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CPKF's (OTC:CPKF) fourth quarter net earnings decreased $0.9 million, or 32%, year over year to $2.0 million, while 2021's fourth quarter diluted EPS fell by $0.19, or 31%, to $0.42 from $0.61 posted a year ago.
This was slightly below our estimate, which had called for a $0.7 million decrease in net earnings to $2.3 million and a $0.14 decline in diluted EPS to $0.47.
The main factors behind the difference between actual results and our estimate were: (1) net interest income was $0.6 million higher than our estimate due to a larger-than expected net interest margin of 3.58% (versus our 3.25% estimate), as well as higher average interest-earning assets; (2) the provision for loan losses swung a positive $0.4 million to a credit of $225,000 (i.e., a reversal of the loss provision) from an estimated charge (provision) of $175,000, as credit quality was better than anticipated; (3) income tax expense was $0.6 million less than our estimate due to an effective tax credit of 2.3% that was 22.3 points lower than our 20.0% effective tax rate estimate, as CPKF trued up the tax accrual account for the year; and (4) other miscellaneous expense was $0.3 million lower than projected. These positives were more than offset by: (1) noninterest income that was $0.8 million, or 17%, less than we had estimated due to worse-than-expected contributions from most segments, except the cash management and trust and wealth management segments; (2) compensation expense was $0.5 million higher than our estimate stemming from one-time bonus payments in recognition of 2021's record profitability; (3) occupancy expense was $0.5 million above our estimate due to a number of one-time costs; and (4) the provision for cash management losses of $0.75 million came in $0.4 million above our $0.35 million estimate, due to exceptional receivables growth during the fourth quarter (up 44% sequentially).
The major reasons for the fourth quarter's $0.9 million, or 32%, decrease in net earnings versus the prior-year quarter were a $0.5 million, or 3%, gain in net revenues, as growth in net interest income (up $1.0 million, or 11%) was partly offset by a $0.5 million, or 12%, decline in other noninterest income. The decrease in noninterest income primarily reflected a $0.3 million drop in mortgage banking income on weaker activity as well as a $0.2 million fall in net merchant services income. In addition, earnings benefitted from a $0.4 million decline in the provision for loan losses to a credit (reversal) of $225,000 from a charge (provision) of $175,000 in the prior year. Moreover, income tax payments were $0.6 million lower due to a reduced effective tax rate that was 19.3 points less than a year ago. These positives were partly offset by a $2.4 million, or 24%, increase in total noninterest expense, largely stemming from a $0.5 million rise in compensation costs (up 8%), a $0.6 million advance in the provision for cash management losses, a $0.9 million jump in other miscellaneous expense (up 33%), and a $0.4 million (49%) rise in occupancy costs.
For the year, CPKF posted record net income of $15.0 million, or $3.11 per diluted share, up from the $11.7 million, or $2.39 per diluted share, posted in 2020.
Primary contributors to this result were a $7.4 million, or 14%, gain in net revenues from an $8.0 million, or 24%, rise in net interest income (including recognition of $4.13 million in PPP fee income), partly offset by a $0.6 million, or 12%, decline in noninterest income, as well as a $2.4 million positive swing in the provision for loan losses. This was partly offset by a $6.2 million, or 17%, increase in total noninterest expense, largely the result of a $3.0 million advance in other miscellaneous expense (up 26%), a $1.6 million jump in the provision for cash management losses stemming from growth in receivables and the charge-off of one $2.3 million credit, a $1.0 million rise in compensation costs (up 5%), and a $0.6 million increase (up 20%) in occupancy costs. In addition, income taxes increased by $0.3 million on larger pretax earnings, partially offset by a lower effective tax rate of 13.3% compared to 14.8% in 2020.
Our diluted EPS estimate for 2022 remains the same at $2.70, or 13% below 2021's diluted EPS of $3.11. The main reasons for the EPS decline in 2022 reflect the winding down of the PPP (and related decrease in recognition of deferred processing fees of an estimated $4.13 million in 2021), the absence of securities gains ($730,000 in 2021), a loss provision of $0.7 million (compared to a credit of $0.4 million in 2021), and a $0.7 million drop in mortgage banking income, partly offset by a strong turnaround in the cash management business, including a $1.4 million gain in fee income (up 68%) and a $1.6 million decrease in the cash management loss provision.
