those a year ago due to lower pretax earnings and a much lower effective tax rate that was 7.0 points below last year's 23.2%.

The loan loss provision was flat year over year at $175,000 (the same as our estimate). Loan loss reserves fell $0.5 million from $7.7 million (1.24% of loans) year over year, but rose $0.3 million sequentially from $6.9 million (1.01% of loans) to $7.2 million (1.03% of loans) as of June 30, 2022.


As to other asset quality measures, CPKF had net recoveries of $82,000 of loans in the second quarter. This is $75,000 larger than the $5,000 of net recoveries in the year-ago quarter and compares to net loan charge-offs of $86,000 for full-year 2021. CEO Jeff Szyperski noted nonperforming assets were 0.460% of total assets on June 30, 2022 compared to 0.815% of total assets on June 30, 2021.

Gross loans outstanding increased $85 million, or about 11%, year over year, and rose $13 million, or 2%, sequentially to $705 million.

CPKF posted a 17.5% ROE and 1.21% ROA for the second quarter of 2022, compared to 12.6% and 1.25%, respectively, in the prior-year quarter.

At the July 15, 2022 Chesapeake Financial Shares Board of Directors meeting, the Board raised the quarterly dividend to $0.15 per share from $0.14 per share (a 7% increase), payable on or before September 15, 2022. This follows two dividend increases in 2021. Notably, CPKF has increased the annual dividend payment every year for the past thirty years since 1991.

In 2022 for the fifteenth 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 #130 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 11.07%.

We are currently reviewing our estimates and valuation model 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 $1,342 million in total assets at June 30, 2022. CPKF is predominantly a small business lender with 16 branch 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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