Ben Reynolds looks at two regional banking outfits from Virginia that make the Top 10 list of recommendations in his Sure Passive Income newsletter, a service that assesses dividend yield, growth and expected return.
Eagle Financial Services (EFSI) is a small bank holding company that serves retail and commercial customers, offering consumer, mortgage, and commercial loans as well as other banking services. The company was founded in 1881 and is headquartered in Berryville, VA.
The last financial crisis and the COVID-19 pandemic did impact results, but we believe that Eagle Financial Services is one of the safer smaller banks in the market.
The company has managed to raise its dividend for more than three decades, just as many other banks were forced to cut their dividends during the financial crisis that took place during the 2007 through 2009 period. This shows that the company can hold up well during recessionary periods, especially compared to other much larger banks, despite its small size.
Eagle Financial Services’ dividend payout ratio was above 60% for the 2007 through 2009 period, but the dividend continued to increase. We estimate a very safe payout ratio of 31% for 2022, one of the lowest in the last decade for the company.
The bank may not grow at an especially fast pace, but strong net interest margin and great credit quality are significant advantages for the company.
Eagle Financial Services remained profitable during the last financial crisis, but earnings did decline from 2008 to 2009. From 2009 through 2019, earnings-per-share grew at 10% annually.
We estimate an earnings growth rate of 5.5% per year for the next five years. Growth in the company’s loan portfolio coupled with above-average interest margins should provide interest income growth in the coming years.
Chesapeake Financial (CPKF) is a bank holding company that is located in Virginia. The bank was founded in 1900 and operates 16 locations. Chesapeake offers typical community banking and wealth management products, as well as services for small businesses.
Chesapeake has an impressive 29-year streak of dividend increases. The stock has a market cap of $100 million, and the bank generates about $61 million in annual revenue.
Chesapeake’s payout ratio has always been low, and today is no different. The stock is expected to pay out just over 20% of earnings, meaning we see the payout as very safe. The bank has generally raised the dividend at roughly the same rate as earnings over time, and therefore we believe Chesapeake has many years of dividend increases ahead.
Recession resistance generally isn’t very good for banks, but Chesapeake — operating a small community bank — has proven quite resilient. After all, it has boosted its dividend through a handful of recessions in the past three decades.
Given the way its earnings hold up well during recessions, and the fact that its payout ratio is so low, we believe the dividend will be raised for many years to come. The yield is currently right in line with historical rates, at 2.8%.
We believe the bank can grow earnings-per-share at 5% over the medium term. We believe Chesapeake’s hesitancy to lend aggressively in the past couple of years — which was impacted by COVID — will serve it well in the quarters to come.
The bank’s loan-to-deposit ratio is very low, and that means it can lend more aggressively as economic conditions improve. Deposits continue to come in, and with strong credit quality, we think the bank’s future is bright.