CPKF participated in the Paycheck Protection Program (PPP), designed to provide a direct incentive for small businesses to keep their workers on the payroll. The Small Business Administration (SBA) will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities. PPP loans are guaranteed by the SBA for 100% of amount of the PPP loan not forgiven. Loans issued prior to June 5, 2020 have a maturity of 2 years and 5 years after that. All loans have an interest rate of 1%. In addition, lenders receive fees for processing the PPP loans: 5% for loans of $350,000 or less, 3% for loans between $350,000 and $2 million, and 1% for loans of $2 million or more. (We note these amounts have been tweaked under new provisions when the Consolidated Appropriations Act (CAA) was signed into law on December 27, 2020. The CAA provides for two types of PPP loans, initial or first-draw loans up to $10 million, for entities that have never received a PPP loan, and second-draw loans up to $2 million for entities that have. The Paycheck Protection Program ended on May 31, 2021).
PPP loans provide for the deferral of payments for a period of 6 months, including payment of principal, interest and fees. Interest will accrue, but payments will not be required during the first 6 months. Processing fees will be amortized over the contract life and adjusted based on actual prepayments. Upon notification from the SBA of the amount of the PPP loan to be forgiven, acceleration of recognition of deferred processing fees will occur for the percentage of the loan forgiven.
Through the end of September 2020, CPKF had generated about $77 million of PPP loans, of which less than $58,000 remained outstanding at December 31, 2021. PPP loans that were originated in 2021 under the CAA totaled $36 million, with a remaining $2.7 million outstanding as of December 31, 2021.
The PPP loans had countervailing impacts on the CPKF's net interest margin. First, the 1% annual interest rate is lower than is typical for CPKF loans, which reduced the NIM. However, PPP processing fees, amortized over the life of the loan, added to the NIM. Moreover, when a PPP loan is forgiven, any deferred processing fee was also added to the NIM. We have estimated a net interest margin of 3.30% for full-year 2022, noting that remaining PPP income will total only about $100,000 in 2022.
The NIM was supplemented in 2021 by the recognition of deferred processing fees. Of total deferred processing fees of about $2.97 million earned during 2020, only $770,000 was taken into income during 2020 while $1.89 million was recognized in 2021's first quarter. Moreover, we estimate that deferred processing fees earned from new PPP loans added under the CAA in 2021 generated an additional $1.52 million of deferred fees in the first quarter and $420,000 in the second quarter, of which $1,178,000 was recognized in the third quarter, significantly more than the $660,000 recognized in the second quarter. The remaining $0.4 million balance of deferred processing fees was booked into income in 2021's fourth quarter ($0.3 million) and 2022's first quarter ($0.1 million).
For 2022, our estimate for the loan loss provision remains $0.7 million, up from $2021's loan loss reversal (credit) of $0.4 million in 2021, but down from 2020's $1.95 million loss provision, which reflected the bulking up of loan loss reserves in preparation for the possibility of asset quality deterioration due to economic distress caused by COVID-19 (which failed to materialize, as asset quality remains strong).
The provision for cash management losses, a separate line item listed under other noninterest expense, is expected to decline to about $240,000 in 2022, down $1.6 million from 2021's $1.8 million, which reflected strong growth in receivables during the fourth quarter, as well as the charge-off of one $2.3 million credit.
There are other factors adding to CPKF's expense burden going forward. CPKF expects several new hires to increase compensation costs. CPKF's digital strategy for its new on-line banking platform requires investing in new technology, leading to higher IT expense. CPKF recently opened a new tech center, which will house IT operations, marketing, and merchant card processing, and will add to depreciation expense beginning in 2021's third quarter.
Loan demand appears to be solid, and we are maintaining our estimate of loan growth in 2022 at 8%.
We are continuing our estimate of merchant services income at $4.3 million in 2022, though a recently added ISO relationship may provide higher growth going forward. We are sharply increasing our estimate of cash management income by $1.4 million (up 68%), as we expect strong receivables growth. This reflects the addition of new clients, as well as growth in existing client credit lines, following the stoppage of the PPP program.
For the first time in 2021, CPKF has shown a separate line item for its mortgage banking operations (previously included in other income), while at the same time folding the ATM income line item into other income. Our stand-alone estimate for mortgage banking income is $2.2 million in 2022, down from $2.8 million actual in 2021, reflecting reduced activity due to the impact of higher mortgage rates.
Chesapeake Financial Shares increased the quarterly dividend twice in 2021. On October 14, 2021, the Board of Directors raised the dividend by 8% to $0.14 per share from $0.13 per share, paid on December 15, 2021, to shareholders of record at December 1, 2021. This follows a 4% dividend increase to $0.13 per share from $0.125 per share declared in January 2021 and paid on March 15, 2021. Notably, CPKF has increased the annual dividend payment every year for the past thirty years since 1991.
In 2021 for the fourteenth 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 #117 in the nation out of approximately 479 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 11.14%. Chesapeake Bank again garnered a top ranking in the American Banker's list of "Best Banks to Work for", and had a #24 spot in 2020, out of the 85 banks listed.
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